Philippine Markets Daily

This UITF has outperformed the PSEi since its inception, with an earning power that is 1.5x more using Uniform Accounting than as-reported metrics

September 18, 2020

This unit investment trust fund (UITF) of the country’s second-largest bank has been outperforming its benchmark, the Philippine Stock Exchange Index (PSEi).

Since its inception, the fund has recorded a gain of 101%, outperforming the 84% return of its benchmark.

As-reported metrics would leave investors confused with the fund’s stock picks. However, Uniform Accounting financial metrics help make sense of the fund’s investments and how they continue to outperform its benchmark at this time.

In addition to examining the fund’s portfolio, we are including fundamental analysis of one of the fund’s largest holdings, providing you with the current Uniform Accounting Performance and Valuation Tearsheet for that company.

Philippine Markets Daily:
Friday Uniform Portfolio Analytics
Powered by Valens Research

Metropolitan Bank & Trust Co., or Metrobank, is the country’s second-largest bank, just next to BDO. It’s also the banking arm of one of the country’s largest conglomerates, GT Capital Holdings Corporation.

We’ve written about two funds from First Metro Investment Corporation—Metrobank’s investment bank arm—First Metro Philippine Equity ETF and First Metro Save and Learn Equity Fund. This week, we’ll focus on Metro Equity Fund that Metrobank itself manages.

Metro Equity Fund was launched on March 1, 2007. Its strategy is to invest in diversified, blue-chip, and fundamentally sound exchange-listed companies, with the Philippine Stock Exchange index (PSEi) serving as its benchmark.

Metro Equity Fund fell from a net asset value per unit (NAVPU) of PHP 1.00 in its 2007 inception to a low of PHP 0.61 in October 2008—a loss of 39%—due to the global financial crisis. In comparison, its benchmark recorded a worse loss of 46% over the same period.

The UITF then recovered and reached a peak PHP 3.01 in January 2018, a 393% return from the fund’s 2008 low. Meanwhile, the PSEi delivered a 428% gain during this span.

However, uncertainties regarding Brexit and the U.S.-China trade war caused the fund’s NAVPU to fall to PHP 2.32 in November 2018, a loss of 23%. Comparably, the PSEi delivered a loss of 24% during this period.

The fund ended 2019 with a NAVPU of PHP 2.60, and fell to as low as PHP 1.60 in March 2020 due to the coronavirus-induced market downturn. It has since rebounded to PHP 2.03 as of September 11, 2020. The fund and its benchmark performed similarly year to date with losses of 22% and 24%, respectively.

Since its inception, Metro Equity Fund outperformed the PSEi with returns of 101% and 84%, respectively. However, looking at Metro Equity Fund’s investments using as-reported metrics, it is not apparent that the fund invests in stable and established companies.

As-reported metrics would have investors believe that this portfolio consists of companies that do not generate economic profit. However, Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the core non-financial holdings of the Metro Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most companies in the Metro Equity Fund show as-reported ROAs that range around and below global cost-of-capital levels, suggesting that they are not generating economic profit. In 2019, the fund generated an average as-reported ROA of 6%, in line with global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, 1.5x cost-of-capital levels and as-reported metrics. These companies have strong returns, with Uniform ROAs above the 6% global average returns except for PLDT Inc. (TEL:PHL).

The Uniform Accounting framework addresses financial statement inconsistencies attributable to the flaws present in the Philippine Financial Reporting Standards (PFRS). This enables investors to determine the true underlying performance of companies and avoid distorted financial analysis and valuation.

As such, it should not be surprising that when analyzing the non-financial holdings of the fund, the figures that easily stand out are the large discrepancies between Uniform ROA and as-reported ROA for these companies.

While at a glance, the difference between as-reported ROA and Uniform ROA may not seem that great, the distortion in percentage ranges from -43% to 197%, with Ayala Corporation (AC:PHL), JG Summit Holdings, Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) all having distortions of more than a hundred percent.

As-reported ROA understates the profitability of AC, suggesting a below-average company with an as-reported ROA of 4%. In reality, this leading conglomerate is a high-quality firm with an 11% Uniform ROA, almost thrice the as-reported number. Over the past 15 years, AC has never seen its Uniform ROA dip below 6%.

Similarly, JGS is not just a 4% ROA firm like what as-reported numbers suggest. It is, in fact, an above-average company with 8% Uniform ROA, consistently generating returns above 7% over the past five years.

By focusing on as-reported metrics alone, Metrobank would never pick most of these companies because they look like anything but profitable businesses.

That said, looking at profitability alone is insufficient to deliver superior investment returns. Investors should also identify if the market is significantly undervaluing the company’s earnings growth potential.

This table shows the earnings growth expectations for the major non-financial holdings of the fund. It features three key data points:

  1. The two-year Uniform earnings per share (EPS) growth represents the Uniform earnings growth the company is likely to have for the next two years. The earnings number used is the value of when we convert consensus sell-side analyst estimates to the Uniform Accounting framework.
  2. The market expected Uniform EPS growth represents what the market thinks Uniform earnings growth is going to be for the next two years. Here, we show by how much the company needs to grow Uniform earnings in the next two years to justify the current stock price of the company. This is the market’s embedded expectations for Uniform earnings growth.
  3. The Uniform EPS growth spread is the difference between the 2-year Uniform EPS growth and market expected Uniform EPS growth.

On average, Philippine companies are expected to have 6% annual Uniform earnings growth over the next two years. Meanwhile, Metro Equity Fund’s major holdings are forecast to underperform with a 7% projected Uniform earnings decline in the next two years, while the market is seeing a 1% Uniform EPS decline.

Among these companies, only TEL, SM, and Globe Telecom, Inc. (GLO:PHL) have positive Uniform earnings growth dislocations.

The market is pricing TEL’s Uniform Earnings to grow by only 6% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 41% moving forward.

Meanwhile, the market is expecting SM’s Uniform earnings to plummet by 11%, while analysts are projecting a lower 8% earnings shrinkage for the company in the next two years.

Overall, as-reported numbers would have investors incorrectly conclude that this portfolio consists of low-quality companies. While these firms suffer from the adverse effects of the coronavirus pandemic, dragging down their short-term earnings growth expectations, Uniform Accounting metrics show that these companies are high quality with intact business models that would drive economic profitability moving forward.

SUMMARY and SM Investments Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the Metro Equity Fund—SM Investments Corporation (SM:PHL).

As the Uniform Accounting tearsheet for SM highlights, it trades at a Uniform P/E of 23.3x, around global corporate averages and its historical averages.

Moderate P/Es require moderate EPS growth to sustain them. In the case of SM, the company has recently shown a 0% Uniform EPS shrinkage.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp on near-term financial forecasts like revenue and earnings.

We take sell-side forecasts for PFRS earnings as a starting point for our Uniform earnings forecasts. When we do this, SM’s sell-side analyst-driven forecast shows that Uniform earnings is expected to shrink by 76% in 2020 and grow by 259% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 905.00 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 11% over the next three years and still justify current price levels. What sell-side analysts expect for SM’s earnings growth is below what the current stock market valuation requires in 2020, but above what the market requires in 2021.

The company has an earning power 2x long-run corporate averages and that is consistently well above global long-run corporate averages—based on its Uniform ROA calculation.

Moreover, SM’s intrinsic credit risk is just 70bps above the risk-free rate. However, cash flows and cash on hand are below total obligations. This indicates that SM has a high dividend risk but low credit risk.

To conclude, SM’s Uniform earnings growth is below peer averages. However, the company is trading around peer average valuations.

About the Philippine Market Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living oftentimes rely on professionals to manage their own investments within the scope of their investment policies.

With so many funds and managers out there, it can get confusing and difficult to decide which one best suits your needs as an investor.

Every Friday, we focus on one fund in the Philippines and take a deeper look into their current holdings. Using Uniform Accounting, we identify the high-quality stocks in their portfolio which may not be obvious using the as-reported numbers.

We also identify which holdings may be problematic for the fund’s returns that they would need to reconsider from a UAFRS perspective.

To wrap up the fund analysis, we highlight one of their largest holdings and focus on key metrics to watch out for, accessible in our tearsheets.

Hope you’ve found this week’s focus on Metro Equity Fund interesting and insightful.

Stay tuned for next week’s Friday Uniform Portfolio Analytics!

Regards,

Angelica Lim
Research Director
Philippine Markets Daily
Powered by Valens Research
www.valens-research.com