Philippine Markets Daily

This UITF has underperformed the PSEi, but average Uniform ROA for its holdings is double as-reported, implying potential upside…also, AEV tearsheet

March 12, 2021

This unit investment trust fund (UITF) from one of the first non-American foreign banks in the Philippines underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). However, its average Uniform ROA for its holdings is double the as-reported, implying potential upside.

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps make sense of the fund’s investments and how it continues to outperform the market.

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
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The Philippine Bank of Communications or PBCOM was founded in 1939, as the Philippine branch of a Taiwanese bank called Bank of Communications. The bank was also one of the first non-American foreign banks in the country.

PBCOM offers several investment products such as money market fund, best balance fund, investment management services, and escrow agency services.

This week, we’ll be giving you an update on the PBCOM Value Equity Fund.

PBCOM Value Equity Fund was launched on December 8, 2010 with the aim to provide investors income and capital growth on a long-term basis. The fund’s investments are mixed between at least 80% in selected shares of stock and the remaining in fixed income deposits and securities. The fund is meant for investors with a more aggressive risk profile.

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PBCOM Value Equity Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its inception in 2010. In September 2011, its NAVPU dropped to a record low of PHP 86.07, attributed to the fear of investors that there would be another global recession. The fund’s 14% loss, slightly underperformed the PSEi’s 12% loss.

The fund then reached its highest NAVPU of PHP 169.82 in January 2018 recording a 97% gain. However, the PSEi still outperformed the fund with a gain of 143%.

The fund’s NAVPU dropped to PHP 90.48 in March 2020 due to the market selloff amid the coronavirus pandemic. This 47% loss slightly outperformed its benchmark’s reported loss of 49%.

As of March 8, 2021, the fund has rebounded with a reported NAVPU of PHP 126.86, an increase of 40%. The fund underperformed its benchmark’s gains of 46%.

Looking at the latest data from the benchmark, PBCOM Value Equity Fund’s cumulative 28% gain has underperformed its benchmark’s 61% gain as of March 2021.

As-reported metrics would have investors believe the fund’s 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 top 8 core non-financial holdings of the PBCOM Value Equity Fund along with its Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

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Most of the companies in the PBCOM Value Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. The fund generated an average as-reported ROA of 5%, slightly below the 6% global corporate average returns.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered stronger earnings with an average Uniform ROA of 10%, twice the as-reported ROA average. These companies have strong returns, with most of the companies having Uniform ROAs greater than global average returns.

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 45% to 197%, with Ayala Corporation (AC:PHL), JG Summit Holdings, Inc. (JGS:PHL), SM Investments Corporation (SM:PHL), and Aboitiz Equity Ventures, Inc. (AEV:PHL) all having distortions of more than a hundred percent.

As-reported metrics understate the profitability of Ayala Corporation, suggesting a below-average company with an as-reported ROA of 4% when in fact, it is a high-quality firm with an 11% Uniform ROA. It has consistently generated returns of at least 9% over the past decade.

Likewise, Aboitiz Equity Ventures, Inc. is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with a 10% Uniform ROA. Furthermore, it has consistently generated returns of at least 10% over the past decade.

By focusing on as-reported metrics alone, these companies 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 a company’s earnings growth potential.

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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 5%-6% annual Uniform earnings growth over the next two years. Meanwhile, PBCOM Value Equity Fund major holdings are forecast to underperform with a 12% projected Uniform earnings shrinkage in the next two years, while the market is forecast to underperform with a 2% Uniform earnings.

Among these companies, only Aboitiz Equity Ventures, Inc. (AEV:PHL) and International Container Terminal Services, Inc. (ICT:PHL) have a positive Uniform earnings growth spread.

The market is pricing Aboitiz Equity Ventures Uniform Earnings to shrink by 7% in the next two years. On the other hand, sell-side analysts are projecting the company’s earnings to be immaterial.

International Container Terminal Services is priced by the market to shrink by 10% in the next two years, while sell-side analysts project the company’s earnings to grow by 7%.

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 mature, low growth, but high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Aboitiz Equity Ventures, Inc.

Today, we’re highlighting one of the individual stock holdings in the PBCOM Value Equity Fund—Aboitiz Equity Ventures, Inc. (AEV:PHL)

As the Uniform Accounting tearsheet for Aboitiz Equity Venture, Inc. highlights, it trades at a Uniform P/E of 20.8x, below the global corporate average of 25.2x, but around its historical average of 20.6x.

Low P/Es require low EPS growth to sustain them. In the case of Aboitiz Equity Ventures, Inc., the company has recently shown a 66% Uniform EPS decline.

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 Philippine Financial Reporting Standards (PFRS) earnings as a starting point for our Uniform earnings forecasts. When we do this, Aboitiz Equity Ventures, Inc. sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 278% in 2020 and shrink by 41% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify AEV’s PHP 42.75 stock price. These are often referred to as market embedded expectations.

Aboitiz Equity Ventures, Inc. is currently being valued as if Uniform earnings were to shrink by 7% annually over the next three years. What sell-side analysts expect for AEV’s earnings growth is well below what the current stock market valuation requires in 2020 and below the requirement in 2021.

The company has an earning power of 2x long-run corporate averages. Aboitiz Equity Venture, Inc. cash flows and cash on hand falls short of obligations within five years. Based on operating risk and refinancing capability, it has an intrinsic credit risk of 230bps, indicating that Aboitiz Equity Venture, Inc. has a high dividend risk and moderate credit risk.

To conclude, Aboitiz Equity Venture, Inc. Uniform earnings growth is well below peer averages, and 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 PBCOM Value Equity Fund interesting and insightful.

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

Regards,

Angelica Lim
Research Director
Philippine Markets Daily
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