Philippine Markets Daily

This UITF has underperformed the PSEi, but average Uniform ROA for its holdings is near 2x as-reported, implying potential upside…also, URC tearsheet

March 5, 2021

This unit investment trust fund (UITF) from the largest bank in the Philippines underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi), but its average Uniform ROA for its holdings is almost double the as-reported, implying potential upside.

However, as-reported metrics would leave investors confused as to why the fund would choose to track the index when the stocks in the index appear to have minimal profitability. Uniform Accounting financial metrics help make sense of the fund’s investments.

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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BDO Unibank, Inc. was incorporated in 1967. In terms of assets, it is the largest bank in the Philippines. The bank offers several investment products such as Peso-Denominated Unit Investment Trust Funds, Dollar-Denominated UITFs, Easy Investment Plan, and Personal Equity and Retirement Accounts (PERA).

We have already discussed some of these funds, including BDO Equity FundBDO ESG Equity FundBDO Focused Equity FundBDO Institutional Equity Fund, and BDO Personal Equity and Retirement Account. This week, we’ll focus on the BDO Equity Index Fund.

BDO Equity Index Fund was launched on July 10, 2015. Its objective is to provide investors with total returns that are highly similar to that of the returns of the PSEi. Specifically, the fund does this by investing in a diversified portfolio that consists of the component companies of the PSEi.

BDO Equity Index Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its inception in 2015. In January 2016, its NAVPU dropped to PHP 89.32 due to the oil price crash. During this period, the UITF’s 11% loss slightly underperformed the PSEi’s 10% loss.

The fund’s NAVPU reached its peak at PHP 120.17 in January 2018, with both the fund and PSEi recording gains of 35%.

The fund’s NAVPU dropped to a record low of PHP 62.16 in March 2020 due to the market selloff amid the coronavirus pandemic. The NAVPU’s 48% loss slightly outperformed its benchmark’s reported loss of 49%.

As of March 1, 2021, the fund has rebounded with a reported NAVPU of PHP 91.22, an increase of 47% from their lowest NAVPU. The fund slightly underperformed its benchmark’s gains of 49%.

Since inception, the UITF has closely tracked its benchmark. However, looking at the latest data from the benchmark, BDO Equity Index Fund’s cumulative 9% loss has underperformed its benchmark’s 7% loss as of March 2021.

Looking at BDO Equity Index Fund’s investments using as-reported metrics, it is not apparent that the PSEi is composed of stable and established companies.

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 BDO Equity Index Fund along with its Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most of these companies 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 9%, almost double 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 -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 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, JG Summit Holdings is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with an 8% Uniform ROA. Furthermore, it has consistently generated returns of at least 6% over the past six years.

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.

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, BDO Equity Index Fund major holdings are forecast to underperform with a 6% projected Uniform earnings shrinkage in the next two years, while the market is seeing an immaterial Uniform earnings growth.

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

The market is pricing PLDT’s Uniform Earnings to grow by 4% in the next two years. On the other hand, sell-side analysts are projecting the company’s earnings to grow by 48%.

International Container Terminal Services is priced by the market to shrink by 2% in the next two years, while sell-side analysts project the company’s earnings to grow by 4%.

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 Universal Robina Corporation

Today, we’re highlighting one of the individual stock holdings in the BDO Equity Index Fund—Universal Robina Corporation (URC:PHL).

As the Uniform Accounting tearsheet for Universal Robina Corporation highlights, it trades at a Uniform P/E of 31.5x, above the global corporate average of 25.2x, but below its historical average of 33.9x.

High P/Es require high EPS growth to sustain them. In the case of Universal Robina Corporation, the company has recently shown a 23% Uniform EPS growth.

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, Universal Robina Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 8% in 2020 and grow by 16% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Universal Robina Corporation’s PHP 150.10 stock price. These are often referred to as market embedded expectations.

Universal Robina Corporation is currently being valued as if Uniform earnings were to grow by 10% annually over the next three years. What sell-side analysts expect for URC’s earnings growth is below what the current stock market valuation requires in 2020 and above the requirement in 2021.

The company has an earning power of 1x the long-run corporate averages. Universal Robina Corporation’s cash flows and cash on hand consistently exceeds obligations. Based on operating risk and refinancing capability, it has an intrinsic credit risk of 120bps, indicating that Universal Robina Corporation has a low dividend risk and moderate credit risk.

To conclude, Universal Robina Corporation’s Uniform earnings growth is below peer averages, and is trading well above 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 BDO Equity Index 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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