Philippine Markets Daily

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

April 23, 2021

This unit investment trust fund (UITF) from the country’s first bank underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). However, the average Uniform ROA for its holdings is almost double the as-reported ROA, 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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Bank of the Philippine Islands (BPI), originally known as El Banco Español Filipino de Isabel II, was founded in 1851 and is the first bank in both the Philippines and Southeast Asia. BPI is a universal bank that offers a wide range of financial products and solutions that serve both retail and corporate clients. The bank has over 800 branches in the country. Its subsidiary, BPI Asset Management and Trust Corporation (BPI AMTC), is the largest standalone trust corporation in the country.

BPI offers both commercial and investment banking products and services. Their investment products and services include money market funds, bond funds, balanced funds, and equity funds to cater to the varying risk profiles of their clients.

We’ve analyzed some of BPI’s UITFs before:

This week, we’ll be giving an update on one of their other funds, the BPI Equity Value Fund.

The BPI Equity Value Fund was launched on April 4, 2005 and aims to provide investors with long-term capital growth. It does this by investing in PSE-listed companies that have a value style bias.

The fund’s benchmark is the PSEi, and is invested in at least 90% of selected stocks while the remaining is invested in cash, money market securities, and time deposits.

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The BPI Equity Value Fund started with a net asset value per unit (NAVPU) of PHP 50.85 at its inception in April 2005. By October 2007, the NAVPU had increased to PHP 105.29. During this period, the fund’s 107% gain outperformed the PSEi’s 94% gain.

From this high, the fund’s NAVPU declined to PHP 52.86 in October 2008 driven by the global market selloff in equities following the global financial crisis. During this period, the fund recorded a loss of 50%, still outperforming the PSEi’s loss of 56%.

The fund’s NAVPU then rebounded to a high of PHP 156.76 in May 2013, recording a gain of 197% but underperforming the benchmark’s 333% gain.

From this peak, the fund’s NAVPU declined by 21% to PHP 124.46 in December 2013. It slightly outperformed the PSEi’s 22% loss over the same period. This decline can be attributed to the aftermath of the Bohol earthquake in October and Typhoon Haiyan in November.

The fund’s NAVPU reached a new high at PHP 193.72 in January 2018. The fund’s 56% gain slightly underperformed its benchmark’s 57% gain.

In March 2020, the fund’s NAVPU dropped to PHP 116.95, due to the market selloff amid the coronavirus pandemic. This 40% loss outperformed its benchmark’s reported loss of 43%.

As of April 16, 2021, the fund has rebounded with a reported NAVPU of PHP 139.99, a gain of 20% that underperformed its benchmark’s gain of 27%.

Since inception, the BPI Equity Value Fund’s cumulative 175% gain has underperformed its benchmark’s gain of 226%.

As-reported metrics would have investors believe that 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 6 core non-financial holdings of the BPI Equity Value 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 BPI Equity Value Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. The fund is generating an average as-reported ROA of 3%, lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered stronger earnings with an average Uniform ROA of 5%, almost 2x the as-reported average. These companies have strong returns, with some 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 BPI Equity Value 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 -232% to 32%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and Ayala Land, Inc. (ALI:PHL) having the highest distortions.

As-reported metrics understate the profitability of Ayala Corporation, suggesting a below-average firm with an as-reported ROA of 2%. In reality, this is a low quality firm with a 5% Uniform ROA. It has consistently generated returns of at least 9% through 2005-2019.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of 3% when in fact, it is an average firm with a 6% Uniform ROA. It has consistently generated returns of at least 6% over the past decade.

Likewise, as-reported metrics understate the profitability of Ayala Land, Inc., suggesting a below-average firm with an as-reported ROA of 2%. In reality, it is a low quality firm with a 4% Uniform ROA. It has consistently generated returns of at least 8% through 2009-2019.

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 according 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, the BPI Equity Value Fund’s major holdings are forecast to drastically overperform with a 29% projected Uniform earnings growth in the next two years, while the market is forecasting a drastic underperformance with a 37% projected Uniform earnings shrinkage.

Among these companies, only JG Summit Holdings, Inc. (JGS:PHL), Ayala Land, Inc. (ALI:PHL), and SM Investments Corporation (SM:PHL) have a positive Uniform earnings growth spread.

The market is pricing JGS’s Uniform Earnings to plummet by 244% in the next two years, while sell-side analysts are projecting the company’s earnings growth to be immaterial.

Likewise, the market is pricing ALI’s Uniform Earnings to grow by 10% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 134%.

Similarly, the market is pricing SM’s Uniform Earnings to grow by 10% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 73%.

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 PLDT, Inc. Tearsheet

Today, we’re highlighting one of the individual stock holdings in the BPI Equity Value Fund—PLDT, Inc. (TEL:PHL).

As the Uniform Accounting tearsheet for PLDT, Inc. highlights, it trades at a Uniform P/E of 17.2x, below the global corporate average of 25.2x, but around its historical average of 17.5x.

Low P/Es require low EPS growth to sustain them. In the case of PLDT, Inc., the company has shown a 195% Uniform EPS growth in 2020.

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, PLDT Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 23% in 2021 and 10% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify TEL’s PHP 1,255 stock price. These are often referred to as market embedded expectations.

PLDT Inc. is currently being valued as if Uniform earnings were to shrink by 9% annually over the next three years. What sell-side analysts expect for TEL’s earnings growth is below what the current stock market valuation requires in 2021 and 2022.

The company has an earning power in line with long-run corporate averages, but its combined cash flows and cash on hand fall short of obligations within five years. Based on its operating risk and refinancing capability, it has an intrinsic credit risk of 130bps, indicating a high dividend risk and moderate credit risk.

To conclude, PLDT Inc.’s Uniform earnings growth is well below peer averages, and is also trading below 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 BPI Equity Value 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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