Philippine Markets Daily

UITF from the oldest bank in the region performed in line with the PSEi YTD, with holdings averaging at Uniform ROA of 9%, almost 2x as-reported

December 18, 2020

This unit investment trust fund (UITF) from the oldest bank in the region has performed in line with its benchmark, the Philippine Stock Exchange Index (PSEi), year-to-date.

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps 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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Founded in 1851, the Bank of the Philippine Islands (BPI) is the oldest bank in Southeast Asia and is one of the largest universal banks in the Philippines.

In the past, we’ve written about four of BPI’s UITFs: BPI Consumer Equity Index FundBPI Equity Value FundBPI Philippine Infrastructure Equity Index Fund, and Odyssey Philippine Equity Fund. This week, we’ll focus on the BPI Invest Philippine High Dividend Equity Fund.

BPI Invest Philippine High Dividend Equity Fund was launched on August 16, 2013. The fund aims to achieve returns through a combination of current income and long-term capital appreciation by investing in listed companies that have an established history of dividend payouts. It also aims to provide returns in excess of the return of the Philippine Stock Exchange Index (PSEi).

BPI Invest Philippine High Dividend Equity Fund had a net asset value per unit (NAVPU) of PHP 100.00 at its 2013 inception. The fund’s NAVPU slightly declined to PHP 98.27 approaching the end of 2013, showing a loss of about 2% but outperforming the PSEi’s 12% loss during this period.

The fund’s NAVPU then climbed to a peak of PHP 135.68 in April 2015. The fund and its benchmark recorded gains of 38% and 41% from their year-end 2013 values, respectively.

The fund then dropped to PHP 105.49 in January 2016. During this period, the fund suffered a 22% loss which outperformed the PSEi’s 25% loss.

The fund’s NAVPU then fluctuated throughout the next two years before eventually reaching its historical peak of PHP 149.95 in January 2018. During this time span, the fund and its benchmark recorded gains of 42% and 49%, respectively.

After another period of fluctuations, the fund’s NAVPU eventually dropped to its historical low of PHP 89.86 in March 2020 due to the coronavirus-induced market downturn. From its historical peak in 2018, the fund recorded a loss of 40% while the PSEi recorded a comparable loss of 44%.

The fund has since rebounded, recording a NAVPU of PHP 124.48 as of December 7, 2020. Year to date, the fund and its benchmark performed similarly, both recording gains of 39% and 43% respectively.

Looking at BPI Invest Philippine High Dividend Equity Fund’s investments using as-reported metrics, it is not apparent that the fund invests in stable and established companies. However, Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the core non-financial holdings of the BPI Invest Philippine High Dividend Equity Fund along with their 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 Invest Philippine High Dividend 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 as-reported average ROA of 5%, slightly below the 6% global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, almost 2x the as-reported ROA average. These companies have strong returns with most companies having an average Uniform ROA 1.5x 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) 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 a current Uniform ROA of 11%. Over the past decade, it has consistently generated returns of at least around 10%.

Likewise, JG Summit Holdings, Inc. is not just a 4% ROA firm like what as-reported numbers suggest, but is actually an above-average company with an 8% Uniform ROA. Moreover, it has consistently generated returns of at least around 7% over the past five 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 the 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 6% annual Uniform earnings growth over the next two years. Meanwhile, BPI Invest Philippine High Dividend Equity Fund’s major holdings are forecast to underperform with a projected 11% Uniform earnings shrinkage within the next two years, while the market is seeing immaterial Uniform earnings growth.

Among these companies, only PLDT Inc. (TEL:PHL) has positive Uniform earnings growth dislocations. The market is pricing PLDT’s Uniform Earnings to grow by 5% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 45%.

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 SM Investments Corporation Tearsheet

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

As the Uniform Accounting tearsheet for SM highlights, it trades at a Uniform P/E of 26.5x, above global corporate averages and its historical average of 24.1x.

High P/Es require high EPS growth to sustain them. In the case of SM, the company has recently shown an immaterial 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, SM’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 66% in 2020 and grow by 94% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 1,068.00 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 8% 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 that requirement in 2021.

The company has an earning power 2x the long-run corporate averages, and has consistently been well above global long-run corporate averages.

Moreover, SM’s cash flows and cash on hand fall short of obligations within five years, suggesting high risk to their dividend. However, because of the company’s operational stability and refinancing capability, intrinsic credit risk is 70bps above the risk free rate, indicating that SM has lower credit risk.

To conclude, SM’s Uniform earnings growth is below peer averages but is trading 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 BPI Invest Philippine High Dividend 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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