Philippine Markets Newsletter

As-reported metrics have investors wrongly believing this PERA UITF’s underperformance vs its benchmark is because of its holdings…also, AC tearsheet

August 20, 2021

This unit investment trust fund (UITF) from the country’s largest bank has underperformed its benchmark, the Philippine Stock Exchange Index (PSEi). Despite its top holdings being index stocks, the fund hasn’t been able to generate the same returns as its benchmark.

Furthermore, as-reported metrics make it appear as if these companies are not producing returns above their cost of capital, leaving investors confused as to why these stocks are in the index. Uniform Accounting financial metrics help make sense of the fund’s investments.

In addition to examining the fund’s portfolio, we are including the 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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First founded in 1968, BDO Unibank, Inc., a subsidiary of the SM Group founded by Henry Sy, is the largest bank and unit investment trust fund (UITF) provider in the Philippines. As of today, it has more than 1,400 operating branches and offices as well as more than 4,400 ATMs across the nation.

BDO offers a wide array of banking services, including both commercial and investment products. 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 BDO’s UITFs before:

This week, we’ll be revisiting the BDO PERA Equity Index Fund.

PERA was formed under Republic Act 9505, otherwise known as the PERA Act of 2008. PERA is a voluntary retirement saving program that enables Filipinos to start planning for retirement even at an early age. This is similar to the retirement savings accounts in other countries such as the 401(k) in the United States.

The BDO PERA Equity Index Fund was launched on December 22, 2016. The objective of this Personal Equity and Retirement Account (PERA) UITF is to generate returns that track its benchmark, the Philippine Stock Exchange Index (PSEi), by investing in exchange-listed stocks.

The fund is suitable for investors with aggressive risk appetites who seek potentially higher returns through stock market investments and who can stay invested for more than three years. Since this is PERA-approved, funds in PERA accounts can also be placed here.

The fund is currently invested in at least 99% of selected shares of stock while the remaining is in short-term deposits.

At its inception in December 2016, BDO PERA Equity Index Fund’s net asset value per unit (NAVPU) was at PHP 100.00. The fund’s NAVPU steadily rose to PHP 132.25 in January 2018, recording a 32% increase and underperforming the PSEi’s 38% gain over the same period.

The fund’s NAVPU then shrank to a low of PHP 98.94 in November 2018 due to uncertainties regarding Brexit and the US-China trade war. The fund slightly underperformed the PSEi, recording losses of 25% and 24%, respectively.

However, the fund’s NAVPU rebounded to PHP 120.57 in July 2019—recording an increase of 22% and matching the PSEI’s performance over the same period.

Afterwards, the fund plummeted to an all-time low of PHP 67.30 in March 2020 brought about by the coronavirus-induced market selloff. The fund incurred a loss of 44%, slightly outperforming the PSEi’s 45% loss.

As of August 16, 2021, BDO PERA Equity Index Fund has recovered to a NAVPU of PHP 93.44, a 39% gain from the 2020 low, slightly underperforming the PSEi’s gain of 41%.

Since its inception, BDO PERA Equity Index Fund has had a cumulative 7% loss versus its benchmark’s cumulative 1% loss.

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 eight core non-financial holdings of the BDO PERA 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 companies in the BDO PERA Equity Index Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 3%, significantly lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better returns with an average Uniform ROA of 6%, 2x the as-reported ROA average. These companies have strong returns, with half of the companies having Uniform ROAs at or above 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 BDO PERA Equity Index 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 26% to 150%, with Ayala Corporation (AC:PHL), Aboitiz Equity Ventures, Inc. (AEV:PHL), and SM Investments Corporation (SM:PHL) having the highest distortions.

As-reported metrics understate the profitability of Ayala Corporation, suggesting an unprofitable firm with an as-reported ROA of 2%. In reality, this firm more closely resembles one that is breaking even, with a Uniform ROA of 5% in line with the average cost of capital. Prior to the pandemic, it consistently generated returns of at least 9% through 2005 to 2019.

Similarly, as-reported metrics understate the profitability of Aboitiz Equity Ventures, suggesting a below-average firm with an as-reported ROA of 3%. In reality, it is an above-average company with an 8% Uniform ROA, more than double its as-reported returns. Prior to the pandemic, it consistently generated returns of at least 10% over the last decade.

Likewise, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of 3%. In reality, this is an average firm with a 6% Uniform ROA. It has consistently generated returns of at least 8% through 2005 to 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.

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 two-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, BDO PERA Equity Index Fund’s major holdings are forecasted to significantly outperform with an 89% projected Uniform earnings growth in the next two years, while the market is forecasting a slight outperformance with an 11% projected Uniform earnings growth.

All the companies in the BDO PERA Equity Index Fund have a positive Uniform earnings growth spread. Among these companies, Ayala Corporation, Aboitiz Equity Ventures, Inc., and Ayala Land, Inc. (ALI:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing AC’s Uniform Earnings to grow by only 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 245%.

On the other hand, the market is expecting AEV’s Uniform Earnings to shrink by 2%, while sell-side analysts are projecting the company’s earnings to grow 160%.

Meanwhile, the market is pricing ALI’s Uniform earnings to grow by 12% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 101%.

Overall, as-reported numbers would significantly understate the expected earnings of these companies as shown by the Uniform-adjusted sell-side estimates.

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 have intact business models that should drive economic profitability moving forward.

SUMMARY and Ayala Corporation Tearsheet

Today, we’re highlighting one of the larger individual stock holdings in the BDO PERA Equity Index Fund—Ayala Corporation (AC:PHL).

As the Uniform Accounting tearsheet for Ayala Corporation highlights, the company trades at a Uniform P/E of 15.4x, which is below the global corporate average P/E of 23.7x and its historical average of 17.1x.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of Ayala Corporation, the company has shown a 105% Uniform EPS shrinkage 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, Ayala Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 651% and 58% in 2021 and 2022, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Ayala Corporation’s PHP 727.00 stock price. These are often referred to as market embedded expectations.

Ayala Corporation is currently being valued as if Uniform earnings were to grow by 4% per year over the next three years. What sell-side analysts expect for Ayala Corporation’s earnings growth is above what the current stock market valuation requires in both 2021 and 2022.

The company has an earning power below long-run corporate averages, and its cash flows and cash on hand fall short of obligations within five years. Moreover, the company has an intrinsic credit risk of 140bps. Together, these indicate that Ayala Corporation has a high dividend risk and moderate credit risk.

To conclude, Ayala Corporation’s Uniform earnings growth is well below peer averages and is trading below peer average valuations.

About the Philippine Markets Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living often 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 PERA Equity Index Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Daily
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