Philippine Markets Newsletter

As-reported numbers suggest that this fund’s top holdings aren’t profitable, but Uniform Accounting shows they are fundamentally sound.

May 15, 2020

This universal bank offers a unit investment trust fund (UITF) that focuses on investing in fundamentally sound companies.

In spite of this fund’s short-term headwinds and poor selection of companies based on as-reported numbers, Uniform Accounting shows that their top holdings are actually profitable.

In addition, we’re 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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Asia United Bank Corporation (AUB), the banking unit of Republic Biscuit Corporation (Rebisco), started operating as a commercial bank in October 1997.

In February 2013, the Bangko Sentral ng Pilipinas (BSP) authorized AUB to operate as a universal bank. As a universal bank, AUB now has two additional powers: powers of an investment house that includes securities underwriting, and the power to invest in allied and non-allied enterprises.

By May 2013, AUB had successfully listed on the Philippine Stock Exchange. Republic Biscuit Corporation, Kuo Yu Philippines Holdings Corporation, and Lambda Holdings Corporation became the bank’s largest stockholders.

Today, AUB has over 250 branches with offerings such as deposit account products and UITFs.

For this week, we’ll focus specifically on one of their UITFs, the AUB Equity Investment Fund (AUB EIF).

AUB EIF was established on May 4, 2006 with a strategy of investing in blue chip companies in the Philippine Stock Exchange index (PSEi).

AUB EIF’s net asset value per unit (NAVPU) during inception was at PHP 100.00. After steadily rising to PHP 144.95 in July 2007, the fund fell to a historical low of PHP 79.93 in October 2008 in the midst of the global financial crisis, a loss of 45%. Its benchmark, the PSEi, incurred a loss of 46% over the same period.

The fund’s NAVPU slowly rose to a peak of PHP 317.94 in January 2018, then dropped 22% to PHP 246.90 in November 2018 on various concerns such as the Brexit and U.S.-China trade war. Similarly, the PSEi had a loss of 24% in the same time span.

After rebounding to a NAVPU of PHP 280.28 by the end of 2019, the fund is down to PHP 217.68 year to date (YTD) due to uncertainties about the COVID-19 pandemic. However, the fund slightly outperformed its benchmark with a loss of 22% YTD versus the PSEi’s 27% YTD loss.

Uncertainty still looms in the Philippines, with different cities and regions possibly shifting from ECQ to GCQ every couple of weeks. Until this matter is resolved, short-term volatility in stock market prices is expected to continue.

The pandemic continues to affect multiple industries and companies, including companies in AUB EIF’s portfolio.

AUB EIF’s top holdings do not appear to be profitable under as-reported numbers. However, Uniform Accounting shows that AUB EIF does indeed invest in profitable, fundamentally sound companies. With Uniform Accounting, investors can see the real profitability and earnings expectations of companies.

The table below lists the top non-financial holdings of AUB EIF along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

As-reported numbers would make investors believe that most of AUB EIF’s holdings are not generating economic profit, with an average as-reported ROA of 5%, lower than global cost of capital levels.

However, the truth is, under Uniform Accounting, most of these companies have actually produced above-average profitability, with average Uniform ROA of 8%, better than global corporate average returns.

Uniform Accounting reveals the real underlying performance of companies by adjusting for inconsistencies in companies’ financial statements brought about by the miscategorizations in the Philippine Financial Reporting Standards (PFRS).

As such, it should not be surprising that when analyzing the non-financial holdings of AUB EIF, the figures that easily stand out are the double-digit 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 -23% to 197%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and JG Summit Holdings, Inc. (JGS:PHL) having distortions greater than a hundred percent.

As-reported ROA understates the profitability of Ayala Corporation, suggesting that this leading conglomerate is a below-average company with an as-reported ROA of 4%. In reality, this holding company is a high-quality firm with an 11% Uniform ROA, almost thrice the as-reported figure.

Meanwhile, as-reported numbers incorrectly suggest that SM Investments Corporation is an average company with an as-reported ROA of 6%. The truth is that it is a high-quality firm with a 12% Uniform ROA, twice the global corporate average returns.

This table shows the earnings growth expectations for the major non-financial ownerships of AUB EIF. It features three key data points:

  1. The 2-year Uniform 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, AUB EIF’s top holdings are forecast to surpass that with a 9% projected Uniform earnings growth in the next two years.

The market, on the other hand, sees a decline in earnings for these companies, forecasting a Uniform EPS shrinkage of 1% over the next two years.

Among these companies, PLDT Inc. (TEL:PHL) and SM Investments Corporation have the highest Uniform earnings growth dislocation.

The market is pricing PLDT Inc.’s Uniform earnings to grow by 5% in the next two years. However, sell-side analysts are forecasting it to accelerate by 40% going forward.

Similarly, the market is expecting SM Investment Corporation’s Uniform earnings to shrink by 13%, but analysts are projecting a strong 19% earnings growth for the firm in the next two years.

That being said, the fund manager should take another look at JG Summit Holdings, Inc. (JGS:PHL).

Markets are expecting JG Summit Holdings to see its Uniform earnings decline by 5% a year going forward. Meanwhile, sell-side analysts are more bearish, forecasting a 12% Uniform earnings shrinkage moving forward.

Overall, one might think that this fund has a low-quality portfolio with average as-reported ROA of 5% and a market-expected earnings shrinkage of 1% moving forward. However, in reality, this fund has healthy profitability levels with an average Uniform ROA of 8% and a strong earnings growth potential of 9% Uniform EPS growth in the next two years.

Through the lens of Uniform Accounting, investors can clearly see that the AUB EIF comprises mostly high-quality and fundamentally sound companies.

SM Prime Holdings, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in AUB Equity Investment Fund—SM Prime Holdings, Inc. (SMPH).

As our Uniform Accounting tearsheet for SMPH highlights, it trades at a Uniform P/E of 29.3x, well above global corporate averages but below its historical averages.

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

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 PFRS earnings as a starting point for our Uniform earnings forecasts. When we do this, SMPH’s sell-side analyst-driven forecast shows that Uniform earnings will shrink by 21% in 2020 and grow by 39% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 31.00 per share. These are often referred to as market embedded expectations.

In order to meet the current market valuation levels of SMPH, the company would have to see Uniform earnings grow by 5% each year over the next three years. Sell-side analysts’ expected 39% earnings growth for the company is well above what the current stock market valuation requires.

The company has an earning power around 1.5x the long-run corporate averages—based on its Uniform ROA calculation. However, with cash flows and cash on hand falling short of obligations within five years, SMPH has a high dividend risk.

To conclude, SM Prime Holdings’ Uniform earnings growth is well below peer averages in 2020, and the company is trading well above average peer 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 AUB Equity Investment 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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