Philippine Markets Newsletter

Last year’s one-off gains aside, this bank’s 14% earnings decline is a step towards being more conservative in its credit management… also,

November 25, 2022

This bank turned to develop its digital services amid the pandemic. 

In 2021, it launched the New PNB Digital App to address banking customers’ growing need for digital solutions during the pandemic. To cater better remittance services to OFWs, PNB partnered with a London-based fintech and remittance company. One World Connect will facilitate a faster and cheaper method for cross-border payments to the Philippines.

We take a look at one of the unit investment trust funds (UITFs) offered by the institution. In addition to examining the fund’s portfolio, we are including a 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 Newsletter:
Friday Uniform Portfolio Analytics
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In its recent earnings, the Philippine National Bank (PNB) reported a massive 86% income decline. This was a result of the recognition of a one-off PHP 33.6 billion gain on loss of control over its subsidiary PNB Holdings Corp. last year that pushed earnings up. 

Absent that adjustment, the bank’s earnings fell only 14% year-on-year, primarily due to the more than doubling of its provision for impairment, credit, and other losses to build up loan reserves. 

In order to keep up with the ever-changing banking environment, the company continued its initiatives, recently partnering with a London-based fintech and remittance company. 

In January 2022, the bank announced its partnership with One World Connect, a mobile and desktop app, to give more options to overseas Filipino workers and the global Filipino community. Additionally, more branches can receive money transfers straight to PNB Peso account or PNB US-Dollar Account.

Then in July 2022, PNB added PHP 392 million more capital from its initial infusion of PHP 245 million in March 2022 to its existing joint venture with Munich-based global financial services provider Allianz. This capital infusion will keep above the minimum regulatory and liquidity requirements. Allianz completed its acquisition of 51% stake in PNB Life Insurance back in 2016 and was later renamed  Allianz PNB Life.

As we continue to monitor PNB’s performance, let’s focus on one of its UITFs—PNB High Dividend Fund.

PNB High Dividend Fund was launched on June 15, 2012. The fund seeks dividend income and long-term capital appreciation by investing in PSE-listed companies with a history of paying dividends and with dividend yields that meet the fund’s yield requirement. The fund aims to outperform its benchmark, which is 100% PSEi.

A fund such as this one is marketed to investors who have an aggressive risk profile. Additionally, investors are advised to stay invested in the Fund for at least five (5) years.

  • At its inception in June 2012, PNB High Dividend Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. The fund’s value peaked by 56% in October 2017 following strong growth in the immediate two quarters after the new administration assumed office in July 2016. Private consumption resumed its position as the main engine of economic growth in the first half of 2017, and a rebound in exports contributed to growth.

  • On the announcement of lockdown due to the COVID-19 pandemic, the fund price shrunk by 47% at PHP 0.83. During the period, the PSEi’s 46% loss did slightly better.

  • In January 2021, the fund recovered and maintained NAVPU around PHP 1.31, which lasted for a month, a 57% growth from its lowest in March 2020, as the economy recovers from the effects of COVID-19. PSEi also recovered and climbed by 57% in the same period.

  • The NAVPU slightly shrunk by 12% to PHP 1.15 as the country had another tightening of economic activities and its benchmark slightly underperformed by shrinking 15%.

  • The fund saw a recovery in the succeeding months, reaching another high of PHP 1.47 in November 2021, and maintained this level until February 2022. This 27% growth is attributed to a higher vaccinated population and the easing of travel restrictions in the country. The fund outperformed PSEi’s 27% gain in this period.

  • In less than a year, however, the fund’s NAVPU dropped to PHP 1.31 following the Russia-Ukraine conflict, oil crisis, and rising inflation rate. Nevertheless, the fund’s 11% decline still outperformed its benchmark’s drop of 18%.

Even though the fund’s performance hasn’t been better than the market’s, it does not mean the companies in its holdings are of lower quality. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that do not generate economic profit. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top eight core non-financial holdings of PNB High Dividend 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 the companies in PNB High Dividend Fund show as-reported ROAs below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 6%, in line with the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better profitability with an average Uniform ROA of 11%, almost double the average as-reported ROA.

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 PNB High Dividend 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 8% to 215%, with Aboitiz Equity Ventures, Inc. (AEV:PHL), Aboitiz Power Corporation (AP:PHL) and DMCI Holdings, Inc. (DMC:PHL) having the highest positive distortions.

Of these holdings, only PLDT Inc. (TEL:PHL) was revealed to have a Uniform ROA in line with as-reported ROA, presenting a potential cause for concern. Companies such as this need to be closely monitored for drastic changes that could negatively affect the fund itself, especially when the support behind the stocks’ performance begins to wane.

As-reported metrics understate the profitability of Aboitiz Equity Ventures, Inc., suggesting a below-average firm with an as-reported ROA of 3%. In reality, this firm more closely resembles one that is actually profitable, with a Uniform ROA of 10% above the average cost of capital. In addition, the company has consistently generated returns of at least 7% over the past half-decade.

Similarly, as-reported metrics understate the profitability of Aboitiz Power Corporation with an as-reported ROA of 4%. In fact, its Uniform ROA is at 11%, its lowest over the past decade.

Likewise, as-reported metrics understate the profitability of DMCI Holdings, Inc., suggesting a below-average firm with an as-reported ROA of only 7%, when this company actually has a 12% Uniform ROA. 

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 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, PNB High Dividend Fund’s major holdings are forecasted to significantly outperform with a 16% projected Uniform earnings growth in the next two years, while the market is forecasting an average with a projected 5% Uniform earnings decline.

Most of the companies in PNB High Dividend Fund have positive Uniform earnings growth. Among these companies, DMCI Holdings, Inc., Semirara Mining and Power Corporation (SCC:PHL), and Universal Robina Corporation (URC:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing DMCI Holdings, Inc’s Uniform earnings to grow by 40% in the next two years, while sell-side analysts are projecting 17% shrinkage for the company’s earnings.

Moreover, the market is pricing Semirara Mining and Power Corporation’s Uniform earnings to shrink by 12% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 42%.

Additionally, the market is pricing Universal Robina Corporation’s Uniform earnings to grow by 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 21%.

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

Uniform Accounting metrics show that these mature, but high growth and high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Semirara Mining and Power Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in PNB High Dividend Fund, Semirara Mining and Power Corporation (SCC:PHL).

As the Uniform Accounting tearsheet for Semirara Mining and Power Corporation highlights, the company trades at a Uniform P/E of 5.1x, below the global corporate average of 18.4x and its historical average of 13.9x.

Low P/Es require low EPS growth to sustain them. In the case of Semirara Mining and Power Corporation, the company has shown a 797% Uniform EPS growth last year.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp of 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, Semirara Mining and Power Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 170% in 2022 and shrink by 26% in 2023.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Semirara Mining and Power Corporation’s PHP 30.20 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power 3x the long-run corporate averages. Moreover, its cash flows and cash on hand consistently exceed obligations, and it also has an intrinsic credit risk of 250bps. Together, these indicate a low dividend risk and moderate credit risk.

Lastly, Semirara Mining and Power Corporation’s Uniform earnings growth is well above peer averages, and well above 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 at the end of the month, 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 Semirara Mining and Power Corporation interesting and insightful.

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


Angelica Lim

Research Director
Philippine Markets Daily
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