The Philippine Bank of Communications (PBCom) has continuously been expanding its operations and developing strategic partnerships. For one, it secured the exclusive right to distribute Etiqa life and non-life insurance products to its customers

PBCom has also been approved by the Bangko Sentral ng Pilipinas (BSP) to become a universal bank. This will allow it to further strengthen its influence in the local banking industry.

Today, we look at one of the institution’s unit investment trust funds (UITF). On top of examining the fund’s portfolio, we will provide you with the current Uniform Accounting Performance and Valuation Tearsheet for one of the fund’s largest holdings.

Philippine Markets Newsletter:
Friday Uniform Portfolio Analytics
Powered by Valens Research

PBCom, founded in 1939 in Binondo, has obtained last 2022 a license from the Bangko Sentral ng Pilipinas (BSP) to upgrade its operations to that of a universal bank.

This license permits PBCom to expand its operations significantly, allowing investments in nonallied enterprises and a broader array of products and services in its 95 branches nationwide. This was not permitted under a regular commercial banking license.

Furthermore, PBCom has joined forces with Etiqa Life and General Assurance Philippines Inc., a subsidiary of Malayan Banking Bhd, in an exclusive insurance distribution agreement. Pending regulatory approvals, this deal will exclusively provide PBCom’s bank clients access to Etiqa’s extensive portfolio of life and non-life insurance products.

The alliance between PBCom and Etiqa Philippines represents a significant leap forward in the financial industry. It not only enhances PBCom’s service offerings but also provides greater insurance options and security to its valued customers.

Let’s take a look at what else PBCom has done so far to add value to its clients.

The PBCom Value Equity Fund launched on December 8, 2010, is a Unit Investment Trust Fund (UITF) that aims to provide income and capital growth to its investors through long-term investments in stocks listed in the Philippine Stock Exchange Index (PSEi).

The fund is suited for investors seeking higher returns from stock market investments but with a long-term time horizon and aggressive risk profile.

• At its inception in December 2010, PBCom Value Equity Fund’s beginning net asset value per unit (NAVPU) was PHP 100. The fund’s value initially shrunk to PHP 86 or 14% in September 2011 when there are delays in public spending, weak industry output, and timely recovery from natural calamities. Its benchmark slightly outperformed at 12%.
• In May 2013, the fund grew by 68% from its shrinkage in 2011 while significantly underperforming PSEi which grew by 98% following the exports jump in Japan and expectations of further interest rate cuts. However, in the next nine months, the fund shrunk by 18% while its benchmark shrunk by 20% as there were sell-off due to growing concerns over emerging markets.
• After a year, the fund’s NAVPU climbed to PHP 155, a 31% growth from its price in February 2014. PSEi slightly outperformed by 37% growth during the same period.
• In October 2015, the fund began shrinking to PHP 144 and continued to shrink by 16% in three months. This follows the drop in US markets from the negative outlook for the global economy and investors were liquidating their positions in the market. The benchmark slightly underperformed by 17% in the same period.
• After two years, the fund grew by 40% at the beginning of 2018 while PSEi outperformed by 49% growth fueled by the optimism on positive economic figures due to economic expansion.
• However, in March 2020, with stocks in free fall, the fund quickly shrunk to PHP 90 or by 47% while the benchmark shrunk by 49%. This was after a two-day closure due to the Luzon-wide lockdown meant to contain the then-COVID-19 outbreak.
• Furthermore, the fund recovered in February 2022 by 65% growth but was followed by a shrinkage of 22% in September 2022 as the peso fell to a new all-time low of 59:$1 before closing at PHP 59.99 due to mounting inflation and recession risks.
• At the start of the third quarter of 2023, the fund and PSEi climbed by 17% and 15%, respectively. Since its inception, the fund underperformed its benchmark, recording a 37% growth versus PSEi’s 57% growth.

Let’s take a look at the quality of the companies in its holdings. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that don’t appear to break even. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top eight core non-financial holdings of PBCom Value Equity 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 PBCom Value Equity 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 5%, below the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered a Uniform ROA of 12%, a profitability above the global corporate average.

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 PBCom Value Equity 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 -133% to 332%, with International Container Terminal Services, Inc. (ICT:PHL), SM Investments Corporation (SM:PHL), and Ayala Corporation (AC:PHL) having the highest positive distortions.

Among these holdings, only JG Summit Holdings, Inc. (JGS:PHL) is below 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 International Container Terminal Services, Inc., suggesting an as-reported ROA of 11%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 45% above the average cost of capital. In addition, the company has consistently generated returns of at least 7% over the past decade.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation with an as-reported ROA of 5%. In fact, its Uniform ROA is at 13%, when its lowest was 8% over the past decade.

Likewise, as-reported metrics understate the profitability of Ayala Corporation, suggesting a below-average firm with an as-reported ROA of only 3% when this company actually has a 7% 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 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, PBCom Value Equity Fund’s major holdings are forecasted to significantly outperform with a 19% projected Uniform earnings growth in the next two years, while the market is forecasting -39% Uniform earnings.

Most of the companies in PBCom Value Equity Fund have positive Uniform earnings growth. Among these companies, JG Summit Holdings, Inc. and Ayala Corporation (AC:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing JG Summit Holdings, Inc.’s Uniform earnings to shrink by 273% in the next two years, while sell-side analysts are projecting an immaterial growth for the company’s earnings.

Moreover, the market is pricing Ayala Corporation’s Uniform earnings to shrink by 3% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 84%.

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 Ayala Land, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the PBCOM Value Equity Fund, Ayala Land, Inc. (ALI:PHL).

As our Uniform Accounting tearsheet for Ayala Land, Inc. highlights, the company trades at a Uniform P/E of 21.7x, which is above the global corporate average of 18.4x but below its historical average of 28.6x.

High P/Es require high EPS growth to sustain them. In the case of Ayala Land, Inc., the company showed a 92% 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, Ayala Land, Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 5% in 2023 and grow by 31% in 2024.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Ayala Land, Inc.’s PHP 25.70 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power below the long-run corporate averages. Moreover, its cash flows and cash on hand consistently exceed its obligations, and it also has an intrinsic credit risk of 240bps. Together, these indicate a moderate dividend risk and moderate credit risk.

Lastly, Ayala Land, Inc.’s Uniform earnings growth is below peer averages and above peer average valuations.

About the Philippine Markets Newsletter
“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 PBCom Value Equity Fund interesting and insightful.

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

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
Powered by Valens Research
www.valens-research.com