The new Metrobank app offers waived InstaPay fees in sending money for small transfers (PHP 1,000 or less) until June 30, 2024. In addition, QR payments across banks and e-wallets are also seamless, offering fee-free transfers for up to PHP 1,000.

Metrobank clients can also use cardless withdrawals via the app, letting clients access cash at any Metrobank or PSBank ATM with generated six-digit PINs.

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
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Metrobank’s new app waives InstaPay transfer fees of up to PHP 1,000 between Metrobank accounts and to other banks/e-wallets until June 30, 2024. Its QR payments also offer free transfers for up to PHP 1,000. Moreover, the bank expanded its reach through the upcoming Cash Pick-up service. Recipients without bank accounts or e-wallets can still receive money and it is redeemable at over 11,000 partner remittance centers nationwide.

Meanwhile, cardless withdrawal will also be available for Metrobank clients. They can seamlessly withdraw cash from any Metrobank or PSBank ATM without the physical card but using the app’s cardless withdrawal feature. Furthermore, the bank also enhanced its security features with the upcoming AppKey feature, enabling biometric authentication via fingerprint or facial recognition.

The Metro Equity Fund launched on March 1, 2007, is a UITF that aims for capital growth and high returns in the long-term to surpass its benchmark of the Philippines Stock Exchange Index (PSEi).

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

• At its inception in March 2007, Metro Equity Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. In January 2018, the fund’s NAVPU grew 2x from its inception while underperforming PSEi which grew by 1.8x given the higher infrastructure spending in the fourth quarter of 2017.
• However, in March 2020, with stocks in free fall, the fund quickly shrunk to PHP 1.60 or by 47% while the benchmark shrunk as well by 49%. This was after a two-day closure due to the Luzon-wide lockdown meant to contain the then-COVID-19 outbreak.
• After a year, the fund grew by 33% as the economy recovered while the PSEi grew by 39%.
• The fund contracted by 8% at the beginning of Q4 2022, reaching a value of PHP 1.95, while the PSEi experienced an 11% decline during the same period due to fare hikes and higher food prices caused by a typhoon from the previous month.
• Lastly, the NAVPU grew to around PHP 2.10 when nearly all sectors had already surpassed their pre-pandemic levels. This growth is equal to the benchmark with 10% growth.
• Since its inception, the fund has outperformed its benchmark, recording a 120% growth versus PSEi’s 102% growth.

With the fund outperforming its benchmark, 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 Metro 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 Metro 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 15%, 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 Metro 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 55% to 316%, with GT Capital Holdings, Inc. (GTCAP:PHL) and International Container Terminal Services, Inc. (ICT:PHL) having the highest positive distortions.

Among these holdings, no companies are below the as-reported ROA. Companies with Uniform ROA below the as-reported ROA present 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 GT Capital Holdings, Inc., suggesting an as-reported ROA of 5%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 20% above the average cost of capital. In addition, the company has consistently generated returns of at least 4% over the past decade.

Similarly, as-reported metrics understate the profitability of International Container Terminal Services, Inc. with an as-reported ROA of 11%. In fact, its Uniform ROA is at 45%, when its lowest was 7% over the past decade.

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, Metro Equity Fund’s major holdings are forecasted to significantly outperform with a 23% projected Uniform earnings growth in the next two years, while the market is forecasting a 7% Uniform earnings shrinkage.

Most of the companies in Metro Equity Fund have negative Uniform earnings. Among these companies, Ayala Corporation (AC:PHL) and GT Capital Holdings, Inc. have the highest positive Uniform earnings growth spread.

The market is pricing Ayala Corporation’s Uniform earnings to grow by 89% in the next two years, while sell-side analysts are projecting a 4% shrinkage for the company’s earnings.

Moreover, the market is pricing GT Capital Holdings, Inc.’s Uniform earnings to grow by 17% in the next two years, while sell-side analysts are projecting the company’s earnings to shrink by 46%.

Overall, as-reported numbers significantly overstate 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 Manila Electric Company Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the Metro Equity Fund, Manila Electric Company (MER:PHL).

As the Uniform Accounting tearsheet for Manila Electric Company highlights, the company trades at a Uniform P/E of 30.2x, which is above the global corporate average of 18.4x but below its historical average of 36.2x.

High P/Es require high EPS growth to sustain them. In the case of Manila Electric Company, the company showed a 23% Uniform EPS shrinkage 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, Manila Electric Company’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 25% in 2023 and 20% shrinkage in 2024.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Manila Electric Company’s PHP 380 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power 1x the long-run corporate averages. Moreover, its cash flows and cash on hand consistently exceed its obligations within five years. Together, these indicate a low dividend risk and moderate credit risk.

Lastly, Manila Electric Company’s Uniform earnings growth is in line with peer averages and in line with 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 the Metro Equity Fund interesting and insightful.

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

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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