Philippine Markets Newsletter

MONDAY MACRO: The PSEi’s rebalancing left Uniform ROAs nearly unchanged, but possibly in a better position

August 23, 2021

The PSEi, the benchmark index for the Philippine stock market, underwent a rebalancing earlier this month.

This is good for the short-term stock trader as rebalancing creates volatility for the stocks affected. However, it’s unclear what it could mean for the long-term investor, but Uniform Accounting may give us a glimpse.

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The aim of the PSEi is to represent the Philippine stock market through 30 companies. To keep the index updated, it is reviewed twice a year.

The PSEi had its second and final review for the year this August. Unlike the first review back in February where it was left unchanged, the PSEi now saw the replacement of its two constituents.

Liquor-maker Emperador (EMP:PHL) and Consunji-led conglomerate DMCI Holdings (DMC:PHL) were removed from the 30-member basket, replaced by the recently public Converge (CNVRG:PHL) and Ayala-led AC Energy (ACEN:PHL).

Events like these are an opportune time for short-term stock traders. Institutional funds that are tracking the PSEi have to wait until the effective date of the rebalancing, but traders can start locking in their positions at the date of announcement.

It’s why Converge’s stock jumped 11.5% and AC Energy’s stock rose 4.6% during the rebalancing announcement on August 6.

The opposite also occurs where traders sell their positions before the institutional funds sell theirs.

In addition, if the price falls too much, some traders will start to buy since the fundamentals of the companies didn’t really change.

There are a lot of ways for traders to profit from or mitigate their losses from the PSEi’s rebalancing, but what’s unclear is how it might impact the long-term PSEi investor, that is, investors primarily invested in index stocks.

Comparing the 3-year aggregate Uniform ROAs of the PSEi, we see that the performance of the new and old constituents did not differ by much.

This is because the companies affected by the rebalancing are not large enough in assets or earnings to move the needle in the group’s overall profitability.

It’s the industrial conglomerates like SM Investments (SM:PHL), San Miguel (SMC:PHL), and Ayala Corporation (AC:PHL) that still have an outsized influence over the index.

However, if we look closely at the individual performance of the affected companies, the PSEi seems to be in a fundamentally better shape with the entry of Converge and AC Energy, no matter how small the change is.

Both Converge and AC Energy have seen improving ROAs, despite the pandemic.

As shown below, Converge’s Uniform ROA rose from 11% in 2019 to 13% in 2020.

Furthermore, with its recent IPO, Converge has the capital to rapidly grow and tap into the growing demand for high-speed wireline broadband plans.

The company even aims to spend PHP 20 billion in capital expenditures for 2021, which could further unlock profitability.

Meanwhile, since the Ayala Corporation took control of the company, AC Energy has seen ROAs inflect positively from -3% in 2019 to 10% in 2020.

So far in 2021, the company has been able to grow its attributable capacity by more than 50%, as it aims to produce 5,000 MW of renewables by 2025 and be the largest renewable energy company in the country.

Unlike the upward ROA trend of Converge and AC Energy, the ROA trends of Emperador and DMC Holdings have been either flat or declining.

For Emperador, even though the company has been recording solid Uniform ROAs, it has been stagnant at 11% over the past four years.

That said, Emperador has been planning to expand international growth, through a secondary listing in the Singaporean market. If successful, we may see the company be included in the PSEi once again.

On the other hand, DMCI Holdings’ profitability has been on a decline since 2017. Specifically, Uniform ROAs contracted from 18% in 2017 to just 2% in 2020.

The industrial conglomerate’s weakening performance can be attributed to the different problems its businesses have faced.

Coal prices had been falling in the past few years for its coal mining business, Semirara (SCC:PHL). Furthermore, its water utility business, Maynilad, recently faced regulatory headwinds. Finally, its real estate business continues to be affected by the pandemic.

Overall, based on the Uniform ROA trends, it seems that the new additions to the PSEi are showing greater growth stories.

It’s not going to be apparent in the near term, as we’ve seen in the PSEi’s aggregate Uniform ROA, but it could become meaningful in the future. As a result, the PSEi’s rebalancing may have raised the upside for investors over the long term.

About the Philippine Markets Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Daily
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