A Singapore-based company called Bizbaz, which specializes in credit scoring and risk models assessment, has partnered with Rizal Commercial Banking Corporation (RCBC). This partnership will allow RCBC Bank to use Bizbaz’s AI-driven credit scoring technology to expand its lending business and reach more customers.

Another of RCBC’s digital capabilities is its newly launched RCBC Boz app, a new business solution that simplifies financial management for entrepreneurs, freelancers, and side hustlers. The app allows users to easily track and manage business transactions separately from their personal finances.

Meanwhile, RCBC’s growth and achievements have attracted the interest of Sumitomo Mitsui Banking Corporation (SMBC) which led to an increase in its shareholding to 20%.

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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Bizbaz, a Singapore-based credit scoring and risk models assessment solution provider, has partnered with RCBC to integrate AI-driven credit scoring into RCBC’s lending process. This partnership aims to expand access to loans, particularly for micro, small, and medium enterprises (MSMEs), the unbanked, and the underbanked.

The AI-powered credit assessment and scoring tool of Bizbaz will enable RCBC to make more informed lending decisions, reducing the risk of non-performing loans (NPLs). The tool analyzes financials, health, lifestyle, and social footprints to create a comprehensive customer or business risk profile.

In addition to RCBC’s digital transformation is the introduction of an all-in-one tool for entrepreneurs, freelancers, and side hustlers. RCBC Boz simplifies the tracking and managing of business transactions separately from personal finances.

RCBC Boz app streamlines business operations and enhances financial management for entrepreneurs. These features include transaction tracking, e-invoicing for efficient collections, automated payroll tasks, business goal setting, and real-time financial reporting.

These digital transformations were bolstered by the increased investment from Sumitomo Mitsui Banking Corporation (SMBC), one of Japan’s leading megabanks. SMBC deepened its commitment to RCBC by raising its stake to 20%, injecting an additional PHP 27.13 billion upon the completion of the share sale in July 2023.

The RCBC R25 Dividend Equity Fund launched on November 8, 2019, 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 November 2019, RCBC R25 Dividend Equity Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. The fund’s value significantly shrunk to PHP 0.57 or by 42% in March 2020 while the benchmark shrunk as well by 43%. This was after a two-day closure due to the Luzon-wide lockdown meant to contain the COVID-19 outbreak.
  
  
• In November 2020, NAVPU recovered by 48% from its decline in March 2020 while PSEi climbed by 55%.
  
  
• Due to the pump in prices of diesel and gasoline, the fund shrunk by 10% in May 2021 while outperforming PSEi which shrinkage by 14%.
  
  
• However, in February 2022, the fund climbed by 30% outperforming PSEi’s 22% growth as more countries reopen to travelers and trade among economies in Asia and the Pacific rose to the highest level in three decades.
  
  
• The fund contracted by 20% over seven months, reaching a value of PHP 0.79, while the PSEi experienced a 23% decline during the same period. Concurrently, the Philippine peso depreciated to an all-time low of PHP 58 against the US dollar.
  
  
• Lastly, the NAVPU grew to PHP 0.95 or 19% when nearly all sectors had already surpassed their pre-pandemic levels. This growth outperformed the benchmark with 16% growth.
  
  
• Since its inception, the fund has outperformed its benchmark, recording an 11% shrinkage versus PSEi’s 23% shrinkage.

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 RCBC R25 Dividend 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 RCBC R25 Dividend 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 RCBC R25 Dividend 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 -11% to 375%, with PLDT Inc. (TEL: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 PLDT Inc., suggesting an as-reported ROA of 1%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 6% above the average cost of capital. In addition, the company has consistently generated returns of at least 2% 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, RCBC R25 Dividend Equity Fund’s major holdings are forecasted to significantly underperform with a 6% projected Uniform earnings shrinkage in the next two years, while the market is forecasting 2% Uniform earnings.

Most of the companies in RCBC R25 Dividend Equity Fund have negative Uniform earnings. Among these companies, Universal Robina Corporation (URC:PHL) and International Container Terminal Services, Inc. have the highest positive Uniform earnings growth spread.

The market is pricing Universal Robina Corporation’s Uniform earnings to grow by 3% in the next two years, while sell-side analysts are projecting 18% growth for the company’s earnings.

Moreover, the market is pricing International Container Terminal Services, Inc.’s Uniform earnings to shrink by 11% in the next two years, while sell-side analysts are projecting the company’s earnings to be immaterial.

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 Emperador Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the RCBC R25 Dividend Equity Fund, Emperador Inc. (EMI:PHL).

As the Uniform Accounting tearsheet for Emperador Inc. highlights, the company trades at a Uniform P/E of 29.9x, which is above the global corporate average of 18.4x and its historical average of 27.7x.

High P/Es require high EPS growth to sustain them. In the case of Emperador Inc., the company showed a 6% 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, Emperador Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 2% and 14% in 2023 and 2024, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Emperador Inc.’s PHP 20.75 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power 2x 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.

Lastly, Emperador Inc.’s Uniform earnings growth is in line with 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 the RCBC R25 Dividend Equity Fund interesting and insightful.

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

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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