Philippine Markets Newsletter

Targeting to offer its products both in GCash and Shopee platforms, Pru Life UK is set to reach millions of users…also

August 26, 2022

Now, even 18-year-olds can avail of affordable protection plans through Pru Life UK’s offerings in GCash under the GInsure feature. In the same month, Pru Life UK began to offer dengue insurance for a coverage of six months to one year through electronic vouchers via Shopee.

We take a look at one of the unit investment trust funds (UITFs) offered by the bank. 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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With phone user count in the Philippines now at around 82.3 million, insurance companies are implementing and accelerating their strategic digital initiatives to drive up financial inclusion and insurance penetration in the country, which is still among the lowest in Asia according to the Insurance Commission.

Intending to provide life insurance access to Filipinos from all sectors, especially the underserved and vulnerable, Pru Life UK has made its health protection plans available via the e-commerce platform Shopee. Currently, Pru Life UK offers health insurance products against dengue, whose cases from January 1 to July 22 have reached 65,190 according to the Department of Health (DOH). The insurer plans to add more types of health insurance plans that would cater to Filipinos’ varying protection and financial needs in the coming months.

Pru Life UK has also partnered with GCash, the mobile wallet provider, to offer easy access to protection plans to millions of Filipinos. This partnership is part of its strategic digital initiatives to fit different age and population groups.

As we continue to monitor Pru Life UK’s performance, let’s focus on one of its UITFs — PRUInvest PH Equity Index Tracker Fund (Class I).

PRUInvest PH Equity Index Tracker Fund, launched on May 7, 2020, seeks to achieve investment returns that track the performance of the Philippine Stock Exchange Index (PSEi) performance by investing in a diversified portfolio of stocks comprising the PSEi in the same weights as the index.

The fund is suitable for investors who exhibit an aggressive risk tolerance, have an investment horizon of at least five years, and are seeking returns that mirror the performance of the Philippine Stock Exchange Index.

  • At its inception in May 2020, PRUInvest PH Equity Index Tracker Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. Two months after the pandemic lockdown, it shrank by 4% within two weeks since it was launched. During the period, the PSEi slightly outperformed the fund with a loss of 3%.
  • In June 2020, just around two weeks after the fund bottomed, it climbed by 20% with NAVPU at PHP 1.14, in line with the PSEi’s 20% increase on the same period.
  • The NAVPU continuously climbed to PHP 1.27, a gain of 10% that slightly underperformed its benchmark’s increase of 11%. Its gain is fueled by optimism about the availability of COVID-19 vaccines.
  • The fund saw a decline in the succeeding months, reaching another low of PHP 1.09 in May 2021. This 14% decline is attributed to a higher alert level of quarantine, slowing economic growth, and the perceived uncertainties over some government reforms. The fund slightly outperformed the PSEi’s loss of 15% in this period.
  • In less than a year, the fund’s NAVPU climbed back to its highest point at PHP 1.32 following the opening of economy, including the easing of travel restrictions. Furthermore, this 21% increase is in line with its benchmark’s gain of 21%.

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 PRUInvest PH Equity Index Tracker 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 PRUInvest PH Equity Index Tracker 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 4%, slightly lower than 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 9%, more than 2x 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 PRUInvest PH Equity Index Tracker 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 -328% to 269%, with International Container Services, Inc. (ICT:PHL), Aboitiz Equity Ventures, Inc. (AEV:PHL), and SM Investments Corporation (SM:PHL) having the highest positive distortions.

Of these holdings, only JG Summit Holdings, Inc. (JGS:PHL) was revealed to have a lower Uniform 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 Services, Inc., suggesting an above-average firm with an as-reported ROA of 9%. In reality, this firm more closely resembles one that is outperforming, with a Uniform ROA of 33% above the average cost of capital. In addition, the company has consistently generated returns of at least 10% over the past half-decade.

Similarly, as-reported metrics understate the profitability of Aboitiz Equity Ventures, Inc. with an as-reported ROA of 3%. In fact, its Uniform ROA is at 10%. Furthermore, the company reported a Uniform ROA of at least 8% over the past decade.

Likewise, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of only 4%, when this company actually has a 9% Uniform ROA. Moreover, prior to the pandemic, the company has maintained to generate returns of at least 11% since 2006.

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, PRUInvest PH Equity Index Tracker Fund’s major holdings are forecasted to significantly outperform with a 35% projected Uniform earnings growth in the next two years, while the market is forecasting an average with a projected 25% Uniform earnings decline.

Most of the companies in PRUInvest PH Equity Index Tracker Fund have positive Uniform earnings growth. Among these companies, Ayala Corporation (AC:PHL), Ayala Land, Inc. (ALI:PHL), and SM Investments Corporation have the highest positive Uniform earnings growth spread.

The market is pricing Ayala Corporation’s Uniform earnings to grow by 2% in the next two years, while sell-side analysts are projecting 151% growth for the company’s earnings.

Moreover, the market is pricing Ayala Land Inc.’s Uniform earnings to grow by 12% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 91%.

Additionally, the market is pricing SM Investments Corporation’s Uniform earnings to have immaterial growth in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 31%.

Overall, as-reported numbers would 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 SM Investments Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in PRUInvest PH Equity Index Tracker Fund, SM Investments Corporation (SM:PHL).

As the Uniform Accounting tearsheet for SM Investments Corporation highlights, the company trades at a Uniform P/E of 16.7x, below the global corporate average of 19.3x and its historical average of 24.4x.

Low P/Es require low EPS growth to sustain them. In the case of SM Investments Corporation, the company has shown a 172% 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, SM Investments Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 29% and 34% in 2022 and 2023, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify SM Investments Corporation’s PHP 882.00 stock price. These are often referred to as market embedded expectations.

SM Investments Corporation is currently being valued as if Uniform earnings were to grow immaterially over the next three years. What sell-side analysts expect for SM Investments Corporation’s earnings growth is above what the current stock market valuation requires through 2023.

Furthermore, the company has an earning power well above the long-run corporate averages. Moreover, its cash flows and cash on hand exceed obligations, and it also has an intrinsic credit risk of 90bps. Together, these indicate a high dividend risk and moderate credit risk.

Lastly, SM Investments Corporation’s Uniform earnings growth is above peer averages, and is 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 PRUInvest PH Equity Index Tracker Fund interesting and insightful.

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


Angelica Lim

Research Director
Philippine Markets Newsletter
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