Philippine Markets Newsletter

The ace up RCBC’s sleeve, this banking veteran is making big waves for the bank in the two years he’s been president…also, GLO tearsheet

November 25, 2021

While RCBC continues to work towards improving banking accessibility in the country, we look at one of the unit investment trust funds (UITF) offered on their digital solutions.

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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As the banking industry regains traction in the Philippines’ recovering economy, one bank in particular has been basking in the spotlight. 

Rizal Commercial Banking Corporation (RCBC) posted a consolidated net income of P5.3 billion for the first nine months of 2021, up by 33% from a year ago. RCBC reports that this was in part due to a 68% increase in new cards issued, bringing the total cards-in-force to nearly 910,000 as of September.

Furthermore, through the unit investment trust funds (UITFs) on RCBC’s digital platform, trust assets under management reached a record high of P134 billion. So with these said, is there a secret to RCBC’s personal record-breaking achievements?

With the goal of pushing RCBC back up to the top 4 banks of the country, CEO Eugene Acevedo has been taking an active visionary approach in leading the bank since his appointment in 2019. 

A banking veteran with over thirty years of experience, Eugene Acevedo has held leadership positions in Union Bank, City Savings Bank, and PNB. Acevedo spent 23 years leading the Global Markets cluster of Citibank in the Philippines, Hong Kong, Taiwan, and Macau. 

Upon becoming the CEO of RCBC in 2019, Acevedo set a goal to double profitability from P4.3 billion in 2018, boost return on equity to 10% (from 6%), and enhance productivity while controlling costs for the next three to five years. 

To promote accessibility, RCBC opened up digital banking solutions that allow anyone to open an account in minutes. This would enable customers to conduct advanced banking transactions such as converting foreign exchange, investing in UITFs, cardless withdrawal, paying for shopping just by scanning a QR, among others. 

In light of these efforts, RCBC’s digital platforms have disbursed P16.1 billion to more than 4.5 million household beneficiaries, benefitting over 22.8 million individuals in 73 out of 81 provinces nationwide, as of June 2021. 

According to Acevedo, using the three D’s—design, data and digitization—the “moonshot” goal is to further bring fintech innovation to eventually reach 65 million Filipinos.

As we continue to monitor Acevedo’s promise of RCBC’s success, let us take a look at one of the UITFs RCBC has made accessible to more Filipinos. We’ve analyzed some of RCBC’s UITFs before, Rizal Equity Fund and RCBC R25 Dividend Equity Fund. This month, we’ll be revisiting the RCBC R25 Blue-Chip Equity Fund.

The RCBC R25 Blue-Chip Equity Fund was established on November 8, 2019. The fund uses an algorithm to invest in stocks consisting of the 25 largest and most actively traded companies for long-term capital appreciation and to surpass its benchmark, the Philippine Stock Exchange Composite Index (PSEi). Specifically, this fund is suited for investors with long-term goals such as building up a retirement fund or funding a college education. 

The fund is suitable for investors with high risk appetites seeking to invest in Philippine equity securities and are comfortable with the risks involved. At least 99% of the fund is invested in stocks, while the remainder is invested in cash and time deposits. 

  • At its inception in November 2019, the RCBC R25 Blue-Chip Equity Fund’s initial net asset value per unit (NAVPU) was at PHP 1.00. This was the highest the NAVPU had reached due to the economic impacts of coronavirus which immediately followed.
  • By March 2020, the fund fell to its record low of PHP 0.59 due to the coronavirus-induced market selloff. The fund’s 41% loss outperformed its benchmark’s 43% loss during this period.
  • The fund has since rebounded and matched its benchmark along the way. As of November 22, 2021, the fund recovered to a NAVPU of PHP 0.91, a 55% gain from its 2020 low, but still underperformed compared to the PSEi’s gain of 58%.
  • Since its inception, RCBC R25 Blue-Chip Equity Fund has had a cumulative 9% loss versus its benchmark’s cumulative 10% loss.

As-reported metrics would have investors believe that the fund’s portfolio consists of companies that do not generate economic profit. Though the fund underperformed its benchmark, that does not mean its holdings consist of bad companies. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top eight core non-financial holdings of the RCBC R25 Blue-Chip 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 the RCBC R25 Blue-Chip Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of just 4%, 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 6%, 1.5x the average as-reported ROA and in line with the global corporate average returns.

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 the RCBC R25 Blue-Chip 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 -36% to 150%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and AC Energy Corporation (ACEN:PHL) having the highest distortions.

Of these holdings, only Globe Telecom, Inc. was revealed to have a lower Uniform ROA, presenting a potential cause for concern. Companies such as these 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 Ayala Corporation, suggesting an unprofitable firm with an as-reported ROA of 2%. In reality, this firm more closely resembles one that is breaking even, with a Uniform ROA of 5% in line with the average cost of capital. Prior to the pandemic, it consistently generated returns of at least 9% from 2005 to 2019.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of 3%. In fact, its Uniform ROA doubles the as-reported number at 7%. Furthermore, it has consistently generated returns of at least 10% from 2005 to 2019.

Likewise, as-reported metrics understate the profitability of AC Energy Corporation, suggesting an average firm with an as-reported ROA of only 5%, when this is actually a high-quality firm with a 10% 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 of when we convert consensus sell-side analyst estimates according to the Uniform Accounting framework.
  1. 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 by 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.
  1. 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 Blue-Chip Equity Fund’s major holdings are forecasted to significantly outperform with a 70% projected Uniform earnings growth in the next two years, while the market is forecasting a slight outperformance with a 16% projected Uniform earnings growth.

All the companies in the RCBC R25 Blue-Chip Equity Fund have a positive Uniform earnings growth spread except for AC Energy Corporation and Globe Telecom, Inc. (GLO:PHL). Among these companies, Ayala Corporation, 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 only 6% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 240%.

Likewise, the market is pricing Ayala Land’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 Investment Corporation’s Uniform earnings to grow by 9% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 67%.

Overall, as-reported numbers would significantly understate the expected earnings of these companies as shown by the Uniform-adjusted sell-side estimates.

While these firms suffer from the adverse effects of the coronavirus pandemic, dragging down their short-term earnings growth expectations, Uniform Accounting metrics show that most of these companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Globe Telecom, Inc. Tearsheet 

Today, we’re highlighting one of the individual stock holdings in the RCBC R25 Blue-Chip Equity Fund, Globe Telecom, Inc. (GLO:PHL).

As the Uniform Accounting tearsheet for Globe Telecom highlights, the company trades at a Uniform P/E of 27.7x, above the global corporate average of 24.0x, and its historical average of 20.6x.

High P/Es require high EPS growth to sustain them. In the case of Globe Telecom, the company has shown a 25% Uniform EPS shrinkage in 2020.

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, Globe Telecom’ sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 23% in 2021 and shrink by 21% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Globe Telecom’ PHP 3,596.00 stock price. These are often referred to as market embedded expectations.

Globe Telecom is currently being valued as if Uniform earnings were to grow by 7% per year over the next three years. What sell-side analysts expect for Globe Telecom’ earnings growth is above what the current stock market valuation requires for both 2021 and 2022.

The company has an earning power slightly below long-run corporate averages, and its cash flows and cash on hand fall short of obligations within five years. However, the company has an intrinsic credit risk of 140bps. Together, these indicate that Globe Telecom has a high dividend risk and moderate credit risk.

Lastly, Globe Telecom’ Uniform earnings growth is in line with peer averages and 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 month’s focus on the RCBC R25 Blue-Chip Equity Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Newsletter
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