Philippine Markets Newsletter

The earning power of one of the most established and oldest UITF portfolios is undervalued when using Uniform Accounting.

July 9, 2020

This bank employs a diversified investment approach in managing one of its unit investment trust funds (UITFs).

This UITF aims to surpass its benchmark, the Philippine Stock Exchange Index (PSEi), by focusing on companies with medium to long-term high capital growth potential.

As-reported metrics would leave investors confused with the fund’s stock picks. However, Uniform Accounting financial metrics help make sense of the fund’s investments and how they fit into the bank’s investment philosophy.

In addition to examining the fund’s portfolio, we are including 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 Daily:
Friday Uniform Portfolio Analytics
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UITFs are bank-operated investments that allow its investors to preserve or grow their capital. The creation of UITFs in the Philippines started in September 2004, through the issuance of Circular 447 by the Bangko Sentral ng Pilipinas (BSP).

Among the oldest and most established UITFs in the Philippines is the BDO Institutional Equity Fund, launched in June 2005.

The fund invests in exchange-listed Philippine companies with high capital growth potential to generate investment returns over the medium to long term. It also invests in bank deposits and other short-term fixed income instruments for liquidity and portfolio re-balancing purposes.

This strategy has reaped benefits for BDO, generating returns better than its benchmark, the PSEi.

The BDO Institutional Equity Fund rose from a PHP 1,000.00 net asset value per unit (NAVPU) on June 15, 2005 to a record PHP 5,765.74 in January 2018, delivering a 577% investment growth since its inception.

However, that initial run was cut short due to various concerns such as Brexit and the U.S.-China trade war. The fund fell 23% from its January 2018 peak to PHP 4,430.07 in November 2018. Similarly, the PSEi had a loss of 24% in the same time span.

After rebounding to a NAVPU of PHP 5,022.30 by the end of 2019, the fund plunged to as low as PHP 3,073.39 before settling at PHP 4,014.51 as of July 6, 2020, due to the coronavirus-induced market downturn. Year to date, both the fund and the PSEi are down by 20% and 18%, respectively.

Looking at BDO Institutional Equity Fund’s investments using as-reported metrics, it is not apparent that the fund invests in high-growth companies.

As-reported metrics would have investors believe that this portfolio consists of companies that do not generate economic profit. However, Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the core non-financial holdings of BDO Institutional Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most companies in the BDO Institutional Equity Fund show as-reported ROAs that range around and below global cost-of-capital levels, suggesting that they are not generating economic profit. However, Uniform Accounting reveals that these companies have strong returns, with Uniform ROA above the 6% global average returns except for PLDT Inc. (TEL:PHL).

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 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 -43% to 197%, with Ayala Corporation (AC:PHL), JG Summit Holdings, Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) having distortions above a hundred percent.

As-reported ROA understates the profitability of AC, suggesting a below-average company with an as-reported ROA of 4%. In reality, this leading conglomerate is a high-quality firm with an 11% Uniform ROA, almost thrice the as-reported number. Over the past 15 years, AC has never seen its Uniform ROA dip below 10%.

Likewise, JGS is not a 4% ROA company like what as-reported numbers show. It is, in fact, an above-average company with an 8% Uniform ROA, consistently generating above-average returns over the past five years.

By focusing on as-reported metrics alone, BDO would never pick most of these companies because they 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 the 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 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 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.
  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 6% annual Uniform earnings growth over the next two years. However, BDO Institutional Equity Fund’s major holdings are forecast to underperform with just 1% projected Uniform earnings growth in the next two years.

Meanwhile, the market is seeing a 1% Uniform EPS shrinkage for these firms in the next two years.

Among these companies, TEL and SM have the highest positive Uniform earnings growth dislocation.

The market is expecting TEL’s Uniform earnings to rise by 4%, but analysts are projecting a robust 32% earnings growth for the telecommunication company in the next two years.

Meanwhile, the market is pricing SM’s Uniform earnings to plummet by 11% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 9% moving forward.

Overall, as-reported numbers would have investors incorrectly conclude that this portfolio consists of low-quality companies. 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 these companies are high quality with intact business models that would drive economic profitability moving forward.

SUMMARY and International Container Terminal Services, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in BDO Institutional Equity Fund—International Container Terminal Services, Inc. (ICT:PHL).

As the Uniform Accounting tearsheet for ICT highlights, it trades at a Uniform P/E of 17.1x, below the global corporate average P/E but around its historical average of 16.5x.

Low P/Es require low EPS growth to sustain them. In the case of ICT, the company has recently shown a 24% Uniform EPS shrinkage.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp on near-term financial forecasts like revenue and earnings.

We take sell-side forecasts for PFRS earnings as a starting point for our Uniform earnings forecasts. When we do this, ICT’s sell-side analyst-driven forecast shows that Uniform earnings is expected to decline by 18% in 2020, before accelerating by 41% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 103.80 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 4% in each of the next three years and still justify current price levels. Sell-side analysts’ expected 41% Uniform EPS growth for ICT is well above what the current stock market valuation requires.

The company has an earning power above global corporate averages—based on its Uniform ROA calculation. However, since the combination of the company’s cash flows and cash on hand falls short starting in 2021, ICT has a high dividend risk.

To conclude, ICT’s Uniform earnings growth is well above peer averages. However, the company is also trading well above peer average valuations.

About the Philippine Markets Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living oftentimes 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, 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 BDO Institutional Equity Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Daily
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