Philippine Markets Newsletter

This asset and wealth manager capitalizes on Asia’s growth potential in its newly launched multi-asset fund… also, CNPF tearsheet

February 3, 2023

As one of the independent asset and wealth managers in the Philippines, this company continues to invest in its technology to be able to compete in a quickly changing digital landscape.

Aside from keeping up-to-date with tech, this fund manager launched a new multi-asset fund in 2022 aimed at capitalizing on Asia’s growth potential—the ATRAM Asian Multi-Asset Income Feeder Fund.

Here we look at one of the institution’s unit investment trust funds (UITFs). 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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Forecasts indicate that Asian equity and Asia as a whole will outperform developed markets. This makes the case stronger for investing in Asian equities.

One fund manager that has been capitalizing on this since July 2022 is Philippine-based ATR Asset Management Group through its ATRAM Asian Multi-Asset Income Feeder Fund. To maximize its yield potential, the fund invests in Asian Real Estate Investment Trusts (REITs), Asian equities, and Asian bonds based on their attractive credit ratings.

ATRAM Asian Multi-Asset Income Feeder Fund was initially made available to ATRAM Prime app investors and aims to distribute dividend income payouts every quarter. Its dividend income will come from interest income from bonds and dividends from equities and REITs.

With the shift to digital technology, the company recently partnered with Additiv, a wealth technology firm based in Zurich, Switzerland, to launch its new digital wealth management platform. This move is in line with ATRAM’s goal to be the market leader in the emerging Wealth-Management-as-a-Service (WmaaS) industry.

In continuing our look at ATRAM’s operations, let’s check out one of its UITFs, the ATRAM Philippine Sustainable Development and Growth Fund – A Units.

On February 17, 2021, the ATRAM Philippine Sustainable Development and Growth Fund was launched. As a means of generating capital growth, it invests locally in equities of companies whose products and services are considered to contribute to positive environmental and social change by the investment manager, thereby facilitating the growth and development of the economy in a sustainable manner.

Investing in funds like these can be beneficial to investors with a high-risk appetite, who are comfortable with the volatility and risks associated with equity funds, and looking for long-term investments in Philippine equity securities.

  • At its inception in February 2021, ATRAM Philippine Sustainable Development and Growth Fund’s beginning net asset value per unit (NAVPU) was PHP 100. The fund’s value shrunk by 5% in March 2021 as the country underwent another round of restrictions in economic activities. Its benchmark slightly underperformed, shrinking 6%.

  • In December 2021, the fund peaked and maintained NAVPU around PHP 121, which lasted for two months. This was a 28% growth from its lowest in March 2021, as the economy recovered from the effects of COVID-19. PSEi also recovered and climbed by 12% in the same period.

  • In less than a year, however, the fund’s NAVPU dropped to PHP 95 following the Russia-Ukraine conflict, oil crisis, and rising inflation rate. Nevertheless, the fund’s 22% decline still outperformed its benchmark’s drop of 17%.

  • In the third quarter of 2022, both the fund and PSEi recovered by 13%. Since inception, the fund managed to outperform its benchmark, recording 0.91% gain versus PSEi’s 7.30% loss.

With the fund outperforming its benchmark, let’s take a look at how high-quality the companies in its holdings are. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that only generate average 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 ATRAM Philippine Sustainable Development and Growth 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 ATRAM Philippine Sustainable Development and Growth 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 7%, slightly above 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 13%, almost double 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 ATRAM Philippine Sustainable Development and Growth 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 44% to 131%, with Nickel Asia Corporation (NIKL:PHL), Manila Water Company, Inc. (MWC:PHL) and Century Pacific Food, Inc. (CNPF:PHL) having the highest positive distortions.

Among these holdings, no company was revealed to have a Uniform ROA in line with or below as-reported 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 Nickel Asia Corporation, suggesting an above-average firm with an as-reported ROA of 16%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 37% above the average cost of capital. In addition, the company has consistently generated returns of at least 13% over the past half-decade.

Similarly, as-reported metrics understate the profitability of Manila Water Company, Inc. with an as-reported ROA of 3%. In fact, its Uniform ROA is at 6%, its lowest over the past decade.

Likewise, as-reported metrics understate the profitability of Century Pacific Food, Inc., suggesting a below-average firm with an as-reported ROA of only 9%, when this company actually has a 16% 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.

  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, ATRAM Philippine Sustainable Development and Growth Fund’s major holdings are forecasted to significantly outperform with an 18% projected Uniform earnings growth in the next two years, while the market is forecasting an average with a projected 4% Uniform earnings growth.

Most of the companies in ATRAM Philippine Sustainable Development and Growth Fund have positive Uniform earnings growth. Among these companies, Ayala Land, Inc. (ALI:PHL), First Gen Corporation (FGEN:PHL), and Nickel Asia Corporation have the highest positive Uniform earnings growth spread.

The market is pricing Ayala Land, Inc.’s Uniform earnings to grow by 10% in the next two years, while sell-side analysts are projecting a 58% growth for the company’s earnings.

Moreover, the market is pricing First Gen Corporation’s Uniform earnings to shrink by 21% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 18%.

Additionally, the market is pricing Nickel Asia Corporation’s Uniform earnings to shrink by 21% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 14%.

Overall, as-reported numbers 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 Century Pacific Food, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in ATRAM Philippine Sustainable Development and Growth Fund, Century Pacific Food, Inc. (CNPF:PHL).

As the Uniform Accounting tearsheet for Century Pacific Food, Inc. highlights, the company trades at a Uniform P/E of 20.3x, below the global corporate average of 18.4x and its historical average of 18.2x.

Low P/Es require low EPS growth to sustain them. In the case of Century Pacific Food, Inc., the company has shown a 21% 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, Century Pacific Food, Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 7% and 14% in 2022 and 2023, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Century Pacific Food, Inc.’s PHP 24.80 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power 3x the long-run corporate averages. Moreover, its cash flows and cash on hand fall short of obligations, and it also has an intrinsic credit risk of 250bps. Together, these indicate a high dividend risk and moderate credit risk.

Lastly, Century Pacific Food, Inc.’s Uniform earnings growth is in line with peer averages, and below 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 Century Pacific Food, Inc. interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Newsletter
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