Philippine Markets Newsletter

This bank enters the new year with a new bank takeover, also MONDE tearsheet

January 26, 2024

On December 29, 2023, the SEC approved the merger of BPI and Robinsons Bank. The Philippine Competition Commission had also agreed the merger would not lessen the competition in the banking sector.

Also earlier this year, BPI promoted the “cyber hygiene” practice among its customers. Recognizing that more than half of documented cybercrimes are online scams, the rigorous practice of cyber hygiene constitutes a critical measure to ensure online security and safeguard sensitive data from criminal actors.

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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Though the merger between the Bank of the Philippine Islands (BPI) and Robinsons Bank Corporation (RBC) was approved in September 2022, with BPI as the surviving entity, it was only in January 2024 that the merger finally took effect.

The consolidation of the two banks’ customer bases and deposit portfolios will significantly expand reach, solidifying the combined entity’s position within the financial landscape. Early this year, BPI also advised its customers to practice “cyber hygiene” to prevent their personal information from getting into the hands of cybercriminals.

In addition to promoting secure online practices, BPI also provides its clients with alternatives for their investments, one of which is the BPI Philippine Consumer Equity Index Fund.

The BPI Philippine Consumer Equity Index Fund launched on January 16, 2017, is a UITF that aims for high returns in the long-term by investing in a diversified portfolio of stocks in the same weights as 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 January 2017, BPI Philippine Consumer Equity Index Fund’s beginning net asset value per unit (NAVPU) was PHP 100. In January 2018, the fund’s NAVPU grew by 27% from its inception while slightly outperforming PSEi which grew by 25% given the higher infrastructure spending in the fourth quarter of 2017.

  • In October 2018, the fund shrunk by 29% while underperforming PSEi’s 24% shrinkage. This happened when the IMF lowered the world growth rates which raised some concerns.

  • After a year, the fund’s NAVPU recovered to PHP 107 or by 20%, outperforming the benchmark at 14% growth. The recovery is mainly due to the optimism over a trade deal between the US and China.

  • However, in March 2020, with stocks in free fall, the fund quickly shrunk to PHP 70 or by 35% while the benchmark shrunk by 39%. This was after a two-day closure due to the Luzon-wide lockdown meant to contain the COVID-19 outbreak.

  • After a year, the fund grew by 35% as the economy recovered while the PSEi grew by 52%.

  • The fund contracted by 20% at the beginning of Q4 2022, reaching a NAVPU of PHP 75, while the PSEi experienced a 19% decline during the same period due to fare hikes and higher food prices caused by a typhoon from the previous month.

  • Lastly, the NAVPU grew to around PHP 80 when nearly all sectors had already surpassed their pre-pandemic levels. This 6% growth slightly underperformed the benchmark’s 8% increase.

  • Since its inception, the fund has underperformed its benchmark, recording a 17% shrinkage versus PSEi’s 9% growth.

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 BPI Philippine Consumer Equity Index 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 BPI Philippine Consumer Equity Index 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 8%, 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 BPI Philippine Consumer Equity Index 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 -143% to 144%, with SM Investments Corporation (SM:PHL) and Emperador Inc. (EMI:PHL) having the highest positive distortions.

Among these holdings, only JG Summit Holdings, Inc. (JGS:PHL) is 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 SM Investments Corporation, suggesting an as-reported ROA of 5%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 13% above the average cost of capital. In addition, the company has consistently generated returns of at least 5% over the past decade.

Similarly, as-reported metrics understate the profitability of Emperador Inc. with an as-reported ROA of 6%. In fact, its Uniform ROA is at 13%, when its lowest was 9% 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, BPI Philippine Consumer Equity Index Fund’s major holdings are forecasted to significantly outperform with a 25% projected Uniform earnings growth in the next two years, while the market is forecasting a 24% Uniform earnings shrinkage.

Most of the companies in BPI Philippine Consumer Equity Index Fund have negative Uniform earnings. Among these companies, JG Summit Holdings, Inc. (JGS:PHL) and Jollibee Foods Corporation (JFC:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing JG Summit Holdings, Inc.’s Uniform earnings to shrink by 264% in the next two years, while sell-side analysts are projecting an immaterial growth for the company’s earnings.

Moreover, the market is pricing Jollibee Foods Corporation’s Uniform earnings to grow by 27% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 95%.

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 Monde Nissin Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the BPI Philippine Consumer Equity Index Fund, Monde Nissin Corporation (MONDE:PHL).

As the Uniform Accounting tearsheet for Monde Nissin Corporation highlights, the company trades at a Uniform P/E of 21.4x, which is around the global corporate average of 22.4x but below its historical average of 31.9x.

Average P/Es require average EPS growth to sustain them. In the case of Monde Nissin Corporation, the company showed a 23% 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, Monde Nissin Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 28% and 32% in 2023 and 2024, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Monde Nissin Corporation’s PHP 8.68 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 and moderate credit risk.

Lastly, Monde Nissin Corporation’s Uniform earnings growth is well above peer averages and 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 the BPI Philippine Consumer Equity Index 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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