Philippine Markets Newsletter

This bank’s first equity fund underperformed the PSEi, but average Uniform ROA for its holdings is 1.5x as-reported, implying potential upside

January 22, 2021

The unit investment trust fund (UITF) from one of the country’s leading universal banks has underperformed the Philippine Stock Exchange Index (PSEi) since its inception. However, it has slightly recovered from its 2020 pandemic-induced lows with the fund’s net asset value per unit (NAVPU) increasing once again.

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps make sense of the fund’s investments and how it continues to outperform the market.

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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Security Bank (SB) was established in 1951, and has since become one of the Philippines’ leading universal banks. Today, SB offers money market funds, Peso bond funds, asset variety funds, as well as Peso Equity and Peso Equity Index funds.

In the past, we’ve written about other Security Bank funds: SB High Dividend Peso Equity Fund and SB Philippine Equity Index Fund. This week, we’ll revisit and look into the performance of Security Bank’s first equity fund, SB Peso Equity Fund.

Launched on February 1, 2010, the Security Bank Peso Equity Fund invests in exchange-listed equities and other marketable securities to achieve long-term growth. The fund aims to surpass its benchmark, the Philippine Stock Exchange Composite Index (PSEi).

SB Peso Equity Fund started with a net asset value per unit (NAVPU) of PHP 1.00 at its 2010 inception.

After five years, the fund’s NAVPU rose to a peak of PHP 2.74 in February 2015. This represents a 174% gain since inception, outperforming the PSEi’s 168% gain over the same period. However, the fund’s NAVPU dropped in January 2016 to PHP 1.73 due to the oil price crash. The fund’s 37% loss underperformed its benchmark’s 21% loss.

The fund’s NAVPU then increased to PHP 2.57 in January 2018, its second-highest unit pricing since inception. The UITF and the PSEi both recorded gains of 49%. The fund’s NAVPU then fell to PHP 2.08 in November 2018, due to uncertainties brought about by Brexit and the US-China trade war. This 19% loss outperformed the PSEi’s 24% drop in the same time span.

Thereafter, the NAVPU plummeted to PHP 1.41 in March 2020 due to the coronavirus pandemic. Since then, the fund has recovered with a NAVPU of PHP 2.03 as of January 15, 2021. The fund underperformed its benchmark, with gains of 44% and 57%, respectively.

As-reported metrics would have investors believe the fund’s 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 the SB Peso 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 of the companies in SB Peso Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting they are not generating economic profit. The fund generated an as-reported average ROA of 6%, which equates to global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 10%, around 1.5x the as-reported ROA average. These companies have strong returns with all companies having Uniform ROAs greater than cost-of-capital levels.

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 great, the distortion in percentage ranges from -21% to 197%, with Ayala Corporation (AC:PHL) and SM Investments Corporation (SM:PHL) having distortions of more than a hundred percent.

As-reported metrics are understating the profitability of Ayala Corporation, suggesting a below-average company with an as-reported ROA of 4% when in fact, it is a high-quality firm with an 11% Uniform ROA. Furthermore, it has consistently generated returns of at least 9% over the past decade.

Likewise, SM Investments is not just a 6% ROA firm like what as-reported numbers suggest. It is an above-average company with a 12% Uniform ROA. Moreover, it has consistently generated returns of at least 7% over the past three years.

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 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 2-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. Meanwhile, the SB Peso Equity Fund’s major holdings are forecasted to underperform with an 8% projected Uniform earnings shrinkage within the next two years, while the market is seeing a 3% Uniform earnings growth.

Among these companies, only International Container Terminal Services (ICT:PHL) has a positive Uniform earnings growth dislocation.

The market is pricing International Container Terminal Services’ Uniform Earnings to shrink by 1% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 9%.

Overall, as-reported numbers would have investors incorrectly conclude 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 these mature, low growth, but high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and AllHome Corp. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in SB Peso Equity Fund—AllHome Corp. (HOME:PHL).

As the Uniform Accounting tearsheet for AllHome highlights, it trades at a Uniform P/E of 27.1x, above the global corporate average of 23.5x and its historical average of 22.5x.

High P/Es require high EPS growth to sustain them. In the case of AllHome, the company has recently shown a 19% 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 Philippine Financial Reporting Standards (PFRS) earnings as a starting point for our Uniform earnings forecasts. When we do this, AllHome’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 20% in 2020 and grow by 84% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 9.15 per share. These are often referred to as market embedded expectations.

To justify current valuations, the company earnings need to grow by 25% per year over the next three years. What sell-side analysts expect for AllHome’s earnings growth is below what the current stock market valuation requires in 2020, but above that requirement in 2021.

AllHome has an earning power around long-run corporate averages. Moreover, the company’s cash flows and cash on hand are almost 3x total obligations. These indicate that AllHome has a low dividend risk.

To conclude, AllHome’s Uniform earnings growth is well above peer averages, but is trading well below peer average valuations.

About the Philippine Market 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 SB Peso 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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