Philippine Markets Newsletter

This CEO had bad grades as a child, but studied hard in college, and has used the power of research to successfully lead his bank…also, TEL tearsheet

December 17, 2021

This bank’s CEO had an interesting educational track record. He had bad grades as a child, joined and then left the seminary, tried out many college courses, and finally graduated with bachelor’s degrees in economics and accounting. After over 20 years in the banking industry, he became CEO of one of the country’s youngest universal and commercial banks.

We take a look at one of the unit investment trust funds (UITF) offered by the bank. 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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EastWest Bank’s first branch was opened along Sen. Gil Puyat Avenue in Makati City on August 1, 1994. Its name is the result of the bank’s desire to combine the traditional prudence, warmth, and hospitality of the East and the efficiency and progressive thinking of the West. 

At present, the bank has a nationwide network of 490 stores and 584 ATMs, and is the 10th largest privately-owned domestic bank in terms of assets.

How was a relatively new bank able to attain this level of success today? Much of EastWest Bank’s growth has been credited to the leadership of CEO Antonio “Tony” Moncupa, who has had his own colorful story shape his philosophies in life. 

Moncupa spent a great deal of his life searching for a purpose. 

Born to a successful agricultural family in Bataan, Moncupa did not take academics seriously at first. However, he took high school in Manila, with the goal of pursuing a role where he could help people. He applied to a seminary, as well as engineering, premedical, and Bachelor of Arts courses, but either failed admission or shifted out.

It was in his college days at De La Salle University when Moncupa realized the value of studying, eventually earning a double major in economics and accounting. 

The value Moncupa placed on education helped him further in his career. When he was promoted to chief dealer in the UCPB Treasury department in the past, he absolutely had no background. He spent a lot of time researching and studying when other colleagues credited successful Treasury trading to “noise.”

It’s likely that his hunger for knowledge and self-introspection have allowed him to continue to lead the bank since being appointed its CEO in 2007. 

EastWest Bank has succeeded in surpassing industry returns with a midyear 2021 ROE of 13%. Recently, the bank has also highlighted its plans to pursue its digital platform, Komo (Kontrol Mo and Pera Mo), which aims to give Filipinos more control and flexibility in managing their own money. Under certain conditions, customers can create an account capable of earning up to 4% interest, enjoy customizable insurance, conduct seamless transfers, QR payments, and view one’s real-time transaction history.

By 2022, the bank aims to grow further by strengthening features and expanding with other products such as loans, analytics, and other innovations to support the Komo initiative.

As we continue to monitor Moncupa’s and EastWest Bank’s performance, let’s take another look at one of the UITFs EastWest Bank offers—EastWest PSEI Tracker Fund.

The EastWest PSEI Tracker Fund was established on December 1, 2015. The fund seeks to achieve investment returns that track the performance of the Philippine Stock Exchange Index (PSEi) by investing in a diversified portfolio of stocks comprising the PSEi in the same weights as the index. The fund will be passively managed by EW Trust & Asset Management Group.

The fund is suitable for investors with high-risk appetites looking to achieve capital growth through a long-term investment horizon of at least ten years.

  • At its inception in December 2015, the EastWest PSEI Tracker Fund’s initial net asset value per unit (NAVPU) was at PHP 100.00. Immediately following, the NAVPU dropped by 14% to PHP 85.66 in January 2016 due to the oil price crash. Meanwhile, the PSEi incurred an equal loss of 14% in the same period.
  • The fund then recovered to its highest peak of PHP 126.84 in January 2018—an increase of 48%, but slightly underperformed its benchmark’s gain of 49% over the same period.
  • After reaching this peak, the fund’s NAVPU then shrank to PHP 96.33 in November 2018 due to uncertainties regarding Brexit and the US-China trade war. The fund performed in line with the PSEi, as both recorded losses of 24%.
  • By the end of 2019, the fund had rebounded by 15% to a NAVPU of PHP 111.10, before it fell to its record low of PHP 66.59 in March 2020 due to the coronavirus-induced market selloff. The fund’s 40% loss slightly outperformed its benchmark’s 41% loss during this period.
  • The fund has since rebounded while matching its benchmark along the way. As of December 13, 2021, the fund recovered to a NAVPU of PHP 103.50, a 55% gain from its 2020 low, but still slightly underperformed compared to the PSEi’s gain of 56%.
  • Since its inception, EastWest PSEI Tracker Fund has had a cumulative 4% gain versus its benchmark’s cumulative 2% gain.

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 the EastWest PSEI Tracker 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 EastWest PSEI Tracker 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 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 EastWest PSEI Tracker 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 26% to 150%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and International Container Terminal Services, Inc. (ICT:PHL) having the highest distortions.

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 boasts a decent firm at 7%. Furthermore, it has consistently generated returns of at least 10% from 2005 to 2019.

Likewise, as-reported metrics understate the profitability of International Container Terminal Services, Inc., suggesting a decent firm with an as-reported ROA of only 7%, when this is actually a high-quality firm with a 13% Uniform ROA. It has consistently generated returns of at least 10% over the last five 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 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, EastWest PSEI Tracker Fund’s major holdings are forecasted to significantly outperform with a 54% projected Uniform earnings growth in the next two years, while the market is forecasting a slight outperformance with a 10% projected Uniform earnings growth.

All the companies in the EastWest PSEI Tracker Fund have positive Uniform earnings growth except for JG Summit Holdings, Inc. (JGS:PHL) and PLDT Inc. (TEL: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 241%.

Likewise, the market is pricing Ayala Land’s Uniform earnings to grow by 13% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 72%.

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 53%.

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 PLDT Inc. Tearsheet 

Today, we’re highlighting one of the individual stock holdings in the EastWest PSEI Tracker Fund, PLDT Inc. (TEL:PHL).

As the Uniform Accounting tearsheet for PLDT highlights, the company trades at a Uniform P/E of 21.5x, below the global corporate average of 24.0x, but above its historical average of 17.8x.

Low P/Es require low, or even negative EPS growth to sustain them. In the case of PLDT, the company has shown a 154% Uniform EPS growth 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, PLDT’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 26% in 2021 and grow by 4% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PLDT’s PHP 1,625.00 stock price. These are often referred to as market embedded expectations.

PLDT is currently being valued as if Uniform earnings were to shrink by 7% per year over the next three years. What sell-side analysts expect for PLDT’s earnings growth is below what the current stock market valuation requires for 2021, but above that requirement in 2022.

The company has an earning power in line with 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 20bps. Together, these indicate that PLDT has a high dividend risk but low credit risk.

Lastly, PLDT’s Uniform earnings growth is below peer averages and is trading well 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 month’s focus on the EastWest PSEI Tracker 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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