Philippine Markets Newsletter

This family’s banking arm made advancement to its services with Japanese clients and acquired shares of a Singaporean company… also, ICT tearsheet

April 28, 2023

To expand its services to Japanese business entities in the Philippines, the Sy-led BDO Unibank, Inc. (BDO) has partnered with Japan’s 16th largest lender, Hyakujushi Bank Ltd. (HBL) based in Kagawa Prefecture.

In addition to its partnership with Japan’s bank, BDO was set to buy out the stake of Singapore’s Keppel Group in SM Keppel Land Inc. (SMKL). By this acquisition, BDO will take full control of The Podium retail and office complex in Mandaluyong City.

Here 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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BDO, which is headed by the Sy family, has teamed up with Japan’s Hyakujushi Bank Ltd. to offer banking support services to Japanese customers in the Philippines. BDO signed a business alliance agreement with the 16th largest lender in Japan, which is headquartered in Kagawa Prefecture.

The agreement went into effect on April 3rd and aims to strengthen the relationship between the two banks. BDO will provide banking support services to Japanese companies with existing operations or plans to expand their businesses in the Philippines.

Another advancement taken by BDO is purchasing Singapore’s Keppel Group’s stake in SM Keppel Land Inc. (SMKL), giving it full control of the Podium Complex in Mandaluyong City. The board of BDO has authorized the acquisition of the 50% stake held by Keppel Philippines Properties Inc. and Opon-KE Properties Inc. in SM Keppel Land Inc. for cash payment based on the adjusted net asset value at closing.

With this purchase, BDO will consolidate its ownership of the Podium Complex, which includes the lender’s Corporate Center Ortigas, the West Tower, and the Podium Mall. According to KPPI’s data, the Podium Complex is a mixed-use development with 50,000 square meters of mall space and 90,000 square meters in the West Tower. The consideration was agreed upon based on the willing-buyer, willing-seller basis, taking into account the assets’ agreed value and the net asset value of the sale shares, according to KPPI.

While the bank’s services and acquisition are progressing, let’s take a look at its investment activities, focusing on one of its UITFs, the BDO Focused Equity Fund.

The BDO Focused Equity Fund was launched on October 18, 2013, with the aim to pursue long-term capital growth by investing in a concentrated portfolio of exchange-listed stocks. The selection of said stocks shall be determined by the Trustee based on operational performance, valuation and market sentiment. The Fund’s benchmark is the Philippine Stock Exchange Composite Index (PSEi).

This type of investment is recommended for investors with an aggressive risk appetite and an investment horizon of more than three years with a willingness to accept potential higher returns but are also aware of the possibility of capital losses.

  • At its inception in October 2013, BDO Focused Equity Fund’s beginning net asset value per unit (NAVPU) was PHP 100. The fund’s value initially climbed to PHP 121 in February 2015 due to the added economic boost from pre-election spending, and as more government-sponsored infrastructure PPP projects gained traction. Its benchmark slightly underperformed at 18%.

  • At the start of 2016, the fund began to shrink by around 33% when the decline in exports of manufactured products reflected the general weakness of the global manufacturing sector. Its benchmark outperformed by shrinking only by 22%. After half of the year, the fund grew by 44% while outperforming PSEi which grew by 29% following the new transition of leadership in the country.

  • The fund significantly underperformed its benchmark in January 2018 when it shrunk by 7% versus 15% growth of its benchmark.

  • After two years of stable movement, the fund’s NAVPU dropped to PHP 55, a 50% shrinkage from its price in January 2018, following the announcement of the lockdown due to COVID-19. PSEi slightly underperformed at 49% shrinkage during the same period.

  • The fund was able to recover at PHP 88 by the end of the year 2021 from its bottom in March 2020, and the fund’s 60% growth slightly underperformed its benchmark growth of 61%. This is due to the availability of COVID-19 vaccines and fewer restrictions on economic activities.

  • In response to the U.S. Fed’s aggressive raising of interest rates to fight inflation, the fund dropped by 22% in the third quarter of 2022, from its climb at the beginning of the year, and it slightly outperformed its benchmark’s drop of 23%.

  • By the first quarter of 2023, the fund and PSEi recovered by 15% and 13%, respectively. Since its inception, the fund underperformed its benchmark, recording a 20% shrinkage versus PSEi’s 1% shrinkage.

With the fund underperforming its benchmark, let’s take a look at the quality of the companies in its holdings. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that don’t appear to break even. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top seven core non-financial holdings of BDO Focused Equity 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 BDO Focused Equity 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 13%, 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 BDO Focused Equity 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 8% to 332%, with Int’l Container Terminal Services, Inc. (ICT:PHL), SM Investments Corporation (SM:PHL), and Ayala Corporation (AC:PHL) having the highest positive distortions.

Among these holdings, only PLDT Inc. (TEL:PHL) is in line with 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 Int’l Container Terminal Services, Inc., suggesting an as-reported ROA of 11%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 45% above the average cost of capital. In addition, the company has consistently generated returns of at least 7% over the past decade.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation with an as-reported ROA of 5%. In fact, its Uniform ROA is at 13%, when its lowest was 8% over the past decade.

Likewise, as-reported metrics understate the profitability of Ayala Corporation, suggesting a below-average firm with an as-reported ROA of only 3% when this company actually has a 7% 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 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, BDO Focused Equity Fund’s major holdings are forecasted to significantly outperform with a 17% projected Uniform earnings growth in the next two years, while the market is forecasting immaterial Uniform earnings.

Most of the companies in BDO Focused Equity Fund have positive Uniform earnings growth. Among these companies, Ayala Corporation and SM Investments Corporation have the highest positive Uniform earnings growth spread.

The market is pricing Ayala Corporation’s Uniform earnings to shrink by 3% in the next two years, while sell-side analysts are projecting an 87% growth for the company’s earnings.

Moreover, the market is pricing SM Investments Corporation’s Uniform earnings to shrink by 5% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 13%.

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 International Container Terminal Services, Inc. Tearsheet

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

As the Uniform Accounting tearsheet for International Container Terminal Services, Inc. highlights, the company trades at a Uniform P/E of 12.2x, which is below the global corporate average of 18.4x but is around its historical average of 11.0x.

Low P/Es require low EPS growth to sustain them. In the case of International Container Terminal Services, Inc., the company showed a 40% 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, International Container Terminal Services, Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 7% in 2023 and grow by 7% in 2024.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify International Container Terminal Services, Inc.’s PHP 3.86 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power 8x the long-run corporate averages. Moreover, its cash flows and cash on hand consistently exceed its obligations, and it also has an intrinsic credit risk of 210bps. Together, these indicate a moderate dividend risk and moderate credit risk.

Lastly, International Container Terminal Services, Inc.’s Uniform earnings growth is in line with peer averages and above 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 BDO Focused Equity 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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