Philippine Markets Newsletter

This fund from the country’s second largest bank outperformed the PSEi year-to-date while as-reported metrics understated its earning power

November 20, 2020

This unit investment trust fund (UITF) from one of the country’s largest banks has slightly outperformed its benchmark year-to-date.

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

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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The Metropolitan Bank & Trust Company (Metrobank), established in 1962, is currently the second largest bank in the Philippines. It offers investment products and services such as fixed income, unit investment trust funds (UITFs), and wealth management services.

We’ve written about Metrobank’s and First Metro’s funds before: First Metro Philippine Equity Exchange-Traded FundFirst Metro Save and Learn Equity Fund, and Metro Equity Fund. This week, we’ll focus on one of Metrobank’s UITFs, Metro High Dividend Yield Fund.

Metro High Dividend Yield Fund was launched on October 10, 2014. The fund’s strategy is to generate returns by investing in blue-chip companies that have dividend payouts and growth potential. The Philippine Stock Exchange Index (PSEi) serves as the fund’s benchmark.

Metro High Dividend Yield Fund started with a net asset value per unit (NAVPU) of PHP 1.00 at its 2014 inception. After rising to PHP 1.12 in April 2015, it dropped to a low of PHP 0.86 in January 2016 due to the oil price crash. In this time span, the fund recorded lower losses of 23% versus the 25% of losses for the PSEi.

The fund’s NAVPU rose to a peak of PHP 1.17 in January 2018, before dropping to PHP 0.90 in November 2018 due to uncertainties regarding Brexit and the U.S.-China trade war. The UITF and its benchmark performed comparably with losses of 24% and 23%, respectively.

The fund ended 2019 with a NAVPU of PHP 0.99. Due to the downturn caused by the COVID-19 pandemic, the fund’s NAVPU dropped to a historical low of PHP 0.66 in March 2020. However, it has rebounded with a NAVPU of PHP 0.91 as of November 16, 2020. Year to date, the fund’s lower 8% loss outperformed the PSEi’s 11% loss.

Looking at Metro High Dividend Yield Fund’s investments using as-reported metrics, it is not apparent that the fund invests in stable and established companies.

As-reported metrics would have investors believe that this 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 Metro High Dividend Yield 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 Metro High Dividend Yield Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. The fund generated an as-reported average ROA of 5%, slightly below global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, almost 2x the as-reported ROA average. These companies have strong returns with most companies having a Uniform ROA above the 6% global 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 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 -43% to 197%, with Ayala Corporation (AC:PHL), JG Summit Holdings, Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) all having distortions of more than 100%.

As-reported metrics understate the profitability of AC, 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. It has consistently generated returns of at least around 10% over the past decade.

Likewise, JGS is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with an 8% Uniform ROA, 2x the as-reported number. Furthermore, JGS has never seen its Uniform ROA dip below 7% levels over the past 5 years.

By focusing on as-reported metrics alone, these companies look like anything but profitable businesses.

That said, looking at profitability by itself 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, Metro High Dividend Yield Fund’s major holdings are forecast to underperform with a 7% projected Uniform earnings shrinkage in the next two years, while the market is seeing an immaterial Uniform earnings shrinkage.

Among these companies, only PLDT Inc. (TEL:PHL) and International Container Terminal Services, Inc. (ICT:PHL) have positive Uniform earnings growth dislocations.

The market is expecting TEL’s Uniform Earnings to increase by 6%, while analysts are projecting 48% Uniform earnings growth over the next two years.

Furthermore, the market is pricing ICT’s Uniform Earnings to shrink by 1% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 13% moving forward.

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

SUMMARY and PLDT, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the Metro High Dividend Yield Fund—PLDT, Inc. (TEL:PHL).

As the Uniform Accounting tearsheet for TEL highlights, it trades at a Uniform P/E of 21.0x, which is below global corporate averages and its historical averages.

Low P/Es require low EPS growth to sustain them. In the case of TEL, the company has recently shown a 21% Uniform EPS growth.

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, TEL’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 149% in 2020, but shrink by 12% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 1,394.00 per share. These are often referred to as market embedded expectations.

The company would have to grow Uniform earnings by 6% over the next three years to justify current price levels. What sell-side analysts expect for TEL’s earnings growth is above what the current stock market valuation requires in 2020, but below that requirement in 2021.

Furthermore, the company has an earning power below long-run corporate averages. Also, TEL’s cash flows and cash on hand fall short of obligations within five years, and the company has an intrinsic credit risk 130bps above the risk-free rate. Together, this indicates that TEL has a moderate credit and high dividend risk.

To conclude, TEL’s Uniform earnings growth is well below peer averages but is trading around 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 Metro High Dividend Yield 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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