Philippine Markets Newsletter

This fund’s late-mover advantage produced massive investment returns, and Uniform Accounting reveals its real earnings growth potential

March 20, 2020

Security Bank took its time before launching its first equity UITF.

Other major Philippine banks had already enjoyed a five-year head start when Security Bank established its equity UITF in 2010, right when the 2007 global economic downturn had just subsided.

Since then, Security Bank’s equity fund has consistently outperformed the Philippine Stock Exchange Index (PSEi)—that is until recently, amid global uncertainties particularly from the COVID-19 pandemic.

In today’s Philippine Markets Daily (PMD), we take a look at the SB Peso Equity Fund and assess its profitability and earnings growth potential.

In addition, we’re 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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Despite taking quite some time, Security Bank made a timely call in putting up an equity UITF back in February 2010. This was around six years following the Bangko Sentral ng Pilipinas’ (BSP) shift from Common Trust Funds (CTFs) to Unit Investment Trust Funds (UITF).

It was also in 2010 when the dust of the global financial crisis had finally settled—the year that turned out to be the onset of what was later known as one of the longest bull runs in Philippine stock market history.

Amid a global equity disinterest, following a massive global economic downturn, Security Bank launched the SB Peso Equity Fund intending to generate long-term equity investment growth. They focused on attaining diversification by investing in Philippines stocks across various industries and select fixed income securities.

The UITF reached a record PHP 2.7 net asset value per unit (NAVPU) in February 2015 from its initial PHP 1.0 NAVPU. This is equivalent to a 170% unit price increase, outperforming the Philippine Stock Exchange Index (PSEi) which delivered a 162% investment return over the same period.

After falling back to around PHP 1.8 NAVPU in January 2016, the fund made another run, posting its second-highest NAVPU at PHP 2.6 in January 2018. This translated to a 44% investment return in two years, beating the PSEi’s 31% growth.

Today, both the UITF and the PSEi are seeing negative performances month-on-month and year-over-year due to the impact of the spread of the coronavirus disease (COVID-19). As a result, SB Peso Equity Fund’s investment returns were slashed to 90% over 10 years, slightly lower than PSEi’s 95% returns over the same period.

The COVID-19 pandemic has forced the Philippine government to implement stringent measures to contain the coronavirus. The whole island of Luzon is on lockdown and communities are on strict quarantine beginning March 17, 2020, until April 13, 2020.

Moreover, mass gatherings are prohibited, malls are closed, and mass public transportation is suspended, disrupting regular business operations and impacting major industries such as manufacturing, properties, consumer, and transportation.

Considering that the SB Peso Equity fund’s major company holdings operate in the aforementioned industries, the fund may see further volatility in the short term.

These companies also show profitability below cost-of-capital levels based on as-reported numbers. However, Uniform Accounting says otherwise.

The table below shows the top 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.

In 2019, the SB Peso Equity Fund generated an average as-reported ROA of 5%, below global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, well above cost-of-capital levels. Uniform Accounting adjusts for the distortions in companies’ financial statements brought about by the inconsistencies in the Philippine Financial Reporting Standards (PFRS), revealing the true underlying performance of companies.

As such, it should not be surprising that when analyzing the non-financial holdings of the SB Peso Equity Fund, the figures that easily stand out are the double-digit discrepancies between Uniform ROA and as-reported ROA for these companies.

While the difference in raw figures may not seem too distant, the distortion in percentage ranges from -24% to 155%, with Ayala Corporation (AC:PHL), International Container Terminal Services, Inc. (ICT:PHL), and SM Investments Corporation (SM:PHL) having distortions greater than a hundred percent.

As-reported ROA understates the earning power of Ayala Corp, suggesting a below-average firm. In reality, this leading conglomerate is a high-quality firm with a 10% Uniform ROA, higher than global corporate average returns. In fact, AC has produced around double-digit returns over the past decade.

Similarly, ICT is not just a 6% ROA firm like what as-reported numbers suggest. It is in fact a high-performing company that generated returns around twice the cost of capital levels in the last 10 years.

Meanwhile, as-reported metrics overstate the earning power of Holcim Philippines, Inc. (HLCM:PHL), treating the cement producer as an average firm with 6% as-reported ROA. The truth is, in the midst of a competitive industry, HLCM struggled to maintain healthy Uniform ROA levels, settling at around 4%-5% Uniform ROA recently.

This table shows the earnings growth potential of the top holdings of the SB Peso Equity Fund. It features three key data points:

  1. The 2-year Uniform 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 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 top holdings are forecast to surpass that with an 11% projected Uniform earnings growth in the next two years.

The market, on the other hand, sees muted growth for these companies with market-expected Uniform EPS shrinkage of 1% over the next two years.

Among these companies, SM Investments and Ayala Land, Inc. (ALI:PHL) have the highest Uniform earnings growth dislocation.

The market is pricing SM’s Uniform earnings to shrink by 13% in the next two years. However, sell-side analysts are seeing a more robust earnings growth potential for SM, forecasting it to accelerate by 22% moving forward.

Similarly, the market is seeing subdued Uniform earnings expansion for ALI, but analysts are projecting strong 20% earnings growth for the firm in the next two years.

Meanwhile, the market’s earnings expectation for HLCM seems too bullish with market-expected Uniform EPS growth of 19%, relative to analysts’ projected 2-Year Uniform EPS Growth of 5%. This doesn’t appear to be an intrinsically undervalued company, and SB should take another look at the fundamentals surrounding this company.

Overall, one might think that this portfolio is below average with subpar 5% ROA and 1% earnings shrinkage moving forward. However, through the lens of Uniform Accounting, investors can clearly see that the SB Peso Equity Fund comprises mostly high-quality companies with double-digit profitability levels and earnings growth potential.

International Container Terminal Services Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in SB Peso Equity Fund—International Container Terminal Services, Inc.

As the Uniform Accounting tearsheet for International Container Terminal Services, Inc. (ICT:PHL) highlights, Uniform P/E trades at 11.1x, well below global corporate averages and around its historical averages.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of International Container Terminal Services, the company has recently shown a 19% 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 PFRS earnings as a starting point for our Uniform earnings forecasts. When we do this, International Container Terminal Services’ sell-side analyst-driven forecast shows that Uniform earnings will shrink by 7% in 2019 and grow by 12% in 2020.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 106 per share. These are often referred to as market embedded expectations.

In order to meet the current market valuation levels of International Container Terminal Services, the company would have to see Uniform earnings shrink by 13% each year over the next three years. What sell-side analysts expect for International Container Terminal Services earnings growth is well above what the current stock market valuation requires.

The company has an earning power at least 2x the long-run corporate averages—based on its Uniform ROA calculation. Moreover, with cash flows and cash on hand consistently exceeding obligations in the next five years, International Container Terminal Services has a low credit and dividend risk.

To conclude, International Container Terminal Services’ Uniform earnings growth is around peer averages in 2019. However, the company 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 the SB Peso Equity Fund interesting and insightful.

Stay tuned for next week’s Friday Uniform Portfolio Analytics!


Angelica Lim & Joel Litman
Research Director & Chief Investment Strategist
Philippine Markets Daily
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