Philippine Markets Newsletter

This newly-incepted fund has performed similarly with the PSEi year to date, with a Uniform earning power 1.5x more than as-reported metrics suggest

October 9, 2020

This newly-incepted unit investment trust fund (UITF) from one of the country’s largest universal banks has performed similarly with its benchmark, the Philippine Stock Exchange Index (PSEi), year to date. The fund and its benchmark recorded losses of 22% and 23%, respectively.

However, 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.

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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Rizal Commercial Banking Corporation (RCBC) is one of the largest universal banks in the Philippines, majority-owned by the Yuchengco Group of Companies.

In the past, we’ve written about Rizal Equity Fund, one of RCBC’s UITFs. This week, we’ll write about one of the bank’s newest UITFs, RCBC R25 Dividend Equity Fund.

RCBC R25 Dividend Equity Fund was launched on November 8, 2019. Its objective is to achieve capital growth by investing in exchange-listed stocks. Specifically, it looks for stocks of the 25 largest, most actively traded companies in the Philippine Stock Exchange (PSE) that have high historical dividend yields.

The fund also aims to surpass its benchmark, the Philippine Stock Exchange Index (PSEi).

RCBC R25 Dividend Equity Fund had a net asset value per unit (NAVPU) of PHP 1.00 at its 2019 inception. The fund’s NAVPU steadily declined to PHP 0.94 at the end of 2019, showing a loss of 6%. Meanwhile, the PSEi outperformed the fund during this period, with a smaller 3% loss.

The fund’s NAVPU continued to freefall and dropped all the way down to a low of PHP 0.58 in March 2020 due to the coronavirus-induced market downturn. The fund and its benchmark recorded losses of 38% and 41% from their year-end 2019 values, respectively.

However, the fund’s NAVPU rebounded to PHP 0.73 in April 2020—a 26% increase from its low. Meanwhile, the PSEi outperformed the fund with gains of 29% over the same period.

Afterward, the fund slightly dropped to PHP 0.68 in May 2020 before jumping to PHP 0.80 the following month, registering a gain of 18%. The PSEi performed comparably with a gain of 20% over the same timespan.

As of October 2, 2020, RCBC R25 Dividend Equity Fund recorded a NAVPU of PHP 0.73. The fund and its benchmark performed similarly with year-to-date losses of 22% and 23%, respectively.

Looking at RCBC R25 Dividend Equity Fund’s investments using as-reported metrics, it is not apparent that the fund invests in high-quality 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 RCBC R25 Dividend 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 companies in the RCBC R25 Dividend Equity Fund show as-reported ROAs that range around and below cost-of-capital levels, suggesting that they are not generating much economic profit. In 2019, the fund generated an as-reported average ROA of 6%, in line with global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, 1.5x as-reported ROA averages and global corporate averages. These companies have strong returns, with Uniform ROA above the 6% global average returns except for PLDT Inc. (TEL:PHL).

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 191%, with Aboitiz Equity Ventures, Inc. (AEV:PHL) and SM Investments Corporation (SM:PHL) both having distortions of more than a hundred percent.

AEV is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with a 10% Uniform ROA. In fact, it has consistently generated returns of at least 10% over the past decade.

Similarly, as-reported ROA understates the profitability of SM, suggesting a below-average company with an as-reported ROA of 6%. In reality, this company is a high-quality firm with a 12% Uniform ROA, 2x the as-reported number. Moreover, SM has never seen its Uniform ROA dip below 7% over the past five years.

By focusing on as-reported metrics alone, RCBC would never pick most of these companies because they 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, RCBC R25 Dividend Equity Fund’s major holdings are forecast to slightly outperform that with a 7% projected Uniform earnings growth in the next two years, while the market is seeing a 2% Uniform EPS shrinkage.

Among these companies, San Miguel Corporation (SMC:PHL) and TEL have the highest Uniform earnings growth dislocations.

The market is expecting SMC’s Uniform Earnings to decline by 2%, while analysts are projecting a 46% Uniform earnings growth over the next two years.

Furthermore, the market is pricing TEL’s Uniform Earnings to grow by only 6% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 43% 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 companies are high quality with intact business models that would drive economic profitability moving forward.

SUMMARY and San Miguel Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the RCBC R25 Dividend Equity Fund—San Miguel Corporation (SMC:PHL).

As the Uniform Accounting tearsheet for SMC highlights, it trades at a Uniform P/E of 28.8x, above global corporate averages and its historical averages.

High P/Es require high EPS growth to sustain them. In the case of SMC, the company has recently shown a 51% 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, SMC’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 168% in 2020 and shrink by 21% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 100.00 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 2% over the next three years and still justify current price levels. What sell-side analysts expect for SMC’s earnings growth is well above what the current stock market valuation requires in 2020, but below what the market requires in 2021.

The company has an earning power around long-run corporate averages. However, SMC’s cash flows and cash on hand fall short of obligations within five years and has an intrinsic credit risk 260bps above the risk-free rate. This indicates that SMC has a high dividend risk and moderate credit risk.

To conclude, SMC’s Uniform earnings growth is well above peer averages, and the company is trading well above 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 RCBC R25 Dividend 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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