Philippine Markets Newsletter

This newly-incepted UITF from one of the largest banks in the country has performed in line with the PSEi year-to-date

December 11, 2020

This unit investment trust fund (UITF) from one of the largest banks in the country performed in line with its benchmark, the Philippine Stock Exchange Index (PSEi), year-to-date.

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps 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) was established in 1960 as a development bank. RCBC is majority-owned by the Yuchengco Group of Companies (YGC), one of the largest conglomerates in Southeast Asia.

Today, RCBC is one of the largest private domestic banks in the Philippines with over 480 branches and 1,500 ATMs.

Together with YGC’s affiliates such as SunLife GREPA Financials (SLGFI) and Malayan Insurance Company, Inc. (MICO), RCBC offers investment-linked life insurance and other non-life insurance products.

RCBC also offers other investment products such as unit investment trust funds (UITFs), two of which we’ve written about before: RCBC R25 Dividend Equity Fund and Rizal Equity Fund. This week, we’ll focus on another one of the bank’s funds, the RCBC R25 Blue-Chip Equity Fund.

RCBC R25 Blue-Chip Equity Fund was launched on November 8, 2019. The fund uses an algorithm to invest in 25 of the country’s largest exchange-listed companies for long-term capital appreciation and to surpass its benchmark, the Philippine Stock Exchange Composite Index (PSEi).

RCBC R25 Blue-Chip Equity Fund had a net asset value per unit (NAVPU) of PHP 1.00 at its 2019 inception. The fund’s NAVPU slightly declined to PHP 0.96 at the end of 2019, showing a loss of 4%. Meanwhile, the PSEi performed comparably during this period with a loss of 3%.

The fund’s NAVPU then dropped all the way down to a low of PHP 0.59 in March 2020 due to the coronavirus-induced market downturn. The fund and its benchmark recorded losses of 39% and 41% from their year-end 2019 values, respectively.

The fund has since rebounded and recorded a NAVPU of PHP 0.87 as of December 4, 2020. Year to date, the fund and its benchmark performed similarly, both recording losses of 9%.

Looking at RCBC R25 Blue-Chip Equity Fund’s investments using as-reported metrics, it is not apparent the fund invests in stable and established companies.

As-reported metrics would have investors believe 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 Blue-Chip 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 of the companies in RCBC R25 Blue-Chip Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting they are not generating economic profit. The fund generated an as-reported average ROA of 5%, slightly below the 6% global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 8%, stronger than as-reported ROA averages and 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 -13% to 197%, with Ayala Corporation (AC:PHL) and Aboitiz Equity Ventures, Inc. (AEV:PHL) having distortions of more than a hundred percent.

As-reported metrics understate the profitability of Ayala Corporation, 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, Aboitiz Equity Ventures is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with a 10% Uniform ROA. Furthermore, Aboitiz Equity Ventures has never seen its Uniform ROA dip below 10% levels in the past decade.

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

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 Blue-Chip Equity Fund’s major holdings are forecast to underperform with a 4% projected Uniform earnings shrinkage within the next two years, while the market is seeing 2% Uniform earnings growth.

Among these companies, only International Container Terminal Services, Inc. (ICT:PHL), Aboitiz Equity Ventures Inc., and Globe Telecom, Inc. (GLO:PHL) have positive Uniform earnings growth dislocations.

The market is pricing International Container Terminal Services’ Uniform earnings to shrink by 2% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 14%.

Additionally, the market is expecting Aboitiz Equity Ventures’ Uniform earnings to decrease by 6%, while analysts are projecting an immaterial Uniform earnings growth over the next two years.

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 Globe Telecom Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the RCBC R25 Blue-Chip Equity Fund—Globe Telecom Inc. (GLO:PHL).

As the Uniform Accounting tearsheet for Globe highlights, it trades at a Uniform P/E of 16.3x, below global corporate averages but around its historical averages.

Low P/Es require low, or even negative, EPS growth to sustain them. In the case of Globe, the company has recently shown a 20% 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, Globe’s sell-side analyst-driven forecast shows Uniform earnings are expected to shrink by 13% in 2020 and grow by 10% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 2,046.00 per share. These are often referred to as market embedded expectations.

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

The company has an earning power slightly above long-run corporate averages, and has consistently been above global long-run corporate averages. Moreover, Globe’s cash flows and cash on hand exceed obligations within five years, but its intrinsic credit risk is 120bps above the risk free rate. These indicate Globe has a low dividend risk and moderate credit risk.

To conclude, Globe’s Uniform earnings growth is well below peer averages and is trading 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 RCBC R25 Blue-Chip 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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