Philippine Markets Newsletter

This PERA UITF from the second largest bank in PH has underperformed its benchmark, but its holdings still have upside…also, AC tearsheet

May 21, 2021

This PERA unit investment trust fund (UITF) from the country’s second largest bank underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). The average Uniform ROA for its holdings is 6%, 1.5x the as-reported average.

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

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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Metropolitan Bank and Trust Co. (Metrobank) is the second largest bank in the Philippines. Founded in 1962, Metrobank offers various financial services ranging from regular banking to insurance, catering to retail and corporate clients. Metrobank has over 900 branches nationwide, and its subsidiaries include First Metro Investment Corp and PSBank.

Metrobank and its subsidiary, First Metro, offer different types of UITFs that cater to the varying risk profiles of its clients.

We’ve analyzed some of Metrobank’s UITFs before:

This week, we’ll be taking a first look at the Metrobank Personal Equity and Retirement Account (PERA) Equity Fund.

PERA was formed under Republic Act 9505, otherwise known as the PERA Act of 2008. PERA is a voluntary retirement saving program that enables Filipinos to start planning for retirement even at an early age. This is similar to the retirement savings accounts in other countries such as the 401(k) in the United States.

To be a PERA contributor, one needs to be a Filipino citizen with a Tax Identification Number (TIN) and the capacity to enter into a contract. Filipinos can contribute up to Php 100,000 annually while Overseas Filipino Workers (OFWs) can contribute up to Php 200,000 annually. For married couples, each spouse can contribute Php 100,000.

Income earned from investments and reinvestments from the maximum amount allowed is exempt from taxes. Apart from Metrobank, ATRAM, BDO, BPI, and Land Bank of the Philippines are other accredited PERA administrators in the country who offer PERA investment products.

PERA contributions follow the 55 and 5 rule where the contributor can only withdraw their contributions when they reach the age of 55 and have made qualified contributions for at least five years.

The Metrobank PERA Equity Fund was recently launched on October 1, 2020. The fund is a peso-denominated UITF that aims to achieve maximum growth through a diversified portfolio of equities listed on the PSE, with the PSEi as its benchmark.

The fund caters to investors with an aggressive risk profile who are willing to stay invested for at least five years, and as PERA rules apply, investors can only withdraw their contributions once they are at least 55 years old.

The fund is currently invested in at least 95% of selected shares of stock while the remaining is invested in time deposits.

At its inception in October 2020, Metrobank PERA Equity Fund’s initial net asset value per unit (NAVPU) was PHP 1.00. The fund’s NAVPU rose to PHP 1.10 by December 2020, its 10% gain for the period underperforming its benchmark’s gain of 23%.

In March 2020, the fund’s NAVPU declined to PHP 0.97 following the market selloff caused by the pandemic, recording a 12% loss that matched its benchmark’s 12% loss.

The fund’s NAVPU further declined to Php 0.95 as of May 17, 2021, showing a 2% loss that matched its benchmark’s 2% loss.

Since inception, the Metrobank PERA Equity Fund has had a cumulative 5% loss, underperforming its benchmark’s cumulative 6% gain. The fund has generally underperformed, or at best, matched its benchmark’s performance.

As-reported metrics would have investors believe that the fund’s 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 top six core non-financial holdings of the Metrobank PERA 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 the Metrobank PERA Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. The fund is generating an average as-reported ROA of 4%, lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better returns with an average Uniform ROA of 6%, 1.5x the average as-reported ROA. These companies have strong returns, with some of the companies having Uniform ROAs above 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 Metrobank PERA 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 22% to 134%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and International Container Terminal Services, Inc. (ICT:PHL) having the highest distortions.

As-reported metrics understate the profitability of Ayala Corporation, suggesting an unprofitable firm with an as-reported ROA of 2%. In reality, this firm more closely resembles one that is breaking even, with a Uniform ROA of 5% that is in line with average cost of capital. Prior to the pandemic, it consistently generated returns of at least 9% through 2005-2019.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of 3% when in fact, it is an average firm with a 6% Uniform ROA. It has consistently generated returns of at least 6% since 2005.

Likewise, as-reported metrics understate the profitability of International Container Terminal Services, Inc., suggesting an above-average firm with an as-reported ROA of 7%. In reality, this is a high-quality firm with a 13% Uniform ROA, almost double its as-reported ROA, and it has consistently generated returns of at least 6% since 2005.

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 of 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 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 5%-6% annual Uniform earnings growth over the next two years. Meanwhile, the Metrobank PERA Equity Fund’s major holdings are forecast to outperform with a 47% projected Uniform earnings growth in the next two years, while the market is also forecasting an outperformance with an 8% projected Uniform earnings growth.

All the companies in the Metrobank PERA Equity Fund have a positive Uniform earnings growth spread except for Ayala Corporation (AC:PHL). Among these companies, Ayala Land, Inc. (ALI:PHL), SM Investments Corporation (SM:PHL), and SM Prime Holdings, Inc. (SMPH:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing ALI’s Uniform Earnings to grow by 11% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 116%.

Likewise, the market is pricing SM’s Uniform Earnings to grow by 10% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 69%.

Similarly, the market is pricing SMPH’s Uniform Earnings to grow by 21% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 72%.

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 Ayala Corporation Tearsheet

Today, we’re highlighting one of the individual stock holdings in the Metrobank PERA Equity Fund—Ayala Corporation (AC:PHL).

As the Uniform Accounting tearsheet for Ayala Corporation highlights, it trades at a Uniform P/E of 14.9x, below the global corporate average of 23.7x, and below its historical average of 17.5x.

Low P/Es require low EPS growth to sustain them. In the case of Ayala Corporation, the company has shown a 110% Uniform EPS shrinkage in 2020.

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, Ayala Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to decline by 493% in 2021 and grow by 53% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify AC’s PHP 725.00 stock price. These are often referred to as market embedded expectations.

Ayala Corporation is currently being valued as if Uniform earnings were to grow by 4% per year over the next three years. What sell-side analysts expect for AC’s earnings growth is below what the current stock market valuation requires in 2021 and above what the current stock market valuation requires in 2022.

The company has an earning power below long-run corporate averages, and its cash flows and cash on hand fall short of obligations within five years. Based on its operating risk and refinancing capability, it has an intrinsic credit risk of 140bps, indicating high dividend risk and moderate credit risk.

To conclude, Ayala Corporation’s Uniform earnings growth is well below peer averages, and is also trading below peer average valuations.

About the Philippine Markets Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living often times 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 Metrobank PERA 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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