Philippine Markets Newsletter

This state-run bank launched an online payment system for traffic violators, plus may merge with another state-run lender… also, #SMC tearsheet

June 30, 2023

To make settling of traffic fines more convenient, the state-owned Land Bank of the Philippines launched its Landbank Link.BizPortal that allows traffic violators to pay their fines electronically.

Meanwhile, negotiations are currently underway for the possible merger of Land Bank of the Philippines and the Development Bank of the Philippines. In addition to this, the Maharlika Investment Fund is also in talks to seek capital funding from both of the state-owned banks. 

Here we look at one of the institution’s unit investment trust funds (UITF). On top of examining the fund’s portfolio, we will provide you with the current Uniform Accounting Performance and Valuation Tearsheet for one of the fund’s largest holdings.

Philippine Markets Newsletter:
Friday Uniform Portfolio Analytics
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The Land Bank of the Philippines has launched an online payment facility, the Landbank Link.BizPortal, which allows traffic violators under the single ticketing system in Metro Manila to settle their fines electronically. 

Motorists can use their Landbank and Overseas Filipino Bank accounts, as well as other participating banks and e-wallets, to make online payments through the portal. This eliminates the need for over-the-counter transactions and providing a safe and convenient option to settle fines.

The current government has recently proposed a merger between the Land Bank of the Philippines and the Development Bank of the Philippines (DBP). 

The former is a specialized government-owned universal bank that primarily offers services to the agricultural sector of the country, with a focus on farmers and fishermen. The latter is another government-owned bank that primarily focuses on providing services to support the infrastructure development of the country.

With this merger, Landbank being the target surviving entity, will be the largest bank in the country in terms of assets with a value of around Php 4.18 billion. The merger will not affect any of the services being provided by Landbank and DBP. 

In fact, the Finance Secretary predicts that better services will be provided in terms of interest rates. The Philippine government is looking to finalize the merger by the end of 2023.

Another key development with Landbank and its planned merger is the proposed Maharlika Investment Fund (MIF), a sovereign wealth fund the government plans to create with a seed capital worth approximately Php 125 billion. The majority of the capital funding will come from Landbank and DBP, contributing about Php 50 billion and Php 25 billion, respectively.

While the bank’s services and merger with DBP progress, and its involvement in the Maharlika Investment Fund is in talks, let’s take a look at its investment activities, focusing on one of its UITFs, the Landbank Equity Fund.

The Landbank Equity Fund was launched on August 1, 2016, with the aim to generate long-term capital growth, to the extent possible, through investments mainly in peso-denominated listed stocks. The Fund’s benchmark is the Philippine Stock Exchange Composite Index (PSEi).

The fund is suitable for aggressive investors with an investment horizon of 5 to 7 years who are willing to take extra risk and accept the possibility that the principal investment can be lost in whole or in part in order to avail of the higher investment returns that can be offered by the equities market.

  • At its inception in August 2016, Landbank Equity Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. The fund’s value initially climbed to PHP 1.12 in January 2018 due to the added economic boost from the new administration spending, and as more government-sponsored infrastructure PPP projects gained traction. Its benchmark slightly outperformed at 12%.

  • The fund significantly outperformed its benchmark in November 2018 when it shrunk by 18% versus 24% shrinkage of its benchmark.

  • After two years of stable movement, the fund’s NAVPU dropped to PHP 0.60, a 35% shrinkage from its price in November 2018, following the announcement of the lockdown due to COVID-19. PSEi slightly underperformed at 32% shrinkage during the same period.

  • The fund was able to recover at PHP 0.91 by the end of the year 2020 from its bottom in March 2020, and the fund’s 52% growth slightly underperformed its benchmark growth of 58%. This is due to the availability of COVID-19 vaccines and fewer restrictions on economic activities.

  • The fund slightly shrunk by 11% in the second quarter of 2021 while its benchmark shrunk by 16%. But the fund recovered by 5% in the following quarter underperforming its benchmark which climbed by 13%.

  • In response to the U.S. Fed’s aggressive raising of interest rates to fight inflation, the fund still kept its value around PHP 0.90 in the second quarter of 2022, from its climb at the third quarter of 2021, and its benchmark slightly outperformed by a 5% climb.

  • Since its inception, the fund outperformed its benchmark, recording an 18% shrinkage versus PSEi’s 19% shrinkage.

With the fund outperforming its benchmark, let’s take a look at the quality of some of the companies in its holdings. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that don’t appear to break even. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top four core non-financial holdings of Landbank 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 Landbank Equity Fund show as-reported ROAs below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 4%, below the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered a Uniform ROA of 8%, a profitability above the global corporate average.

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 Landbank 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 55% to 146%, with SM Investments Corporation (SM:PHL), and Ayala Corporation (AC:PHL) having the highest positive distortions.

As-reported metrics understate the profitability of SM Investments Corporation, suggesting an as-reported ROA of 5%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 13% above the average cost of capital. In addition, the company has consistently generated returns of at least 8% over the past decade.

Similarly, as-reported metrics understate the profitability of Ayala Corporation with an as-reported ROA of 3%. In fact, its Uniform ROA is at 7%, when its lowest was 5% over the past decade.

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 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 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 two-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, Landbank Equity Fund’s major holdings are forecasted to significantly outperform with a 41% projected Uniform earnings growth in the next two years, while the market is forecasting 1% Uniform earnings.

Most of the companies in Landbank Equity Fund have positive Uniform earnings growth. Among these companies, Ayala Corporation and SM Investments Corporation have the highest positive Uniform earnings growth spread.

The market is pricing Ayala Corporation’s Uniform earnings to shrink by 3% in the next two years, while sell-side analysts are projecting an 84% growth for the company’s earnings.

Moreover, the market is pricing SM Investments Corporation’s Uniform earnings to shrink by 5% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 15%.

Overall, as-reported numbers significantly understate the expected earnings of these companies, as shown by the Uniform-adjusted sell-side estimates.

Uniform Accounting metrics show that these mature but high-growth and high-return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and San Miguel Corporation Tearsheet

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

As the Uniform Accounting tearsheet for San Miguel Corporation highlights, the company trades at a Uniform P/E of 37.2x, which is above the global corporate average of 18.4x and its historical average of 28.5x.

High P/Es require high EPS growth to sustain them. In the case of San Miguel Corporation, the company showed a 173% Uniform EPS growth last year.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp of 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, San Miguel Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 39% and 10% in 2023 and 2024, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify San Miguel Corporation’s PHP 108 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power below the long-run corporate averages. Moreover, its cash flows and cash on hand fall short of its obligations, and it also has an intrinsic credit risk of 320bps. Together, these indicate a high dividend risk and moderate credit risk.

Lastly, San Miguel Corporation’s Uniform earnings growth is in line with peer averages and above 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 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 at the end of the month, 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 Landbank Equity Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Daily
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