Philippine Markets Newsletter

This UITF from a bank with a focus on social inclusion has continued to outperform its benchmark, the PSEi, since inception…also, MEG tearsheet

August 27, 2021

This unit investment trust fund (UITF) from a government-owned bank has outperformed the Philippine Stock Exchange Index (PSEi). Moreover, the average Uniform ROA for this UITF’s holdings is 6%, 2x the as-reported average of 3%.

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 the 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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Land Bank of the Philippines (LBP) started its operations in 1963 as a government owned-institution. Its aim is to achieve a balance between fulfilling its social mandate of aiding the agricultural and aquacultural sectors while remaining financially profitable.

LBP offers a wide array of banking services, including treasury, remittance, and trust products. Their trust products and services include money market funds, bond funds, growth funds, equity funds, and global dollar funds. These investment products cater to the diverse risk profiles of their clients. 

This week, we’ll be revisiting the LANDBANK Equity Fund

The LANDBANK Equity Fund was established on August 1, 2016. The investment strategy of this fund is to generate long-term capital growth by investing in peso-denominated listed equities that comprise the PSEi.

The fund is suitable for investors with aggressive risk appetites and who are willing to stay invested for at least five years. The fund is currently invested in at least 82% of selected equities, while the remaining is in cash and deposits. 

At its inception in August 2016, LANDBANK Equity Fund’s net asset value per unit (NAVPU) was at PHP 1.00. The fund’s NAVPU steadily declined to PHP 0.91 in December 2016, recording a 9% decrease and outperforming the PSEi’s 19% loss over the same period. This loss was also felt across other Asian stocks as US equities and oil prices continued to fall.

Following this low, the fund’s NAVPU steadily rose to a peak of PHP 1.12 in January 2018. The fund underperformed the PSEi during this period, reporting a 23% gain against the PSEi’s 38% gain.

By June 2018, the fund’s NAVPU again shrank to PHP 0.91 due to the weakening peso and the escalating fear of a global trade war. The fund incurred a loss of 19%, outperforming the PSEi’s loss of 23%.

The fund’s NAVPU then plummeted to an all-time low of PHP 0.60 in March 2020 brought about by the coronavirus-induced market selloff. The fund incurred a loss of 34%, matching the PSEI’s performance over the same period. 

As of August 23, 2021, the LANDBANK Equity Fund has recovered to a NAVPU of PHP 0.84, a 39% gain from the 2020 low, underperforming the PSEi’s 43% gain.

Since its inception, LANDBANK Equity Fund has had a cumulative 16% loss versus the PSEi’s cumulative 18% loss.

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 four core non-financial holdings of the 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 companies in the LANDBANK Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 3%, significantly 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%, 2x the as-reported ROA 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 the 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 47% to 150%, with Ayala Corporation (AC:PHL), San Miguel Corporation (SMC:PHL), and Puregold Price Club, Inc. (PGOLD: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% in line with the average cost of capital. Prior to the pandemic, it consistently generated returns of at least 9% from 2005 to 2019.

Similarly, as-reported metrics understate the profitability of San Miguel Corporation, suggesting an unprofitable firm with an as-reported ROA of 2%. In reality, it is a below-average company with a 4% Uniform ROA, double its as-reported returns. Prior to the pandemic, it consistently generated returns of at least 5% from 2015 to 2019. 

Likewise, as-reported metrics understate the profitability of Puregold Price Club, suggesting a decent firm with an as-reported ROA of 7%. In reality, this is a high-quality firm with a 12% Uniform ROA. It has consistently generated returns of at least 10% over the last 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 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 according to the Uniform Accounting framework.
  1. 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.
  1. 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 an 83% projected Uniform earnings growth in the next two years, while the market is forecasting a slight underperformance with a 2% projected Uniform earnings growth.

All the companies in the LANDBANK Equity Fund have a positive Uniform earnings growth spread. Among these companies, Ayala Corporation, San Miguel Corporation, and Megaworld Corporation (MEG:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing AC’s Uniform earnings to grow by only 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 243%.

Similarly, the market is expecting SMC’s Uniform earnings to grow by 9%, while sell-side analysts are projecting the company’s earnings to grow 51%.

On the other hand, the market is pricing MEG’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 24%.

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

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 have intact business models that should drive economic profitability moving forward.

SUMMARY and Megaworld Corporation Tearsheet

Today, we’re highlighting one of the individual stock holdings in the LANDBANK Equity Fund—Megaworld Corporation (MEG:PHL).

As the Uniform Accounting tearsheet for Megaworld Corporation highlights, the company trades at a Uniform P/E of 14.8x, below both the global corporate average P/E of 23.7x and its historical average of 18.3x.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of Megaworld Corporation, the company has shown a 47% 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, Megaworld Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink immaterially in 2021 and grow by 55% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Megaworld Corporation’s PHP 2.87 stock price. These are often referred to as market embedded expectations.

Megaworld Corporation is currently being valued as if Uniform earnings were to shrink by 5% per year over the next three years. What sell-side analysts expect for Megaworld Corporation’s earnings growth is above what the current stock market valuation requires in both 2021 and 2022.

The company has an earning power below long-run corporate averages, but its cash flows and cash on hand consistently exceed obligations within five years. Moreover, the company has an intrinsic credit risk of 210bps. Together, these indicate that Megaworld Corporation has a moderate credit risk, but low dividend risk. 

To conclude, Megaworld Corporation’s Uniform earnings growth is well below peer averages and is 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 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 LANDBANK 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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