Philippine Markets Newsletter

This UITF from a multinational insurance company underperformed the PSEi, but its holdings imply potential upside…also, GTCAP tearsheet

July 23, 2021

This unit investment trust fund (UITF) from one of the world’s largest insurance companies has underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). However, the average Uniform ROA for this UITF’s 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.

In addition to examining the fund’s portfolio, we are including the fundamental analysis of one of the fund’s 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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Manulife Philippines is a subsidiary of Manulife Financial Corporation, one of the largest insurance companies in the world.

Manulife Investment Management and Trust Corporation, a subsidiary of Manulife Philippines, acquired its trust and other fiduciary business license from the Banko Sentral ng Pilipinas in 2017 and started operations in September 2017. It operates under the brand name of Manulife Investment Management, the global wealth and asset management segment of Manulife Financial Corporation.

This week, we’ll be taking a look at the Class A shares of Manulife Equity Wealth Fund. Class A shares typically charge a front-end sales load, but they tend to have lower fees and annual expenses compared to other mutual fund share classes.

The Manulife Equity Wealth Fund, launched on September 18, 2017, invests in a concentrated portfolio of stocks listed on the Philippine Stock Exchange (PSE). The fund aims to achieve long-term capital appreciation by investing in stocks listed on the Philippine Stock Exchange, as well as fixed income securities and other liquid fixed income instruments.

With the goal of attaining long-term capital growth, the fund is suitable for investors who have aggressive risk appetites and who are willing to stay invested for at least five years. The fund is currently invested in 99% equity, while the remaining is in a mixture of cash and cash equivalents.

At its inception in September 2017, Manulife Equity Wealth Fund’s net asset value per unit (NAVPU) was at PHP 1.00. After rising to PHP 1.07 by January 2018, it dropped to a value of PHP 0.81 in November 2018 due to uncertainties regarding Brexit and the US-China trade war. The fund recorded a loss of 24% in that period, in line with its benchmark, the PSEi.

After its November 2018 low, the fund recovered in the succeeding years. By July 2019, its NAVPU was at PHP 0.98, delivering a 21% gain from its previous low, although still slightly underperforming the PSEi’s gain of 22%.

By March 2020, the fund fell to a record low of PHP 0.56 due to the coronavirus-induced market selloff. The fund incurred a 43% loss that slightly outperformed its benchmark’s 45% loss in the same period.

As of July 16, 2021, the fund’s NAVPU is at PHP 0.77, a 38% gain that underperformed its benchmark’s 45% gain.

Since its inception, the Manulife Equity Wealth Fund has had a cumulative 23% loss versus its benchmark’s cumulative 19% loss in the same period.

Even though the fund’s performance hasn’t been better than the market’s, it does not mean the companies in its holdings are of lower quality. 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 eight core non-financial holdings of the Manulife Equity Wealth 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 Manulife Equity Wealth 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%—lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered stronger returns with an average Uniform ROA of 6%, 1.5x the average as-reported ROA. These companies’ returns are in line with 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 Manulife Equity Wealth 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 26% to 150%, 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% 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 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 a decent 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. 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 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, the Manulife Equity Wealth Fund’s major holdings are forecasted to outperform that with a 41% projected Uniform earnings growth in the next two years, while the market is forecasting a drastic underperformance with a 2% projected Uniform earnings growth.

All the companies in the Manulife Equity Wealth Fund have a positive Uniform earnings growth spread except for Ayala Corporation and PLDT, Inc. (TEL:PHL). Among these companies, GT Capital Holdings, Inc. (GTCAP:PHL), Ayala Land, Inc. (ALI:PHL), and SM Investments Corporation have the highest positive Uniform earnings growth spread.

The market is pricing GTCAP’s Uniform earnings to shrink by 23% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 78%.

On the other hand, the market is pricing ALI’s Uniform earnings to grow by 13% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 103%.

Similarly with ALI, the market is pricing SM’s Uniform earnings to grow by 9% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 61%.

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

SUMMARY and GT Capital Holdings, Inc. Tearsheet

Today, we’re highlighting one of the individual stock holdings in the Manulife Equity Wealth Fund (Class A)—GT Capital Holdings, Inc. (GTCAP:PHL).

As the Uniform Accounting tearsheet for GT Capital Holdings, Inc. highlights, it trades at a Uniform P/E of 3.6x, below the global corporate average of 23.7x and its historical average of 6.1x.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of GT Capital Holdings, the company has shown a 68% 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, GT Capital Holdings’ sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 131% in 2021 and by 36% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify GT Capital Holdings’ PHP 607.50 stock price. These are often referred to as market embedded expectations.

GT Capital Holdings is currently being valued as if Uniform earnings were to shrink by 23% per year over the next three years. What sell-side analysts expect for GT Capital Holdings’ 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 exceed obligations from 2022-2025. Moreover, the company has an intrinsic credit risk of 330bps. Together, these indicate that GT Capital Holdings has a moderate credit risk and a low dividend risk.

To conclude, GT Capital Holdings’ Uniform earnings growth is above peer averages, but is trading well 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 the Manulife Equity Wealth Fund (Class A) interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Daily
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