Philippine Markets Newsletter

This UITF from one of the country’s largest asset managers outperformed the PSEi YTD, with a Uniform earning power almost 2x as-reported metrics

October 30, 2020

This unit investment trust fund (UITF) from one of the country’s leading asset managers has slightly outperformed its benchmark, the Philippine Stock Exchange Index (PSEi), year to date.

However, as-reported metrics would leave investors confused with the fund’s stock picks. Uniform Accounting financial metrics help make sense of the fund’s investments and how it continues to outperform its benchmark.

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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ATR Asset Management, or ATRAM, is one of the leading independent asset managers in the Philippines. It operates through ATR Asset Management, Inc. and the ATRAM Trust Corporation. ATR Asset Management, Inc. manages ATRAM’s mutual funds, while ATRAM Trust Corporation manages ATRAM’s unit investment trust funds (UITFs).

In October 2016, ATRAM Trust Corporation became the Philippines’ first stand-alone trust corporation after receiving its license to operate from the Bangko Sentral ng Pilipinas (BSP).

We’ve written about ATR Asset Management, Inc.’s mutual funds before, namely: ATRAM Alpha Opportunity FundATRAM Philippine Equity Opportunity Fund, and Soldivo Strategic Growth Fund. This week, we’ll focus on one of ATRAM Trust Corporation’s UITFs, the ATRAM Philippine Equity Smart Index Fund.

ATRAM Philippine Equity Smart Index Fund was launched on March 1, 2016. The fund’s objective is to outperform its benchmark, the Philippine Stock Exchange Index (PSEi), which it plans to do so with an enhanced index approach that combines elements of active and passive management.

ATRAM Philippine Equity Smart Index Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its 2016 inception, which then climbed to a peak of PHP 131.66 in January 2018. Afterward, it dropped to PHP 102.11 in June 2018, a loss of 22% due to the slowdown in the Chinese economy. Similarly, the PSEi recorded a loss of 23% during the same period.

The fund slightly recovered to PHP 115.45 in September 2018, but once again dropped to PHP 99.66 in November that same year due to uncertainties regarding Brexit and the U.S.-China trade war. The fund and its benchmark reported comparable losses of 14% and 13% in that span, respectively.

The fund ended 2019 with a NAVPU of PHP 113.05, then dropped to its lowest point of PHP 70.45 in March 2020 due to the downturn caused by the coronavirus pandemic. Today, the fund has slightly rebounded, recording a NAVPU of PHP 96.38 as of October 23, 2020. The fund has slightly outperformed its benchmark year to date, recording a lower loss of 15% compared to the PSEi’s loss of 17%.

Looking at ATRAM Philippine Equity Smart Index Fund’s investments using as-reported metrics, it is not apparent that the fund invests in stable and established companies.

As-reported metrics would have investors believe that 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 ATRAM Philippine Equity Smart Index 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 the ATRAM Philippine Equity Smart Index Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. In 2019, the fund generated an as-reported average ROA of 5%, slightly below global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, almost 2x the as-reported ROA averages and 1.5x global corporate averages. These companies have strong returns, with Uniform ROA above the 6% global average returns, except for PLDT Inc. (TEL:PHL).

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 -43% to 197%, with Ayala Corporation (AC:PHL), Aboitiz Equity Ventures, Inc. (AEV:PHL), JG Summit Holdings Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) all having distortions of more than a hundred percent.

As-reported ROA understates the profitability of AC, suggesting a below-average company with an as-reported ROA of 4%. It is in fact a high-quality firm with an 11% Uniform ROA. In fact, it has consistently generated returns of at least around 10% over the past decade.

Likewise, AEV is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with a 10% Uniform ROA. Moreover, over the past decade, AEV has never seen its Uniform ROA dip below 10%.

By focusing on as-reported metrics alone, ATRAM would never pick most of these companies because they 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 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, ATRAM Philippine Equity Smart Index Fund’s major holdings are forecast to underperform with a 6% projected Uniform earnings shrinkage in the next two years, while the market is seeing a 1% Uniform EPS shrinkage.

Among these companies, only TEL, AEV, and International Container Terminal Services, Inc. (ICT:PHL) have positive Uniform earnings growth dislocations.

The market is pricing TEL’s Uniform Earnings to grow by only 5% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 45% moving forward.

Furthermore, the market is expecting AEV’s Uniform Earnings to decline 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 are suffering 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 largest individual stock holdings in the ATRAM Philippine Equity Smart Index Fund—Ayala Corporation (AC:PHL).

As the Uniform Accounting tearsheet for AC highlights, it trades at a Uniform P/E of 20.2x, 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 AC, the company has recently shown a 308% 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, AC’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 75% in 2020, but grow by 105% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 775.00 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 7% over the next three years and still justify current price levels. What sell-side analysts expect for AC’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 2x the long-run corporate averages. However, AC’s cash flows and cash on hand exceeds obligations within five years except in 2024, and the company has an intrinsic credit risk 140bps above the risk-free rate. This indicates that AC has a moderate credit and dividend risk.

To conclude, AC’s Uniform earnings growth is below peer averages, but the company is trading around 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 ATRAM Philippine Equity Smart Index 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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