Philippine Markets Newsletter

This UITF from SEA’s first bank closely tracked the index for 10 years before its underperformance spread grew too wide… also, TEL tearsheet

July 2, 2021

This unit investment trust fund (UITF) from the Philippines’ first bank 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 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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Bank of the Philippine Islands (BPI), founded in 1851, was the first bank in Southeast Asia and is the 4th largest bank in the Philippines. BPI is a universal bank that offers a wide range of financial products and solutions that serve both retail and corporate clients. The bank has over 800 branches in the country. Notably, its subsidiary, BPI Asset Management and Trust Corporation (BPI AMTC), is the largest standalone trust corporation in the country.

BPI offers both commercial and investment banking products and services. Their investment products and services include money market funds, bond funds, balanced funds, and equity funds to cater to the varying risk profiles of their clients.

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

This week, we’ll revisit one of their funds, the Odyssey Philippine Equity Fund.

The Odyssey Philippine Equity Fund was established on May 5, 2003. Odyssey funds are actively managed by BPI AMTC, and this fund in particular invests in a concentrated portfolio of stocks listed on the Philippine Stock Exchange (PSE). The fund aims to outperform its benchmark, the Philippine Stock Exchange Index (PSEi).

With the goal of attaining long-term capital growth, the fund is suitable for investors who have an aggressive risk appetite and who are willing to stay invested for at least five years. The fund is currently invested in 95% equity, while the remaining is in a mixture of cash, time deposits, and money market.

At its inception in May 2003, Odyssey Philippine Equity Fund’s net asset value per unit (NAVPU) was at PHP 100.00. After rising to PHP 362.86 in July 2007, it dropped to nearly a third of its value to PHP 137.96 in October 2008 due to the ripple effect of the global financial crisis. The fund recorded a loss of 62%, underperforming its benchmark, the PSEi, which incurred a loss of 55% over the same period.

After reaching this October 2008 low, the fund recovered in the succeeding years. By May 2013, its NAVPU was at a record PHP 553.83, delivering a 301% growth from its previous low, though still underperforming the PSEi’s gain of 323%.

However, NAVPU dropped by 31% to PHP 382.58 in January 2016 due to the oil price crash. Meanwhile, the PSEi only incurred a loss of 16% in the same period.

By the end of 2019, the fund rebounded to a NAVPU of PHP 455.43 before falling once more to PHP 318.50 in March 2020, due to the coronavirus-induced market selloff. The fund recorded a 30% loss that roughly matched its benchmark’s 32% loss in the same period.

By June 28, 2021, the fund’s NAVPU recovered to PHP 400.91, a 26% gain that only slightly underperformed its benchmark’s gain of 30%.

Since its inception, Odyssey Philippine Equity Fund has had a cumulative 301% gain versus its benchmark’s cumulative 542% gain.

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 Odyssey Philippine 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 Odyssey Philippine 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 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 Odyssey Philippine 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 -232% to 134%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and International Container Terminal Services, Inc. (ICT:PHL) having the highest positive 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 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 an average firm with an as-reported ROA of 7%. In reality, it has a 13% Uniform ROA, or nearly double its as-reported ROA. Furthermore, it has generated returns of at least 10% over the past 5 years.

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 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, Odyssey Philippine Equity Fund’s major holdings are forecast to outperform with a 32% projected Uniform earnings growth in the next two years, while the market is forecasting a drastic underperformance with a 24% projected Uniform earnings shrinkage.

All the companies in the Odyssey Philippine Equity Fund have a positive Uniform earnings growth spread except for Ayala Corporation and PLDT, Inc. (TEL:PHL). Among these companies, JG Summit Holdings, Inc. (JGS:PHL), Ayala Land, Inc. (ALI:PHL), and SM Investments Corporation have the highest positive Uniform earnings growth spread.

The market is pricing JGS’s Uniform Earnings to shrink by 244% in the next two years, while sell-side analysts are projecting the company’s earnings to be immaterial.

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 105%.

Similarly, the market is pricing SM’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 65%.

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 PLDT, Inc. Tearsheet

Today, we’re highlighting one of the individual stock holdings in the Odyssey Philippine Equity Fund—PLDT, Inc. (TEL:PHL).

As the Uniform Accounting tearsheet for PLDT, Inc. highlights, it trades at a Uniform P/E of 17.4x, below the global corporate average of 23.7x, but around its historical average of 17.5x.

Low P/Es require low EPS growth to sustain them. In the case of PLDT, Inc., the company has shown a 195% Uniform EPS growth 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, PLDT, Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 23% in 2021 and by 5% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify TEL’s PHP 1,288.00 stock price. These are often referred to as market embedded expectations.

PLDT, Inc. is currently being valued as if Uniform earnings were to shrink by 9% per year over the next three years. What sell-side analysts expect for TEL’s earnings growth is below what the current stock market valuation requires in 2021, but above that requirement in 2022.

The company has an earning power in line with long-run corporate averages, and its cash flows and cash on hand exceed obligations from 2023-2025. In addition, the company has an intrinsic credit risk of 130bps above the risk free rate. Together, these signal that TEL has a moderate credit and dividend risk.

To conclude, PLDT, Inc.’s Uniform earnings growth is well below peer averages, and 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 Odyssey Philippine 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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