This UITF from SEA’s first bank has finally outperformed the PSEi, and during a pandemic no less…also, ICT tearsheet
Even with 170 years of existence, Bank of the Philippine Islands (BPI) continues to find ways to grow. Bolstering its position as one of the biggest banks in the country, it has partnered with GCash to broaden its retail offerings and investment options.
We also take a look at one of the unit investment trust funds (UITFs) offered by the bank. In addition to examining the fund’s portfolio, we are including a 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 Newsletter:
Friday Uniform Portfolio Analytics
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Mobile wallet GCash’s partnership with BPI enabled the universal bank to expand its retail offerings by providing affordable and accessible investing opportunities to its customers.
The partnership enables GCash users to invest in BPI’s investment funds through BPI Investment Management Inc.’s ALFM Global Multi-Asset Income Fund (GMAIF) and the Philippine Stock Index Fund under GInvest.
BPI’s ALFM GMAIF is a US dollar-denominated feeder fund that invests at least 90% of its assets into a single collective scheme with investments including fixed income and equities. Furthermore, users of GCash can start investing for as low as PHP 1,000 in ALFM GMAIF whose target fund is managed by the world’s largest asset managers, BlackRock, Inc.
BPI offers both commercial and investment banking products and services. Its investment products and services include money market funds, bond funds, balanced funds, and equity funds to cater to the varying risk profiles of its clients.
We’ve analyzed some of BPI’s UITFs before:
- BPI Consumer Equity Index Fund
- Odyssey Philippine High Conviction Equity Fund
- BPI Invest Philippine High Dividend Equity Fund
- BPI Invest Philippine Equity Index Fund
- BPI Invest Philippine Consumer Equity Index Fund
- BPI Equity Value Fund
- Odyssey Philippine Equity Fund
- BPI Invest Philippine Infrastructure Equity Index Fund
As we continue to monitor BPI’s performance, let’s revisit one of the UITFs BPI offers—BPI Invest Philippine Infrastructure Equity Index Fund.
BPI Invest Philippine Infrastructure Equity Index Fund, launched on January 16, 2017, is an equity index fund that intends to achieve for its participants investment returns that track the performance of the BPI Invest Philippine Infrastructure Equity Index by investing in a diversified portfolio of stocks in the same weights as the index, to the extent practicable.
The fund is suitable for investors who have an aggressive risk appetite and intend to stay invested for a period greater than five years. Around 98% of the fund is invested in equities, while the remaining is in time deposits.
- At its inception in January 2017, the BPI Invest Philippine Infrastructure Equity Index Fund’s initial net asset value per unit (NAVPU) was at PHP 100. The fund’s NAVPU initially dropped to PHP 59.27 in March 2020, a 41% decrease. Other Asian stocks also experienced losses due to the pandemic. The fund managed to recover two years later and climb to 25% returns since inception, outperforming the PSEi that incurred a loss of 0.48% over the same period.
- The fund started to outperform the PSEi in September 2021 then reached its highest peak of PHP 125.19 in March 2022.
- After reaching this peak, the fund dropped 9% to PHP 113.59 in May 2022 due to the negative effects of the Russia-Ukraine conflict such as higher commodities and energy prices. The fund performed in line with the PSEi in the same time span.
- As of May 23, 2022, the fund rebounded to a NAVPU of PHP 118.95, a 5% gain from its May 13, 2022 low, outperforming PSEi’s 8% loss.
- Since its inception, BPI Invest Philippine Infrastructure Equity Index Fund has had a cumulative 19% gain versus the PSEi’s cumulative 8% loss.
As-reported metrics would have investors believe that the fund’s portfolio consists of companies that do not generate economic profit. 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 BPI Invest Philippine Infrastructure Equity Index 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 BPI Invest Philippine Infrastructure Equity Index Fund show as-reported ROAs above cost-of-capital levels, suggesting that they are generating economic profit. Moreover, the fund is generating an average as-reported ROA of 5%, slightly lower than the global corporate average returns of 6%.
However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better profitability with an average Uniform ROA of 10%, 2x the average as-reported ROA. These companies have strong returns, with some of the companies having a Uniform ROA above 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 BPI Invest Philippine Infrastructure Equity Index 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 -75% to 269%, with International Container Terminal Services, Inc. (ICT:PHL), Aboitiz Equity Ventures, Inc. (AEV:PHL), and Aboitiz Power Corporation (AP:PHL) having the highest distortions.
As-reported metrics understate the profitability of International Container Terminal Services, suggesting an unprofitable firm with an as-reported ROA of 9%. In reality, this firm more closely resembles one that is high quality, with a Uniform ROA of 33% which is above the average cost of capital. Over the past five years, it consistently generated returns of at least 11.
Similarly, as-reported metrics understate the profitability of Aboitiz Equity Ventures, suggesting a decent firm with an as-reported ROA of 3%. In fact, its Uniform ROA boasts a high-quality firm at 10%. Furthermore, it has consistently generated returns of at least 8% in the last decade.
Likewise, as-reported metrics understate the profitability of Aboitiz Power Corporation, suggesting another unprofitable firm with an as-reported ROA of only 4%, when this is an above-average firm with an 11% Uniform ROA. It has consistently generated returns of at least 10% in the last 10 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:
- 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.
- 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.
- 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, BPI Invest Philippine Infrastructure Equity Index Fund’s major holdings are forecasted to significantly outperform with a 30% projected Uniform earnings growth in the next two years, while the market is forecasting an outperformance with a 2% projected Uniform earnings growth.
All the companies in the BPI Invest Philippine Infrastructure Equity Index Fund have a positive Uniform earnings growth spread except for Globe Telecom, Inc. (GLO:PHL). Among these companies, DMCI Holdings, Inc. (DMC:PHL), Semirara Mining and Power Corporation (SCC:PHL), and Aboitiz Power Corporation have the highest Uniform earnings growth spread.
The market is pricing DMCI Holdings’ Uniform earnings to grow by only 19% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 442%.
Similarly, the market is pricing Semirara Mining and Power Corporation’s Uniform earnings to grow by 14% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 159%.
On the other hand, the market is pricing Aboitiz Power Corporation’s Uniform earnings to shrink by 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 23%.
Overall, as-reported numbers would significantly understate the expected earnings of these companies as shown by the Uniform-adjusted sell-side estimates.
Uniform Accounting metrics show that these mature, high-return companies have intact business models that should drive economic profitability moving forward.
SUMMARY and International Container Terminal Services, Inc. Tearsheet
Today, we’re highlighting one of the individual stock holdings in the BPI Invest Philippine Infrastructure Equity Index Fund, International Container Terminal Services, Inc. (ICT:PHL).
As the Uniform Accounting tearsheet for International Container Terminal Services, Inc. highlights, it trades at a Uniform P/E of 15.8x, below the global corporate average of 20.6x, but above its historical average of 13.4x.
Low P/Es require low, and even negative, EPS growth to sustain them. In the case of International Container Terminal Services, Inc., the company has shown a 57% Uniform EPS growth in the last year.
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, International Container Terminal Services, Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 7% in 2022 and 12% in 2023.
Based on the current stock market valuations, we can back into the required earnings growth rate that would justify International Container Terminal Services, Inc.’s PHP 217.80 stock price. These are often referred to as market embedded expectations.
International Container Terminal Services, Inc. is currently being valued as if Uniform earnings were to shrink by 13% per year over the next three years. What sell-side analysts expect for International Container Terminal Services, Inc.’s earnings growth is above what the current stock market valuation requires through 2023.
The company has an earning power well above long-run corporate averages, and its cash flows and cash on hand consistently exceed obligations. However, it has an intrinsic credit risk of 180bps. Together, these indicate a low dividend risk and moderate credit risk.
Lastly, International Container Terminal Services, Inc.’s Uniform earnings growth is below peer averages, but is trading above peer average valuations.
About the Philippine Markets Newsletter
“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 BPI Invest Philippine Infrastructure Equity Index Fund interesting and insightful.
Stay tuned for next week’s Friday Uniform Portfolio Analytics!
Philippine Markets Newsletter
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