Philippine Markets Newsletter

This UITF from the country’s first universal bank invests in companies with an earning power 2x more using Uniform Accounting than as-reported metrics

September 25, 2020

This unit investment trust fund (UITF) from the Philippines’ first universal bank has performed similarly year to date against its benchmark, the Philippine Stock Exchange Index (PSEi). The fund and its benchmark recorded losses of 23% and 24%, respectively.

Furthermore, as-reported metrics would leave investors confused with the fund’s stock picks. On the other hand, Uniform Accounting financial metrics help 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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Philippine National Bank (PNB) was established in 1916 as a government-owned banking institution. It became the first universal bank in the Philippines in 1980, and is currently one of the country’s largest banks.

We’ve written about one of PNB’s funds before, PNB High Dividend Fund. This week, we’ll focus on another one of their UITFs, PNB Equity Fund.

PNB Equity Fund, formerly AUP Equities Fund, was relaunched on March 1, 2016. Its strategy is to achieve capital appreciation by investing in exchange-listed companies while aiming to outperform its benchmark, the PSEi.

PNB Equity Fund rose from a net asset value per unit (NAVPU) of PHP 1.36 at its 2016 inception to PHP 1.60 in August 2016—a return of 18%—following a recovery from the 2015-2016 stock market selloff. In comparison, its benchmark recorded a slightly greater return of 20% over the same period.

The UITF’s NAVPU continued to decline, reaching a low of PHP 1.31 in December 2016, an 18% loss from the fund’s 2016 high. Meanwhile, the PSEi delivered a 19% loss during this same period.

The fund’s NAVPU then rose steadily and reached a peak of PHP 1.78 in January 2018, bringing gains of 36%. Comparably, the PSEi delivered gains of 38% during this period.

The fund ended 2019 lower with a NAVPU of PHP 1.51 and fell to as low as PHP 0.95 in March 2020 due to the coronavirus-induced market downturn. It has since rebounded to PHP 1.17 as of September 18, 2020. The fund and its benchmark have performed similarly year to date with losses of 23% and 24%, respectively.

Looking at PNB Equity 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 PNB Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.


All companies in the PNB Equity Fund show as-reported ROAs that range around and below global 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%. In reality, this leading conglomerate is a high-quality firm with an 11% Uniform ROA, almost thrice the as-reported number. Over the past 15 years, AC has never seen its Uniform ROA dip below 6%.

Similarly, 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. In fact, it has consistently generated returns of at least 10% over the past decade.

By focusing on as-reported metrics alone, PNB 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, PNB Equity Fund’s major holdings are forecast to underperform with a 7% projected Uniform earnings decline in the next two years, while the market is seeing a 3% Uniform EPS decline.

Among these companies, only TEL, AEV, and SM have positive Uniform earnings growth dislocations.

The market is pricing TEL’s Uniform Earnings to grow by only 6% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 43% moving forward.

Furthermore, the market is expecting AEV’s Uniform Earnings to decline by 6%, while analysts are projecting an immaterial 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 suffer from the adverse effects of the coronavirus pandemic, dragging down their short-term earnings growth expectations, Uniform Accounting metrics show that these companies are high quality with intact business models that would drive economic profitability moving forward.

SUMMARY and Aboitiz Equity Ventures, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the PNB Equity Fund—Aboitiz Equity Ventures, Inc. (AEV:PHL).

As the Uniform Accounting tearsheet for AEV highlights, it trades at a Uniform P/E of 20.9x, 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 AEV, the company has recently shown a 66% Uniform EPS shrinkage.

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, AEV’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 214% and 69% in 2020 and 2021, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 48.00 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 6% over the next three years and still justify current price levels. What sell-side analysts expect for AEV’s earnings growth is below what the current stock market valuation requires in 2020 and 2021.

The company has an earning power around 2x long-run corporate averages and that is consistently well above global long-run corporate averages—based on its Uniform ROA calculation.

However, AEV’s cash flows and cash on hand fall short of total obligations within five years. Moreover, intrinsic credit risk is 230bps above the risk-free rate. This indicates that AEV has a high dividend risk and moderate credit risk.

To conclude, AEV’s Uniform earnings growth is well below peer averages. However, 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 PNB 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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