Philippine Markets Newsletter

This UITF from the oldest bank in PH approximated the PSEi, with holdings showing an avg Uniform ROA of almost 2x as-reported…also, BLOOM tearsheet

February 26, 2021

This unit investment trust fund (UITF) from the oldest bank in the Philippines has successfully approximated the Philippine Stock Exchange Composite Index (PSEi).

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps make sense of the fund’s investments and how it continues to outperform the market.

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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Established in 1851, Bank of the Philippine Islands (BPI) is the region’s oldest bank. It is also currently the second largest bank in the Philippines in terms of assets. Its subsidiary, BPI Asset Management and Trust Corporation (BPI AMTC), on the other hand, is the largest standalone trust corporation in the Philippines.

BPI’s offerings include investment funds and Odyssey funds, which include Philippine Peso-Denominated Funds as well as Global Funds. We have already discussed some of those funds, including BPI Consumer Equity Index FundBPI Equity Value FundBPI Philippine High Dividend Equity FundBPI Philippine Infrastructure Equity Index FundOdyssey Philippine Equity Fund and Odyssey Philippine High Conviction Equity Fund.

This week, we’ll look into the performance of another one of its UITFs, BPI Invest Philippine Consumer Equity Index Fund.

BPI Invest Philippine Consumer Equity Index Fund was launched on January 16, 2017. The fund’s strategy is to track the BPI Philippine Consumer Equity Index, and invest in a diversified portfolio in similar weights. The BPI Philippine Consumer Equity Index is composed of Philippine companies that derive their sales from consumer-related business activities.

Source: BPI Philippine Consumer Equity Index Fund (KIIDS)

Since inception, the UITF has closely tracked its benchmark. However, looking at the latest data from the benchmark, BPI Invest Philippine Consumer Equity Index Fund’s cumulative 9% loss has underperformed its benchmark’s 4% loss as of January 2021.

In addition, we take a look a look at how this UITF has performed against the Philippine Stock Exchange Composite Index since the fund’s inception until February 19, 2021.

BPI Invest Philippine Consumer Equity Index Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its 2017 inception. Its NAVPU rose the following year, reaching a high of PHP 127.54 in January 2018. The fund’s 28% growth outperformed that of the PSEi’s at 25%.

However, the fund’s NAVPU fell to PHP 91.06 in November 2018 due to uncertainties regarding Brexit and the U.S.-China trade war. During this period, the UITF’s 29% loss underperformed the PSEi’s 24% loss.

Afterward, the fund’s NAVPU rose to PHP 111.22 in July 2019. The fund and PSEi both recorded a gain of 22%.

The fund’s NAVPU dropped to a record low of PHP 69.78 in March 2020 due to the coronavirus pandemic. The NAVPU’s 37% loss outperformed that of the PSEi’s 40% drop, and the fund has rebounded since then with a NAVPU of PHP 95.52 as of February 19, 2021. The fund slightly underperformed the PSEi, with gains of 37% and 38%, respectively.

Since inception, BPI Invest Philippine Consumer Equity Index Fund’s 4% loss has approximated the PSEi’s 4% loss as of February 2021.

Looking at BPI Invest Philippine Consumer Equity Index Fund’s investments using as-reported metrics, it is not apparent that the BPI Philippine Consumer Equity Index is composed of 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 these companies.

The table below shows the top 10 core non-financial holdings of BPI Invest Philippine Consumer Equity 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 these companies show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. The fund generated an average as-reported ROA of 5%, slightly below the 6% global corporate average returns.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered stronger earnings with an average Uniform ROA of 9%, almost twice the as-reported ROA average. All but one of these companies have strong returns, having Uniform ROAs greater than 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 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 45% to 762%, with Bloomberry Resorts Corporation (BLOOM:PHL), JG Summit Holdings, Inc. (JGS:PHL), LT Group, Inc. (LTG:PHL), Robinsons Retail Holdings, Inc. (RRHI:PHL) and SM Investments Corporation (SM:PHL) all having distortions of more than a hundred percent.

As-reported metrics understate the profitability of Robinsons Retail Holdings, suggesting a below-average company with an as-reported ROA of 4% when in fact, it is a high-quality firm with a 10% Uniform ROA. It has consistently generated returns of at least 6% over the past seven years.

Likewise, JG Summit Holdings is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with a 8% Uniform ROA. Furthermore, it has consistently generated returns of at least 6% over the past five 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 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, BPI Invest Philippine Consumer Equity Index Fund’s major holdings are forecast to underperform with a 3% projected Uniform earnings growth in the next two years, in contrast with market expectations of an 18% Uniform earnings shrinkage.

Among these companies, only Jollibee Foods Corporation (JFC:PHL), LT Group, Inc., Puregold Price Club, Inc. (PGOLD:PHL), Robinsons Retail Holdings, Inc. and San Miguel Corporation (SMC:PHL) have a positive Uniform earnings growth spread.

The market is pricing LT Group’s Uniform Earnings to shrink by 173% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 40%.

Meanwhile, Puregold Price Club’s Uniform earnings is expected by the market to shrink by 5% in the next two years, when sell-side analysts are projecting the company’s earnings to grow by 8%.

Robinsons Retail Holdings is priced by the market to shrink by 7% in the next two years, while sell-side analysts project the company’s earnings to grow by 4%.

Furthermore, the market is pricing San Miguel Corporation’s Uniform Earnings to shrink by 1% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 30%.

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 mature, low growth, but high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Bloomberry Resorts Corporation

Today, we’re highlighting one of the largest individual stock holdings in the BPI Invest Philippine Consumer Equity Index Fund—Bloomberry Resorts Corporation (BLOOM:PHL).

As the Uniform Accounting tearsheet for Bloomberry Resorts Corporation highlights, it trades at a Uniform P/E of 24.3x, around the global corporate average of 25.2x, but above its historical average of -17.8x.

Moderate P/Es require moderate EPS growth to sustain them. In the case of Bloomberry Resorts Corporation, the company has recently shown a 69% 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, Bloomberry Resorts Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 179% in 2020 and 140% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 7.68 per share. These are often referred to as market embedded expectations.

BLOOM is currently being valued as if Uniform earnings were to shrink 14% annually over the next three years. What sell-side analysts expect for Bloomberry Resorts Corporation’s earnings growth is below what the current stock market valuation requires in 2020 and 2021.

The company has an earning power of 3x long-run corporate averages. Bloomberry Resorts Corporation’s cash flows and cash on hand are at 162% of total obligations. Based on operating risk and refinancing capability, it has an intrinsic credit risk of 450bps, indicating that Bloomberry Resorts Corporation has a moderate credit risk and low dividend risk.

To conclude, Bloomberry Resorts Corporation’s Uniform earnings growth is well below 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 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 BPI Invest Philippine Consumer Equity 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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