Philippine Markets Newsletter

This UITF from the oldest bank in Southeast Asia has performed better than the PSEi year to date, and it shows under Uniform Accounting

October 2, 2020

This unit investment trust fund (UITF) from Southeast Asia’s first bank has outperformed the Philippine Stock Exchange Index (PSEi) year to date. The fund and the PSEi recorded losses of 3% and 25%, respectively.

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 they continue to outperform the PSEi at this time.

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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The Bank of the Philippine Islands (BPI) is the oldest bank in Southeast Asia and is one of the largest universal banks in the Philippines.

In the past, we’ve written about three of BPI’s UITFs: BPI Consumer Equity Index FundBPI Equity Value Fund, and Odyssey Philippine Equity Fund. This week, we’ll focus on the BPI Philippine Infrastructure Equity Index Fund.

BPI Philippine Infrastructure Equity Index Fund was launched on January 16, 2017. Its strategy is to track the BPI Infrastructure Index—a diversified portfolio of companies with business in the infrastructure industry selected by BPI—as close as they can to generate returns.

BPI Philippine Infrastructure Equity Index Fund began with a net asset value per unit (NAVPU) of PHP 100.00 at its 2017 inception, then steadily rose to a peak of PHP 112.29 in September 2017, delivering a 12% return. The PSEi performed similarly, recording a 13% return over the same time span.

However, the fund’s NAVPU dropped to PHP 84.83 in November 2018—a loss of 24% from its peak—caused by uncertainties regarding Brexit and the U.S.-China trade war. Meanwhile, the PSEi outperformed the fund with a loss of 16% over the period.

The fund ended 2019 with a NAVPU of PHP 83.10. In March 2020, it fell to a historical low of PHP 59.27 due to the coronavirus-induced market downturn. It has since rebounded to PHP 80.80 as of September 25, 2020. Year to date, the fund has outperformed the PSEi with losses of 3% versus the benchmark’s loss of 25%.

Looking at BPI Philippine Infrastructure Equity Index Fund’s investments using as-reported metrics, it is not apparent that the fund invests in profitable 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 BPI Philippine Infrastructure 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 companies in the BPI Philippine Infrastructure Equity Index Fund show as-reported ROAs that range around cost-of-capital levels, suggesting that they are not generating much economic profit. In 2019, the fund generated an as-reported average ROA of 6%, in line with global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, 1.5x as-reported ROA averages and 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 191%, with Aboitiz Equity Ventures, Inc. (AEV:PHL) and Aboitiz Power Corporation (AP:PHL) both having distortions of more than a hundred percent.

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.

Similarly, as-reported ROA understates the profitability of AP, suggesting a below-average company with an as-reported ROA of 5%. In reality, this company is a high-quality firm with a 13% Uniform ROA, over 2x the as-reported number. Over the past 15 years, AP has never seen its Uniform ROA dip below 11%.

By focusing on as-reported metrics alone, BPI 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, BPI Philippine Infrastructure Equity Index Fund’s major holdings are forecast to lag that with a 5% projected Uniform earnings growth in the next two years, while the market is seeing a 7% Uniform EPS shrinkage.

Among these companies, TEL and Manila Water Company, Inc. (MWC:PHL) have the highest 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 MWC’s Uniform Earnings to decline by 12%, while analysts are projecting a 12% 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 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 First Gen Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the BPI Philippine Infrastructure Equity Index Fund—First Gen Corporation (FGEN:PHL).

As the Uniform Accounting tearsheet for FGEN highlights, it trades at a Uniform P/E of 8.8x, well 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 FGEN, the company has recently shown a 48% 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, FGEN’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 6% in 2020, followed by a 15% growth in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 23.60 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 16% over the next three years and still justify current price levels. What sell-side analysts expect for FGEN’s earnings growth is above 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.

Moreover, FGEN’s cash flows and cash on hand are 134% of total obligations. However, intrinsic credit risk is 280bps above the risk-free rate. This indicates that FGEN has a low dividend risk and moderate credit risk.

To conclude, FGEN’s Uniform earnings growth is well above peer averages. However, the company 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 Philippine Infrastructure 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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