Philippine Markets Newsletter

This UITF from the second-largest bank in PH has been outperforming its benchmark, and its holdings still have potential upside…also, SM tearsheet

May 7, 2021

This unit investment trust fund (UITF) from the country’s second largest bank outperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). In spite of this, the average Uniform ROA for its holdings is almost double the as-reported ROA, implying further potential upside.

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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Metropolitan Bank and Trust Co. (Metrobank) is the second largest bank in the Philippines. Founded in 1962, Metrobank offers various financial services ranging from regular banking to insurance that caters to retail and corporate clients. Metrobank has over 900 branches nationwide. Its subsidiaries include First Metro Investment Corp and PSBank.

Metrobank, through its subsidiary, First Metro, offers different types of UITFs that cater to the varying risk profiles of its clients.

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

This week, we’ll be giving an update on one of their other funds, the Metro Equity Fund.

The Metro Equity Fund was launched back in March 1, 2007. The fund is a peso-denominated UITF suitable for investors with high risk appetites who aim to achieve maximum growth. It does this by investing in diversified, blue-chip and fundamentally sound companies listed on the Philippine Stock Exchange (PSE).

The fund is invested in at least 90% of selected stocks while the remaining is invested in time deposits, and uses the PSEi as its benchmark.

The Metro Equity Fund started out with a net asset value per unit (NAVPU) of PHP 1.00 during its inception in March 2007. The fund’s NAVPU rose to PHP 1.21 in October 2007. The fund and its benchmark both recorded a gain of 21% during this period.

The fund’s NAVPU then declined to PHP 0.61 in October 2008, recording a 50% loss due to the aftermath of the global financial crisis. The fund outperformed the PSEi’s 56% loss during the same period.

10 years after the global financial crisis, the fund’s NAVPU rebounded to an all-time high of PHP 3.09 in January 2018, a 398% gain. However, the fund’s gain underperformed its benchmark’s gain of 431% during the same period.

From the its all-time high, the fund’s NAVPU dropped to PHP 1.59 in March 2020 due to the pandemic-induced market selloff. The fund’s 47% loss slightly outperformed its benchmark’s 49% loss.

As of May 3, 2021, the fund’s NAVPU has rebounded to PHP 2.10. This 32% gain underperformed the benchmark’s 38% gain.

Since inception, the Metro Equity Fund’s cumulative 110% gain has outperformed its benchmark’s gain of 100%.

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 7 core non-financial holdings of the Metro 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 Metro 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 3%, lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered stronger earnings with an average Uniform ROA of 5%, almost 2x the as-reported average. These companies have strong returns, with some of the companies 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 Metro 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 JG Summit Holdings, Inc. (JGS:PHL), Ayala Corporation (AC:PHL), and SM Investments Corporation (SM:PHL) having the highest 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 average cost of capital. Prior to experiencing pandemic-related concerns, it has consistently generated returns of at least 9% through 2005-2019.

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.

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 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 5%-6% annual Uniform earnings growth over the next two years. Meanwhile, the Metro Equity Fund’s major holdings are forecast to drastically outperform with a 44% projected Uniform earnings growth in the next two years, while the market is forecasting a drastic underperformance with a 27% projected Uniform earnings shrinkage.

All the companies in the Metro Equity Fund have a positive Uniform earnings growth spread, with the exception of Ayala Corporation (AC:PHL). Among those companies, JG Summit Holdings, Inc. (JGS:PHL), Ayala Land, Inc. (ALI:PHL), and SM Investments Corporation (SM:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing JGS’s Uniform Earnings to plummet by 240% in the next two years, while sell-side analysts are projecting the company’s earnings growth to be immaterial.

Likewise, the market is pricing ALI’s Uniform Earnings to grow by 10% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 133%.

Similarly, the market is pricing SM’s Uniform Earnings to grow by 9% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 73%.

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 SM Investments Corporation Tearsheet

Today, we’re highlighting one of the individual stock holdings in the Metro Equity Fund—SM Investments Corporation (SM:PHL).

As the Uniform Accounting tearsheet for SM Investments Corporation highlights, it trades at a Uniform P/E of 27.4x, below the global corporate average of 23.7x, but around its historical average of 27.5x.

High P/Es require high EPS growth to sustain them. In the case of SM Investments Corporation, the company has shown a 68% Uniform EPS shrinkage 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, SM Investments Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 73% in 2021 and 72% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify SM’s PHP 961 stock price. These are often referred to as market embedded expectations.

SM Investments Corporation is currently being valued as if Uniform earnings were to grow by 9% annually over the next three years. What sell-side analysts expect for SM’s earnings growth is above what the current stock market valuation requires in 2021 and 2022.

The company has an earning power in line with long-run corporate averages, but its cash flows and cash on hand fall short of obligations within five years. Based on its operating risk and refinancing capability, it has an intrinsic credit risk of 70bps, indicating high dividend risk but low credit risk.

To conclude, SM Investments Corporation’s Uniform earnings growth is above peer averages, and is also trading above 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 Metro 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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