Philippine Markets Newsletter

This UITF has successfully outperformed the PSEi, with its holdings showing an average Uniform ROA almost double the as-reported…also, RRHI tearsheet

March 19, 2021

This unit investment trust fund (UITF) from an independent financial institution from the Philippines has outperformed its benchmark, 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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AB Capital Trust or ABCIC-TID is an independent financial institution managing over PHP 20 billion in funds. It was founded in 1980 as Anscor Finance, and in 2012 was acquired by Viscal Investment, Inc., a subsidiary of Viscal Development Corporation.

AB Capital Trust offers several trust products and services such as short-term funds, balanced funds, employee benefits trusts and equity funds.

This week, we’ll be discussing the AB Capital Equity Fund.

AB Capital Equity Fund was launched on December 4, 2006 and aims to surpass its benchmark by investing in the long-term capital growth of Philippine equities listed in the Philippine Stock Exchange (PSE).

AB Capital Equity Fund started with a net asset value per unit (NAVPU) of PHP 1.00 at its inception in 2006. In November 2008, its NAVPU dropped to PHP 0.69, its lowest level so far after recording a 31% loss due to the global financial crisis. Likewise, the PSEi recorded a 29% loss but it still outperformed the fund.

On the other hand, the fund reached its highest NAVPU in February 2015 at PHP 3.52, recording a gain of 410% from its 2008 low. The fund outperformed the PSEi, which recorded a 297% gain.

In March 2020, the fund’s NAVPU dropped to PHP 1.92, due to the market selloff amid the coronavirus pandemic. This 45% loss slightly underperformed its benchmark’s reported loss of 41%.

As of March 15, 2021, the fund has rebounded with a reported NAVPU of PHP 2.67 or an increase of 39%. The fund slightly underperformed its benchmark’s gains of 42%.

Since inception, AB Capital Equity Fund’s cumulative 169% gain has outperformed its benchmark’s 135% gain as of March 2021.

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 eight core non-financial holdings of the AB Capital 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 AB Capital Equity Fund 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 double the as-reported ROA average. These companies have strong returns, with most 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 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), JG Summit Holdings, Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) all having distortions of more than a hundred percent.

As-reported metrics understate the profitability of Ayala Corporation, suggesting a below-average company with an as-reported ROA of 4% when in fact, it is a high-quality firm with an 11% Uniform ROA. It has consistently generated returns of at least 9% over the past decade.

Likewise, JG Summit Holdings, Inc. is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with an 8% Uniform ROA, consistently generating returns of at least 6% over the past six 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:

  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, AB Capital Equity Fund major holdings are forecast to underperform with a 4% projected Uniform earnings shrinkage in the next two years, while the market is also forecasting an underperformance of a 1% projected earnings shrinkage.

Among these companies, only Universal Robina Corporation (URC:PHL), PLDT, Inc. (TEL:PHL) and International Container Terminal Services, Inc. (ICT:PHL) have a positive Uniform earnings growth spread.

The market is pricing Universal Robina Corporation’s Uniform earnings to have a gain of 7% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 10%.

Likewise, PLDT, Inc.’s Uniform earnings is priced by the market to grow by 4% in the next two years. On the other hand, sell-side analysts are projecting the company’s earnings to grow by 39%

As for International Container Terminal Services, the market is pricing its Uniform earnings to shrink by 9% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 10%.

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 Robinsons Retail Holdings, Inc. Tearsheet

Today, we’re highlighting one of the individual stock holdings in the AB Capital Equity Fund—Robinsons Retail Holdings, Inc. (RRHI:PHL).

As the Uniform Accounting tearsheet for Robinsons Retail Holdings, Inc. highlights, it trades at a Uniform P/E of 12.7x, below the global corporate average of 25.2x and its historical average of 17.7x.

Low P/Es require low EPS growth to sustain them. In the case of Robinsons Retail Holdings, Inc., the company has recently shown a 25% Uniform EPS increase.

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, Robinsons Retail Holdings, Inc. sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 4% in 2020 and 13% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify the PHP 54.20 stock price These are often referred to as market embedded expectations.

Robinsons Retail Holdings, Inc. is currently being valued as if Uniform earnings were to shrink by 8% annually over the next three years. What sell-side analysts expect for RRHI’s earnings growth is above what the current stock market valuation requires in 2020 and 2021.

The company has an earning power of 2x long-run corporate averages. Robinsons Retail Holdings’ cash flows and cash on hand consistently exceeds obligations. Based on its operating risk and refinancing capability, the company has an intrinsic credit of 200bps, indicating a low dividend risk and moderate credit risk.

To conclude, Robinsons Retail Holdings’ Uniform earnings growth is above peer averages, and is trading above 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 AB Capital 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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