Philippine Markets Newsletter

This UITF has underperformed the PSEi, but its holdings’ average Uniform ROA is 1.5x as-reported, implying potential upside…also, RLC tearsheet

March 26, 2021

This unit investment trust fund (UITF) from the country’s first universal bank underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). However, the average Uniform ROA for its holdings is 1.5x as-reported, implying 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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The Philippine National Bank or PNB started its operations in 1916 as a government owned-institution. It was the first Philippine universal bank and operated as the country’s central bank until 1949. The bank was later privatized in 1989 and remains one of the largest banks in the country.

PNB offers an array of investment products such as money market funds, bond funds, balanced funds, and equity funds to cater to the varying risk profiles of their clients.

We’ve written about the PNB Equity Fund before, and this week, we’ll be giving an update on one of their other funds, the PNB High Dividend Fund.

The PNB High Dividend Fund was launched on June 15, 2012 and aims to provide investors with dividend income as well as income from capital appreciation over the long term. It does this by investing in PSE-listed companies that have a history of paying dividends with yields that meet the fund manager’s requirements.

The fund’s benchmark is the PSEi, and is invested in at least 90% of selected stocks while the remaining is invested in time deposit products.

The PNB High Dividend Fund started with a net asset value per unit (NAVPU) of PHP 1.00 at its inception in 2012. By May 2013, the NAVPU had increased to PHP 1.45. During this period, the UITF’s 45% gain underperformed the PSEi’s 50% gain.

From this high, the fund’s NAVPU declined to PHP 1.10, recording a loss of 24% through December 2013. The fund underperformed the PSEi’s 22% loss over the same period. This decline can be attributed to the aftermath of the Bohol earthquake in October and Typhoon Haiyan in November.

The fund’s NAVPU then rebounded to PHP 1.56 in April 2015, recording a gain of 42% and outperforming the benchmark’s 40% gain.

In January 2016, the fund’s NAVPU declined to PHP 1.17 due to the oil price crash. Both the fund and the PSEi recorded losses of 25%.

The fund’s NAVPU then peaked to its highest value at PHP 1.57 in September 2017. The fund’s 34% gain slightly underperformed its benchmark’s 36% gain.

In March 2020, the fund’s NAVPU dropped to PHP 0.83, due to the market selloff amid the coronavirus pandemic. This 47% loss underperformed its benchmark’s reported loss of 43%.

As of March 22, 2021, the fund has rebounded with a reported NAVPU of PHP 1.17, an increase of 41% a year after. The fund outperformed its benchmark’s gain of 35%.

Since inception, the PNB High Dividend Fund’s cumulative 17% gain has underperformed its benchmark’s gain of 31%.

As-reported metrics would have investors believe 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 PNB High Dividend Fund along with its Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Some of the companies in the PNB High Dividend 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 6%, in line with 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%, 1.5x the as-reported 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 PNB High Dividend 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 -29% to 102%, with SM Investments Corporation (SM:PHL) and Nickel Asia Corporation (NIKL:PHL) having the highest distortions.

As-reported metrics understate the profitability of SM Investments Corporation, suggesting an average firm with an as-reported ROA of 6% when in fact, it is a high quality firm with a 12% Uniform ROA. It has consistently generated returns of at least 6% over the past decade.

Likewise, Nickel Asia Corporation is not just a 7% ROA firm like what as-reported numbers suggest. In reality, it is a high quality company with a Uniform ROA of 13% that consistently generated returns of at least 9% over the past decade.

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 PNB High Dividend Equity Fund’s major holdings are forecast to slightly underperform with a 5% projected Uniform earnings growth in the next two years, while the market is forecasting an even larger underperformance with a 4% projected Uniform earnings shrinkage.

Among these companies, only Nickel Asia Corporation (NIKL:PHL), Robinsons Land Corporation (RLC:PHL), Semirara Mining and Power Corporation (SCC:PHL), and Universal Robina Corporation (URC:PHL) have a positive Uniform earnings growth spread.

The market is pricing Nickel Asia Corporation’s Uniform earnings to grow by 1% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 57%.

Likewise, Robinsons Land Corporation’s Uniform earnings is priced by the market to shrink by 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 16%.

As for Semirara Mining and Power Corporation, the market is pricing its Uniform earnings to shrink by 17% in the next two years, while sell-side analysts are projecting the company’s earnings to shrink by only 13%.

In the case of Universal Robina Corporation, its Uniform earnings is priced by the market to grow by 7% 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 Land Corporation Tearsheet

Today, we’re highlighting one of the individual stock holdings in the PNB High Dividend Fund—Robinsons Land Corporation (RLC:PHL)

As the Uniform Accounting tearsheet for Robinsons Land Corporation highlights, it trades at a Uniform P/E of 14.1x, below the global corporate average of 25.2x, and its historical average of 18.2x.

Low P/Es require low EPS growth to sustain them. In the case of Robinsons Land Corporation, the company has recently shown a 6% Uniform EPS decline.

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 Land Corporation sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 3% in 2020 and grow by 38% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify RLC’s PHP 18.10 stock price. These are often referred to as market embedded expectations.

Robinsons Land Corporation is currently being valued as if Uniform earnings were to shrink by 4% annually over the next three years. What sell-side analysts expect for RLC’s earnings growth is above what the current stock market valuation requires in 2020 and 2021.

The company has an earning power below long-run corporate averages, and its cash flows and cash on hand consistently exceeds expectations. Based on its operating risk and refinancing capability, it has an intrinsic credit risk of 230bps, indicating a low dividend risk and moderate credit risk.

To conclude, Robinsons Land Corporation’s Uniform earnings growth is above peer averages, but is trading below 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 High Dividend 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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