Philippine Markets Newsletter

This UITF has underperformed the PSEi, but its holdings’ average Uniform ROA is almost 2x as-reported, implying potential upside…also, JGS tearsheet

April 16, 2021

This unit investment trust fund (UITF) from the country’s largest universal bank underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). However, the average Uniform ROA for its holdings is almost double the as-reported ROA, 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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BDO Unibank, Inc. (BDO) is a full-service universal bank that was founded in 1968. The bank was acquired in 1976 by the SM Group, one of the country’s largest conglomerates. It merged with Equitable PCI Bank in 2007 and is currently the largest bank in the Philippines, with over close to 1,500 operating domestic branches.

BDO offers both commercial and investment banking products and services. Their investment products and services include money market funds, bond funds, balanced funds, and equity funds to cater to the varying risk profiles of their clients.

We’ve written about five of BDO’s UITFs before: BDO Equity FundBDO Institutional Equity FundBDO Focused Equity FundBDO Pera Equity Index Fund, and BDO Sustainable Dividend Fund. This week, we’ll be giving an update on one of their other funds, the BDO ESG Equity Fund.

The BDO ESG Equity Fund was launched on December 11, 2015 and aims to provide investors with long-term capital appreciation. It does this by substantially investing in PSE-listed companies that exhibit good environmental, social and governance (ESG) practices.

The fund’s benchmark is the PSEi, and is invested in at least 90% of selected stocks while the remaining is invested in short-term deposits.

The BDO ESG Equity Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its inception in 2015. By July 2016, the NAVPU had increased to PHP 119.61. During this period, both the fund and the PSEi recorded a 20% gain.

From this high, the fund’s NAVPU declined to PHP 97.73 in December 2016 due to the aftermath of the US elections and uncertainty in US interest rates coupled with local political tensions. During this period, the fund recorded a loss of 18%, slightly outperforming the PSEi’s 19% loss.

The fund’s NAVPU then rebounded to a high of PHP 123.45 in January 2018, recording a gain of 26% but underperforming the benchmark’s 38% gain.

In October 2018, the fund’s NAVPU declined to PHP 98.22 following concerns brought about by the impact of the US-China Trade War on economic growth. The fund’s 20% loss outperformed the PSEi’s 24% loss.

The fund’s NAVPU ascended to PHP 120.83 in July 2019. The fund’s 23% gain slightly outperformed its benchmark’s 22% gain.

In March 2020, the fund’s NAVPU dropped to PHP 70.84, due to the market selloff amid the coronavirus pandemic. This 41% loss outperformed its benchmark’s reported loss of 45%.

As of April 12, 2021, the fund has rebounded with a reported NAVPU of PHP 95.25, an increase of 34% a year after. The fund underperformed its benchmark’s gain of 41%.

Since inception, the PNB High Dividend Fund’s cumulative 6% loss has underperformed its benchmark’s loss of 4%.

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 9 core non-financial holdings of the BDO ESG 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 BDO ESG Equity Fund show as-reported ROAs at or above cost-of-capital levels, suggesting that they are generating economic profit. The fund generated an average as-reported ROA of 5%, 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 9%, almost 2x 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 BDO ESG 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 32% to 197%, with Ayala Corporation (AC:PHL), JG Summit Holdings, Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) having the highest distortions.

As-reported metrics understate the profitability of Ayala Corporation, suggesting an average firm 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.

Similarly, as-reported metrics understate the profitability of JG Summit Holdings, Inc., suggesting an average firm with an as-reported ROA of 4% when in fact, it is a high quality firm with an 8% Uniform ROA. It has consistently generated returns of at least 6% over the past six years.

Likewise, 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.

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 BDO ESG Equity Fund’s major holdings are forecast to drastically underperform with an 11% projected Uniform earnings shrinkage in the next two years, while the market is also forecasting an underperformance with a 3% projected Uniform earnings shrinkage.

Among these companies, only International Container Terminal Services, Inc. (ICT:PHL) has a positive Uniform earnings growth spread.

The market is pricing International Container Terminal Services, Inc.’s 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 JG Summit Holdings, Inc. Tearsheet

Today, we’re highlighting one of the individual stock holdings in the BDO ESG Equity Fund—JG Summit Holdings, Inc. (JGS:PHL).

As the Uniform Accounting tearsheet for JG Summit Holdings, Inc. highlights, it trades at a Uniform P/E of 28.8x, above the global corporate average of 25.2x, but around its historical average of 30.3x.

High P/Es require high EPS growth to sustain them. In the case of JG Summit Holdings, Inc., the company has shown a 53% Uniform EPS growth in 2019.

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, JG Summit Holdings, Inc. sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 120% in 2020 and 252% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify JGS’s PHP 59.75 stock price. These are often referred to as market embedded expectations.

JG Summit Holdings, Inc. is currently being valued as if Uniform earnings were to shrink by 2% annually over the next three years. What sell-side analysts expect for JGS’s earnings growth is below what the current stock market valuation requires in 2020 and 2021.

The company has an earning power in line with long-run corporate averages, and its combined cash flows and cash on hand consistently exceeds obligations. Based on its operating risk and refinancing capability, it has an intrinsic credit risk of 120bps, indicating a moderate dividend risk and moderate credit risk.

To conclude, JG Summit Holdings Inc.’s Uniform earnings growth is well below peer averages, and is trading well 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 BDO ESG 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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