Philippine Markets Newsletter

This UITF managed to secure market-beating returns only for a year after its launch…also, SMPH tearsheet

May 28, 2021

This unit investment trust fund (UITF) from one of the leading universal banks in the Philippines has underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). However, the average Uniform ROA for its holdings is 5%, almost double the as-reported average.

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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Security Bank was established in 1951 as the first private and Filipino-controlled bank of the post-World War II period.

Security Bank’s investment products include money market funds, Peso bond funds, asset variety funds, as well as Peso Equity and Peso Equity Index funds that cater to the varying risk profiles of its clients.

In the past, we’ve written about other Security Bank funds:

This week, we’ll be revisiting the SB High Dividend Peso Equity Fund.

The SB High Dividend Peso Equity Fund was launched on March 10, 2014. The fund is a peso-denominated UITF that aims to achieve income growth and long-term capital appreciation by investing in equities listed on the PSE that offer high dividend payouts. The fund’s benchmark is the PSEi.

The fund is suited for investors with an aggressive risk profile who seek potentially higher yields from dividends as well as capital gains. Investors are recommended to stay invested for one to three years.

The UITF is currently invested in at least 96% of selected shares of stock while the remaining is allocated for cash and other receivables.

At its inception in March 2014, SB High Dividend Peso Equity Fund’s initial net asset value per unit (NAVPU) was PHP 1.00. The fund’s NAVPU rose to its all-time high of PHP 1.37 by February 2015, its 37% gain for the period almost double its benchmark’s gain of 19%.

From this peak, the fund’s NAVPU then declined to PHP 0.91 in January 2016 following the oil price crash. The fund’s 33% loss underperformed its benchmark’s 20% loss during the same period.

The fund’s NAVPU rose to PHP 1.32 in January 2018, recording a 45% gain that slightly underperformed its benchmark’s 46% gain.

In March 2020, the fund’s NAVPU declined to PHP 0.71 following the market selloff caused by the pandemic, recording a 46% loss that slightly outperformed its benchmark’s 49% loss.

As of May 24, 2021, the fund’s NAVPU has rebounded to PHP 0.91, showing a 28% gain and underperforming its benchmark’s gain of 33%.

Since inception, the SB High Dividend Peso Equity Fund has had a cumulative 8% loss, which underperformed its benchmark’s cumulative 4% loss.

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 seven core non-financial holdings of the SB High Dividend Peso 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 SB High Dividend Peso 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 better returns with an average Uniform ROA of 5%, almost 2x the average as-reported ROA. These companies have strong returns, with some of the companies having Uniform ROAs at or above 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 SB High Dividend Peso 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 the pandemic, it 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 according 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 SB High Dividend Peso Equity Fund’s major holdings are forecast to outperform with a 54% projected Uniform earnings growth in the next two years, while the market is also forecasting an outperformance with a 12% projected Uniform earnings growth.

All the companies in the SB High Dividend Peso Equity Fund have a positive Uniform earnings growth spread except JG Summit Holdings, Inc. (JGS:PHL). Among these companies, Ayala Corporation (AC:PHL), Ayala Land, Inc. (ALI:PHL), and SM Investments Corporation (SM:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing AC’s Uniform Earnings to grow by 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 140%.

Likewise, the market is pricing ALI’s Uniform Earnings to grow by 11% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 110%.

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 68%.

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 Prime Holdings, Inc. Tearsheet

Today, we’re highlighting one of the individual stock holdings in the SB High Dividend Peso Equity Fund—SM Prime Holdings, Inc. (SMPH:PHL).

As the Uniform Accounting tearsheet for SM Prime Holdings, Inc. highlights, it trades at a Uniform P/E of 38.8x, above the global corporate average of 23.7x but below its historical average of 47.5x.

High P/Es require high EPS growth to sustain them. In the case of SM Prime Holdings, Inc., the company has shown a 66% 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 Prime Holdings, Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 68% in 2021 and 73% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify SMPH’s PHP 33.20 stock price. These are often referred to as market embedded expectations.

SM Prime Holdings, Inc. is currently being valued as if Uniform earnings were to grow by 21% per year over the next three years. What sell-side analysts expect for SMPH’s earnings growth is above what the current stock market valuation requires in 2021 and 2022.

The company has an earning power below long-run corporate averages, and 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 100bps, indicating high dividend risk and moderate credit risk.

To conclude, SM Prime Holdings, Inc.’s Uniform earnings growth is above 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 SB High Dividend Peso 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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