Philippine Markets Newsletter

This UITF might not be able to find ways to beat the market, but its holdings’ ROAs are much higher than as-reported metrics show…also, ICT tearsheet

July 9, 2021

This unit investment trust fund (UITF) from the Philippines’ largest bank has underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). Even with average Uniform ROA for its holdings at 7%, almost double the as-reported average, the fund is unable to beat the market.

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps make sense of the fund’s investments.

In addition to examining the fund’s portfolio, we are including the 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 in the Philippines. It was first established in 1968 as Acme Savings Bank with just two branches in Metro Manila. Today, as the largest bank in the country, BDO has over 1,400 operating branches and offices, and more than 4,400 ATMs nationwide.

BDO offers a wide array of banking services, including both commercial and investment products. 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 analyzed some of BDO’s UITFs before:

This week, we’ll revisit one of their funds, the BDO Focused Equity Fund.

The BDO Focused Equity Fund was launched on October 18, 2013. The peso-dominated UITF aims to pursue long-term capital growth by investing in a concentrated portfolio of exchange-listed stocks chosen based on operational performance, valuation, and market sentiment. The fund’s benchmark is the Philippine Stock Exchange Index (PSEi).

The fund is suitable for investors with aggressive risk appetites who seek potentially higher returns through stock market investments and who can stay invested for one to three years. The fund is currently invested in at least 98% of selected shares of stock while the remaining is in short-term deposits.

At its inception in October 2013, BDO Focused Equity Fund’s net asset value per unit (NAVPU) was at PHP 100.00. After rising to PHP 121.10 in March 2015, it dropped to a low of PHP 81.52 in January 2016 due to the oil price crash. The fund recorded a loss of 33%, underperforming its benchmark which incurred a loss of 23% over the same period.

By September 2017, the fund had recovered to reach a peak of PHP 121.92, a 50% gain from the fund’s 2016 low. However, uncertainties regarding Brexit and the US-China trade war caused the fund’s NAVPU to shrink to PHP 82.76 by November 2018. The fund underperformed the PSEi during this period, reporting a 32% loss against the PSEi’s 15% loss.

By the end of 2019, the fund rebounded to a NAVPU of PHP 92.38 before falling once more to a record low of PHP 54.79 in March 2020, induced by the coronavirus-induced market selloff. The fund recorded a 41% loss that matched its benchmark’s loss in the same period.

As of July 5, 2021, the fund’s NAVPU has recovered to PHP 81.13, a 48% gain that only slightly underperformed its benchmark’s gain of 52%.

Since its inception, BDO Focused Equity Fund has had a cumulative 19% loss versus its benchmark’s cumulative 6% gain.

Even though the fund’s performance hasn’t been better than the market’s, it does not mean the companies in its holdings are of lower quality. 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 BDO Focused 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 Focused Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 4%—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 7%, almost 2x the average as-reported ROA. These companies have strong returns, with most 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 BDO Focused 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 26% to 150%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and International Container Terminal Services, Inc. (ICT: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 the 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.

Likewise, as-reported metrics understate the profitability of International Container Terminal Services, Inc., suggesting an average firm with an as-reported ROA of 7%. In reality, it has a 13% Uniform ROA, or nearly double its as-reported ROA. Furthermore, it has generated returns of at least 10% over the past five 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 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 BDO Focused Equity Fund’s major holdings are forecasted to outperform that with a 35% projected Uniform earnings growth in the next two years, while the market is forecasting an underperformance with a 7% projected Uniform earnings growth.

All the companies in the BDO Focused Equity Fund have a positive Uniform earnings growth spread except for Ayala Corporation and PLDT, Inc. (TEL:PHL). Among these companies, Ayala Land, Inc. (ALI:PHL), SM Investments Corporation, and SM Prime Holdings, Inc. (SMPH:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing ALI’s Uniform Earnings to grow by 13% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 103%.

Likewise, the market is pricing SM’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 61%.

Similarly, the market is pricing SMPH’s Uniform Earnings to grow by 23% 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 high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and International Container Terminal Services, Inc. Tearsheet

Today, we’re highlighting one of the individual stock holdings in the BDO Focused Equity Fund—International Container Terminal Services, Inc. (ICT:PHL).

As the Uniform Accounting tearsheet for International Container Terminal Services highlights, it trades at a Uniform P/E of 16.9x, below the global corporate average of 23.7x, but above its historical average of 14.7x.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of International Container Terminal Services, the company has shown a 2% Uniform EPS growth 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, International Container Terminal Services’ sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 6% in 2021 and grow by 24% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify International Container Terminal Services’ PHP 165.30 stock price. These are often referred to as market embedded expectations.

International Container Terminal Services is currently being valued as if Uniform earnings were to shrink by 6% per year over the next three years. What sell-side analysts expect for International Container Terminal Services’ earnings growth is above what the current stock market valuation requires in 2021 and 2022.

The company has an earning power double the long-run corporate averages, and its cash flows and cash on hand consistently exceed obligations within five years. However, the company has an intrinsic credit risk of 300bps. Together, these indicate that International Container Terminal Services has a moderate credit risk and low dividend risk.

To conclude, International Container Terminal Services’ Uniform earnings growth is well below peer averages, but is trading well 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 often 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 Focused 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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