Philippine Markets Newsletter

This UITF underperformed the PSEi after launching during the pandemic, but its Uniform earning power is 2x as-reported metrics…also, JGS tearsheet

July 30, 2021

This unit investment trust fund (UITF) from the first life insurance company in the Philippines to pioneer investment-linked life insurance has slightly underperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi). However, the average Uniform ROA for this UITF’s holdings is 6%, 2x the as-reported average.

However, as-reported metrics would leave investors confused as to why the fund would choose to track the index when the stocks in the index appear to have minimal profitability. Uniform Accounting financial metrics help 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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PruLife UK’s history in the Philippines began in 1996. The company is a subsidiary of financial services grant Prudential plc based in London, United Kingdom. Prudential plc has around 26 million insurance customers worldwide and manages £664 billion in assets as of June 30, 2018.

In 2002, PruLife UK pioneered the sale of variable unit-linked life insurance in the Philippines through the PruLink Investor Account. PruLife UK offers a selection of funds in the market such as PRULink Money Market Fund, PRULink Peso Bond Fund, PRULink Equity Index Tracker Fund, PRULink Growth Fund and many more.

This week, we’ll be taking a look at the Class A shares of the PRULink Equity Index Tracker Fund. Class A shares typically charge a front-end sales load, but they tend to have lower fees and annual expenses compared to other mutual fund share classes.

The PRUInvest PH Equity Index Tracker Fund (Class A) was established during the peak of the COVID-19 pandemic on May 7, 2020. The Fund seeks to achieve investment returns that track the performance of the Philippine Stock Exchange Index (PSEi) by investing in a diversified portfolio of stocks comprising the PSEi in the same weights as the index.

The fund is suitable for investors who have aggressive risk appetites, and who are seeking to achieve returns that mirror the performance of the PSEi. The fund is currently invested in at least 99% of selected shares of stock while the remaining is in cash.

At its inception in May 2020, PRUInvest PH Equity Index Tracker Fund’s net asset value per unit (NAVPU) was at PHP 1.00. The fund’s NAVPU rose to PHP 1.15 by June 2020, recording a gain of 15% and slightly underperforming its benchmark’s 16% gain over the same period.

Following two lows during August and September, by January 2021, the fund grew to a record high of PHP 1.27. The fund slightly underperformed the PSEi during this period, reporting a 10% gain against the PSEi’s 11% gain.

Within the same month, the fund dropped to PHP1.15 due to lingering coronavirus worries. The fund incurred a 10% loss that slightly underperformed its benchmark’s 9% loss in the same period.

The fund immediately rebounded back to PHP 1.23 in the next month, followed by a drop until May 2021, with its NAVPU settling at PHP 1.08. The fund delivered a 6% loss from its previous low, underperforming the PSEi’s loss of 2%.

After a month, the fund recovered to PHP 1.23 once again, before recording a NAVPU of PHP 1.11 as of July 26, 2021. Since the previous loss, the fund reported a 3% gain that outperformed its benchmark’s 2% loss.

Since its inception, the PRUInvest PH Equity Index Tracker Fund has had a cumulative 11% gain, versus its benchmark’s cumulative 13% gain in the same period.

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 PRUInvest PH Equity Index Tracker 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 PRUInvest PH Equity Index Tracker 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 3%, significantly lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered stronger returns with an average Uniform ROA of 6%, 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 PRUInvest PH Equity Index Tracker 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 Ayala Corporation (AC:PHL), Aboitiz Equity Ventures, Inc. (AEV:PHL), and SM Investments Corporation (SM:PHL), having the highest positive 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% in line with the average cost of capital. Prior to the pandemic, it consistently generated returns of at least 9% through 2005 to 2019.

Similarly, as-reported metrics understate the profitability of Aboitiz Ventures Inc., suggesting a below-average firm with an as-reported ROA of 3% when in fact, it is a high quality firm with an 8% Uniform ROA. It has consistently generated returns of at least 10% over the past decade.

Likewise, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of 3%. In reality, this is an average firm with a 6% Uniform ROA. It has consistently generated returns of at least 8% 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 two-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, PRUInvest PH Equity Index Tracker Fund’s major holdings are forecasted to outperform that with a 57% projected Uniform earnings growth in the next two years, while the market is forecasting a drastic underperformance with a 13% projected Uniform earnings growth.

All the companies in the PRUInvest PH Equity Index Tracker Fund have a positive Uniform earnings growth spread except for JG Summit Holdings, Inc. (JGS:PHL). Among these companies, Ayala Land, Inc. (ALI:PHL), Ayala Corporation and Aboitiz Equity Ventures 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 105%.

Likewise, the market is pricing AC’s Uniform earnings to grow by 7% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 143%.

Similarly, the market is pricing AEV’s Uniform earnings to shrink by 2% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 82%.

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 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 PRUInvest PH Equity Index Tracker Fund (Class A), JG Summit Holdings, Inc. (JGS:PHL).

As the Uniform Accounting tearsheet for JG Summit Holdings highlights, it trades at a Uniform P/E of 81.4x, above both the global corporate average of 23.7x, and its historical average of -22.3x.

High P/Es require high EPS growth to sustain them. In the case of JG Summit Holdings, the company has shown a 159% Uniform EPS decline 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, JG Summit Holdings’ sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 59% in 2021 and by 261% in 2022.

The company has an earning power below the long-run corporate averages, and its cash flows and cash on hand fall short of obligations within five years. Moreover, the company has an intrinsic credit risk of 120bps. Together, these indicate that JG Summit Holdings has a moderate credit risk and high dividend risk.

To conclude, JG Summit Holdings’ 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 the PRUInvest PH Equity Index Tracker Fund (Class A) interesting and insightful.

Stay tuned for next week’s Friday Uniform Portfolio Analytics!


Angelica Lim
Research Director
Philippine Markets Daily
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