Philippine Markets Newsletter

Through GCash, this asset manager group is offering opportunities to budding investors via a fund that matches the PSEi…also, ICT tearsheet

October 29, 2021

As we’ve witnessed in the past 1.5 years, cash is no longer king—Filipino consumers have become more comfortable transacting online. With personal finance apps in the country continuing to grow rapidly, we look at one of the unit investment trust funds (UITF) offered on the popular app GCash.

In addition to examining the fund’s portfolio, we are including a 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 Newsletter:
Friday Uniform Portfolio Analytics
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Recognized as the leading mobile wallet brand in the Philippines in 2021, GCash is widely considered to be leading the digital revolution in the country. It has been able to do this through continuously pursuing investments in technology and infrastructure, with the goal of addressing the Filipinos’ financial needs one at a time.

In fact, a third of the app’s monthly active users utilize at least one of the brand’s expanding portfolio of digital financial service products. 

The company’s success is largely thanks to its platform approach, opening it up to partnerships with other renowned financial institutions even internationally. It then partners up to offer products to its increasing 46 million user base, whereas banks remain restricted to offering their own services.

Among GCash’s product portfolio, its investment platform (GInvest), savings service (GSave), insurance policy service (GInsure), and lending service (GCredit), all have reached remarkable milestones in the past year. Furthermore, GCash seeks to launch a “Buy Now, Pay Later” service later this year, aimed at addressing financial challenges encountered by its users during the pandemic.

Of note is GInvest, which has already captured 70% of the domestic market of total UITF accounts. Through the large customer share brought about from GCash’s main function of permitting easy cashless transactions, GInvest is an effective addition that serves as a great introduction for young investors seeking new sources of capital. New investors as young as 18 years old can invest in local and global companies for as low as P50 through this product.

In particular, GCash has partnered with ATRAM Trust (ATR Asset Management Group) and SEEDBOX Philippines, a company that introduced digitized investing in the Philippines to provide easy access to expertly managed funds.

We’ve talked about two of ATRAM’s mutual funds before, ATRAM Alpha Opportunity Fund and ATRAM Philippine Equity Opportunity Fund. This month, let us look at one of ATRAM’s funds currently being offered in GCash’s app: ATRAM Philippine Equity Smart Index Fund.

The ATRAM Philippine Equity Smart Index Fund was established on March 1, 2016. The fund is designed to generate excess returns compared to the PSEi through an enhanced index approach, combining the elements of passive and active management. This fund is managed by Ivan Ante, a fund manager with 8 years in the asset management industry.

The fund is suitable for investors with high-risk appetites seeking to invest in Philippine equity securities and are comfortable with the risks involved. At least 99% of the fund is invested in stocks, while the remainder is invested in cash. Unlike other UITFs, the fund only sets the minimum investment required at PHP 50 and does not charge early redemption fees.

  • At its inception in March 2016, the ATRAM Philippine Equity Smart Index Fund’s initial net asset value per unit (NAVPU) was at PHP 100.00. The fund eventually reached its highest peak of PHP 131.66 in January 2018—an increase of 32%, but underperformed its benchmark’s gain of 35% over the same period.
  • After reaching this peak, the fund’s NAVPU then shrank to PHP 99.66 in November 2018 due to uncertainties regarding Brexit and the US-China trade war. The fund matched the PSEi and recorded losses of 24%.
  • By the end of 2019, the fund had rebounded by 14% to a NAVPU of PHP 113.84, before it fell to its record low of PHP 70.45 in March 2020 due to the coronavirus-induced market selloff. The fund’s 38% loss outperformed its benchmark’s 41% loss during this period.
  • As of October 25, 2021, ATRAM Philippine Equity Smart Index Fund has recovered to a NAVPU of PHP 106.32, a 51% gain from its 2020 low, but still underperformed compared to the PSEi’s gain of 56%.
  • Since its inception, ATRAM Philippine Equity Smart Index Fund has had a cumulative 6% gain versus its benchmark’s cumulative 7% gain.

As-reported metrics would have investors believe that the fund’s portfolio consists of companies that do not generate economic profit. Though the fund underperformed its benchmark, that does not mean its holdings consist of bad companies. 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 ATRAM Philippine Equity Smart Index 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 ATRAM Philippine Equity Smart Index 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 just 3%, significantly lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better profitability with an average Uniform ROA of 6%, 2x the average as-reported ROA and in line with the global corporate 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 ATRAM Philippine Equity Smart Index 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% in line with the average cost of capital. Prior to the pandemic, it consistently generated returns of at least 9% from 2005 to 2019.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of 3%. In fact, its Uniform ROA doubles the as-reported number at 6%. Furthermore, it has consistently generated returns of at least 8% from 2005 to 2019.

Likewise, as-reported metrics understate the profitability of International Container Terminal Services, Inc., suggesting a decent firm with an as-reported ROA of only 7%, when this is actually a high-quality firm with a 13% Uniform ROA. It has consistently generated returns of at least 10% over the last 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.
  1. 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.
  1. 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, ATRAM Philippine Equity Smart Index Fund’s major holdings are forecasted to significantly outperform with a 79% projected Uniform earnings growth in the next two years, while the market is forecasting a slight outperformance with a 13% projected Uniform earnings growth.

All the companies in the ATRAM Philippine Equity Smart Index Fund have a positive Uniform earnings growth spread. Among these companies, Ayala Corporation, Ayala Land, Inc. (ALI:PHL), and SM Investments Corporation have the highest positive Uniform earnings growth spread.

The market is pricing Ayala Corporation’s Uniform earnings to grow by only 6% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 240%.

Likewise, the market is pricing Ayala Land’s Uniform earnings to grow by 12% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 91%.

Additionally, the market is pricing SM Investment Corporation’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 67%.

Overall, as-reported numbers would significantly understate the expected earnings of these companies as shown by the Uniform-adjusted sell-side estimates.

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 most of these 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 ATRAM Philippine Equity Smart Index Fund, International Container Terminal Services, Inc. (ICT:PHL).

As the Uniform Accounting tearsheet for International Container Terminal Services highlights, the company trades at a Uniform P/E of 18.7x, below the global corporate average of 24.3x, but above its historical average of 13.5x.

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 of 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 28% in 2021 and grow by 21% 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 178.90 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 for both 2021 and 2022.

The company has an earning power 2x above long-run corporate averages, but its cash flows and cash on hand fall short of obligations within five years. Moreover, the company has an intrinsic credit risk of 210bps. Together, these indicate that International Container Terminal Services has a high dividend risk and moderate credit risk.

Lastly, International Container Terminal Services’ Uniform earnings growth is in line with peer averages and peer average valuations.

About the Philippine Markets Newsletter
“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 at the end of the month, we focus on one fund in the Philippines and take a deeper look into its 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 month’s focus on the ATRAM Philippine Equity Smart Index Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Newsletter
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