Philippine Markets Newsletter

Through its key strategies, this bank has flourished amidst the volatile pandemic market…also, MEG tearsheet

April 1, 2022

As a specialized government bank, LANDBANK has had an eventful past couple of years. It nearly doubled its electronic transactions in just a year amid the pandemic. Then came the strategic merger with the United Coconut Planters Bank (UCPB) on March 1, 2022. Following these events, how does the bank fare in the current banking landscape?

We also take a look at one of the unit investment trust funds (UITF) offered by the bank. 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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The pandemic has accelerated the advancement of digitalization. For financial institutions, we see this through increased electronic transactions. The Land Bank of the Philippines (LANDBANK) was able to grow its electronic transactions by 46%, reaching PHP 2.45 trillion in 2021. This is in line with the national records of 53% of Filipinos gaining access to electronic money accounts in Q1 2021, compared to 2019.

To better serve its clients, LANDBANK invested in innovative technological solutions designed to adapt to the changing customer behavior.

This was achieved through 6 channels that allow customers to conveniently transact online:

  • LANDBANK Mobile Banking
  • Link.BizPortal e-Payment
  • iAccess Retail Internet Banking
  • weAccess Institutional Internet Banking
  • LANDBANK Bulk Credit System (LBCS)
  • LANDBANK Electronic Modified Disbursement System (eMDS)

LANDBANK Mobile Banking, which had the most transactions out of the 6 channels, recorded 103.8 million transactions in 2021, with a total value of PHP 172.4 billion. This represented a 44% increase in volume and 103% transaction value growth compared to 2020 for the app.

With more than 5 million downloads, the app offers a secure online transacting solution, bills payment, as well as UITF investment options.

In light of the bank’s performance, on March 1, 2022, LANDBANK merged with UCPB upon an Executive Order by President Duterte. Cecilia Borromeo, LANDBANK’s president and CEO, explained that the union would improve the Philippines’ agriculture sector through “a stronger, more resilient, and unified” banking institution. 

Due to the merger, LANDBANK became the 2nd largest bank in the country in terms of assets, recording total assets of PHP 2.9 trillion.

Thanks to the two events listed above, LANDBANK is positioned to better serve its customers in an increasingly digital environment while fulfilling its role to close the gap towards achieving inclusive rural development nationwide. 

As we continue to monitor Landbank’s performance, let’s revisit one of the UITFs LANDBANK offers—LANDBANK Equity Fund.

The LANDBANK Equity Fund, established on August 1, 2016, is an equity fund that aims for long-term capital growth through investments in a diversified portfolio of peso-denominated listed equities that comprise the PSEi. 

The fund is suitable for investors who have an aggressive risk appetite, who intend to stay invested for a period greater than five years. The fund is currently invested in at least 82% of selected equities, while the remaining is in cash and deposits.

  • At its inception in August 2016, the LANDBANK Equity Fund’s initial net asset value per unit (NAVPU) was at PHP 1.00. The fund’s NAVPU initially dropped to PHP 0.91 in December 2016, a 9% decrease. Other Asian stocks also experienced losses due to the continued decline of US equities and oil prices. Despite this, the fund outperformed the PSEi, as the PSEi incurred a loss of 19% over the same period.
  • The fund then recovered to its highest peak of PHP 1.12 in January 2018—an increase of 23%. However, it underperformed its benchmark’s gain of 38% over the same period.
  • After reaching this peak, the fund dropped 19% to PHP 0.91 in June 2018 due to the weakening peso and the escalating fear of a global trade war. The fund outperformed the PSEi, which had a loss of 23% in the same time span.
  • By the end of 2019, the fund remained stable, increasing by 3% to a NAVPU of PHP 0.94, before it fell to a record low of PHP 0.60 in March 2020 due to the coronavirus-induced market selloff. The fund’s 36% loss outperformed its benchmark’s 41% loss during this period.
  • As of March 28, 2022, the fund recovered to a NAVPU of PHP 0.87, a 44% gain from its 2020 low, underperforming PSEi’s 54% gain.
  • Since its inception, LANDBANK Equity Fund has had a cumulative 13% loss versus its benchmark’s cumulative 12% loss.

As-reported metrics would have investors believe that the fund’s portfolio consists of companies that do not generate economic profit. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top four core non-financial holdings of the LANDBANK 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 LANDBANK Equity Fund show as-reported ROAs 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%, 2x 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 7%, more than 2x the average as-reported ROA. These companies have strong returns, with one of the companies having a Uniform ROA 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 LANDBANK 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 47% to 150%, with Ayala Corporation (AC:PHL), Puregold Price Club, Inc. (PGOLD:PHL), and  San Miguel Corporation (SMC: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 Puregold Price Club, suggesting a decent firm with an as-reported ROA of 7%. In fact, its Uniform ROA boasts a high-quality firm at 16%. Furthermore, it has consistently generated returns of at least 11% in the last decade.

Likewise, as-reported metrics understate the profitability of San Miguel Corporation, suggesting another unprofitable firm with an as-reported ROA of only 2%, when this is only a below-average firm with a 4% Uniform ROA. It has consistently generated returns of at least 4% in 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.

  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 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, LANDBANK Equity Fund’s major holdings are forecasted to significantly outperform with a 76% projected Uniform earnings growth in the next two years, while the market is forecasting an underperformance with a -1% projected Uniform earnings growth.

All the companies in the LANDBANK Equity Fund have a positive Uniform earnings growth spread. Among these companies, Ayala Corporation (AC:PHL), San Miguel Corporation (SMC:PHL), and Megaworld Corporation (MEG:PHL) have the highest 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 235%.

Similarly, the market is pricing San Miguel Corporation’s Uniform earnings to grow by 6% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 52%.

On the other hand, the market is pricing Megaworld Corporation’s Uniform earnings to shrink by 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 15%.

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

Uniform Accounting metrics show that these mature, high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Megaworld Corporation Tearsheet

Today, we’re highlighting the largest individual stock holding in the LANDBANK Equity Fund, Megaworld Corporation (MEG:PHL).

As the Uniform Accounting tearsheet for Megaworld Corporation highlights, the company trades at a Uniform P/E of 18.2x, below both the global corporate average of 24.0x and its historical average of 18.9x.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of Megaworld Corporation, the company has shown a 47% 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 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, Megaworld Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 7% in 2021 and by 26% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Megaworld Corporation’s PHP 3.15 stock price. These are often referred to as market-embedded expectations.

Megaworld Corporation is currently being valued as if Uniform earnings were to shrink by 4% per year over the next three years. What sell-side analysts expect for Megaworld Corporation’s earnings growth is above what the current stock market valuation requires in 2021 and in 2022.

The company has an earning power below long-run corporate averages, but its cash flows and cash on hand consistently exceed obligations. Based on its operating risk and refinancing capability, it has an intrinsic credit risk of 190bps, indicating low dividend risk and moderate credit risk.

Lastly, Megaworld Corporation’s Uniform earnings growth is below peer averages but is trading in line with 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 BDO Sustainable Dividend 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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