Philippine Markets Newsletter

To optimize operations and modernize integrations points, this bank collaborated with Microsoft and OpenLegacy…also, SMPH tearsheet

July 29, 2022

In the first half of 2022, Security Bank Corporation streamlined its operations and accelerated its digital transformation. The bank’s net profit even soared by 66% in the first quarter compared to the same quarter a year ago.

We take a look at one of the unit investment trust funds (UITFs) 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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Security Bank Corporation, one of the Philippines’ leading universal banks, recorded a higher net income in the first quarter of the year, owing to lower loan loss buffers and an improvement in its key income-generating activities.

The bank’s net profit soared by 66% to PHP 2.7 billion in the first quarter from a year earlier. The bank’s President and CEO, Sanjiv Vohra, reported that despite the Omicron surge in the first quarter of the year, client activity, as shown by its wholesale loans, has improved. Furthermore, macro factors such as new government policy, Russia-Ukraine conflict, and central bank action on inflation will take place in the coming months expecting to affect the client activities.

In the second quarter of the year, the bank had several developments into its operations to accelerate modernization of core system’s APIs and to streamline its sales proposal and approval process for even greater efficiency.

Security bank partnered with OpenLegacy to efficiently build new digital services and generate business-level APIs with the ease of cloud. Moreover, to eliminate operational inefficiencies, the bank sought help from Microsoft’s capability to develop the Sales Proposal Builder (SPB) application, an efficient and collaborative system to drive productivity.

As we continue to monitor Security Bank’s performance, let’s focus on one of its UITFs—SB Philippine Equity Index Fund.

SB Philippine Equity Index Fund, launched on November 23, 2015, aims to achieve income growth and investment returns that closely track the total return of the Philippine Stock Exchange Index (PSEi). The fund seeks investments in PSEi stocks using the same weights as in the index and aims to mimic its benchmark (gross of fees) which is 100% PSEi (price only return).

The fund is suitable for investors who exhibit an aggressive risk tolerance, seek potentially high capital growth from stock price appreciation, have the possibility to be exposed to capital losses given the volatile nature of the local equities markets, and have an investment horizon of 1 to 3 years.

  • At its inception in November 2015, SB Philippine Equity Index Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. It had a relatively neutral position until July 2016 when it rose by 15% to PHP 1.15 after the national elections. During the period, the PSEi slightly outperformed the fund with a gain of 16%.

  • In March 2017, the fund returned to its beginning NAVPU at PHP 1.00 because of the jitters over US interest rates alongside domestic political noise. Its 2% decrease is in line with its benchmark’s loss of 2%.

  • The NAVPU slowly recovered by January 2018 to climb at PHP 1.27, a gain of 27%, but slightly underperformed its benchmark’s increase of 29%. Its gain is fueled by optimism on the positive economic figures.

  • The fund saw a decline in the succeeding months, reaching another low of PHP 0.96 in November 2018. This 24% decline is attributed to rising prices, slowing economic growth, and the perceived uncertainties over some government reforms. The fund is in line with the PSEi’s loss of 24% in this period.

  • In March 2020, the fund’s NAVPU dropped to its lowest point at PHP 0.66 following the massive market selloff caused by the COVID-19 pandemic.
    Furthermore, this 40% decline from year end 2019 slightly outperformed its benchmark’s loss of 41%.

  • The fund has slowly recovered from its decline, with a NAVPU of PHP 0.93 in June 2020. This 42% gain is equivalent to its benchmark’s gain of 42%.

  • Since its inception, SB Philippine Equity Index Fund has had a cumulative loss of 11% versus PSEi’s cumulative loss of 11% during the same period.

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. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top eight core non-financial holdings of SB Philippine Equity 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 SB Philippine Equity Index 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 4%, slightly 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 9%, more than 2x the average as-reported ROA.

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 SB Philippine Equity 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 -328% to 269%, with International Container Services, Inc. (ICT:PHL), Aboitiz Equity Ventures, Inc. (AEV:PHL), and SM Investments Corporation (SM:PHL) having the highest positive distortions.

Of these holdings, only JG Summit Holdings, Inc. (JGS:PHL) was revealed to have a lower Uniform ROA, presenting a potential cause for concern. Companies such as this need to be closely monitored for drastic changes that could negatively affect the fund itself, especially when the support behind the stocks’ performance begins to wane.

As-reported metrics understate the profitability of International Container Services, Inc., suggesting an above-average firm with an as-reported ROA of 9%. In reality, this firm more closely resembles one that is outperforming, with a Uniform ROA of 33% above the average cost of capital. In addition, the company has consistently generated returns of at least 10% over the past half decade.

Similarly, as-reported metrics understate the profitability of Aboitiz Equity Ventures, Inc. with an as-reported ROA of 3%. In fact, its Uniform ROA is at 10%. Furthermore, the company reported a Uniform ROA of at least 8% 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 only 4%, when this company actually has a 9% Uniform ROA. Moreover, prior to the pandemic, the company has maintained to generate returns of at least 11% since 2006 .

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, SB Philippine Equity Index Fund’s major holdings are forecasted to significantly outperform with a 29% projected Uniform earnings growth in the next two years, while the market is forecasting an average with a projected 6% Uniform earnings growth.

Most of the companies in SB Philippine Equity Index Fund have positive Uniform earnings growth. Among these companies, Ayala Corporation (AC:PHL), 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 2% in the next two years, while sell-side analysts are projecting 151% growth for the company’s earnings.

Moreover, the market is pricing Ayala Land Inc.’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 Investments Corporation’s Uniform earnings to have immaterial growth in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 31%.

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, but high growth and 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 largest individual stock holdings in SB Philippine Equity Index Fund, SM Prime Holdings, Inc. (SMPH:PHL).

As the Uniform Accounting tearsheet for SM Prime Holdings, Inc. highlights, the company trades at a Uniform P/E of -255.3x, below the global corporate average of 19.3x and its historical average of -83.1x.

Low P/Es require low EPS growth to sustain them. In the case of SM Prime Holdings, Inc., the company has shown a 20% Uniform EPS growth last year.

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, SM Prime Holdings Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to decline by 199% and 28% in 2022 and 2023, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify SM Prime Holdings Inc.’s PHP 36.75 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 SM Prime Holdings Inc.’s earnings growth is below what the current stock market valuation requires through 2023.

Furthermore, the company has an earning power below the long-run corporate averages. Moreover, its cash flows and cash on hand fall short of obligations, and it also has an intrinsic credit risk of 120bps. Together, these indicate a high dividend risk and moderate credit risk.

Lastly, SM Prime Holdings, Inc.’s Uniform earnings growth is well below peer averages, and is trading well below 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 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 BPI Invest Philippine Infrastructure Equity Index Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Newsletter
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