Philippine Markets Newsletter

Uniform Accounting helps make sense of why this high dividend yield fund chose these companies to invest in…also, AC tearsheet

October 1, 2021

In August 2021, the Philippines’ second largest bank launched the Metro Multi-Themed Equity Fund of Funds, its newest unit investment trust fund (UITF) that invests in US leaders in digital innovation. While we wait for more data on the fund’s performance, we revisit one of its earlier UITFs.

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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It’s been 18 months since the COVID-19 pandemic caused nationwide lockdowns and quarantines. The Philippines had even been in a 15-month recession as businesses shut down and economic activity nearly came to a halt. Until now, investors are still concerned about the pandemic’s negative economic and financial effects. 

Fortunately for the banking industry, the light at the end of this tunnel may be closer than investors think.

Many investors remain worried about the Philippines’ growth prospects, considering the spike in COVID-19 cases due to the delta variant. It’s easy to fear the worst since banks have tightened credit standards to control their bad debts. Net income for Philippines banks had shrunk by around 16% year-on-year for the semester-ended September 2020. 

However, as we’ve highlighted in the past, Philippine banks remain safe, with a capital adequacy ratio at 15%-16%, above the standard of 10% the Bangko Sentral ng Pilipinas (BSP) set. Banks have also used this pandemic as an opportunity to strengthen their digital services and even take advantage of the 2020 stock market selloff. 

By June 2021, the Philippine banking industry managed to bounce back, reporting nearly PHP 123 billion in net income, up 43% versus the previous year.

For Metropolitan Bank and Trust Company (Metrobank), which is currently celebrating 59 years as a banking leader in the Philippines, net income rose to PHP 11.7 billion for the first half of 2021, 28% increase from the year before. It also recorded a capital adequacy ratio of around 20% and liquidity coverage ratio of 262%. These are signs of the bank’s strength and growth prospects as the Philippine economy recovers. 

In fact, just last month, Metrobank announced its newest Unit Investment Trust Fund (UITF), Metro Multi-Themed Equity Fund of Funds. This fund seeks to take advantage of the emerging trends brought about by the pandemic, investing in US funds focused on industries such as digital health, disruptive innovation, and digital security, which all currently show great potential in long-term growth.

Interested investors can visit a Metrobank branch to start a UITF account then begin investing through their digital Metrobank Online app.

While we wait for more data to be available for Metrobank’s newest UITF, let us look into our historical assessments of the bank’s other funds:

On top of these, we’ll be revisiting the Metro High Dividend Yield Fund.  

The Metro High Dividend Yield Fund was established on October 10, 2014. The Peso-denominated fund invests in blue-chip stocks with both high long-term growth potential and dividend payouts. In doing so, the fund aims to surpass its benchmark, the Philippine Stock Exchange Index (PSEi).

The fund is suitable for investors with aggressive risk appetites seeking capital growth over the long-term, and are willing to be exposed to a higher level of risk. Due to this, investors are recommended to stay invested for at least 5 years. The fund is currently invested in at least 98% stocks, while the remaining is in time deposits and cash.

At its inception in October 2014, the Metro High Dividend Yield Fund’s initial net asset value per unit (NAVPU) was at PHP 1.00. After gaining 12% to reach a NAVPU of PHP 1.12 in April 2015, it dropped below the fund’s initial value to PHP 0.86 in January 2016 due to the oil price crash. The fund recorded a loss of 23% and slightly outperformed the PSEi, which incurred a loss of 25% over the same period.

The fund then recovered to its highest peak of PHP 1.17 in January 2018—an increase of 36%, but underperformed its benchmark’s gain of 49% over the same period.

After reaching this peak, the fund’s NAVPU then shrank to PHP 0.90 in November 2018 due to uncertainties regarding Brexit and the US-China trade war. The fund slightly outperformed the PSEi and recorded losses of 23% and 24%, respectively.

By the end of 2019, the fund had rebounded by 12% to a NAVPU of PHP 1.00, before it fell to its record low of PHP 0.66 in March 2020, due to the coronavirus-induced market selloff. The fund’s 34% loss outperformed its benchmark’s 41% loss during this period.

As of September 27, 2021, Metro High Dividend Yield Fund has recovered to a NAVPU of PHP 0.93, a 42% gain from its 2020 low, but still underperformed compared to the PSEi’s gain of 50%.

Since its inception, Metro High Dividend Yield Fund has had a cumulative 7% loss versus its benchmark’s cumulative 3% loss.

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 Metro High Dividend Yield 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 Metro High Dividend Yield 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 4%, 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%, almost 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 the Metro High Dividend Yield 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, Metro High Dividend Yield 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 10% projected Uniform earnings growth.

All the companies in the Metro High Dividend Yield 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 5% 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 Ayala Corporation Tearsheet 

Today, we’re highlighting one of the individual stock holdings in the Metro High Dividend Yield Fund, Ayala Corporation (AC:PHL).

As the Uniform Accounting tearsheet for Ayala Corporation highlights, the company trades at a Uniform P/E of 30.6x, above both the global corporate average of 24.3x, and its historical average of 21.0x.

High P/Es require high EPS growth to sustain them. In the case of Ayala Corporation, the company has shown a 105% 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, Ayala Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 818% in 2021 and grow by 61% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify SM Prime Holdings’ PHP 817.00 stock price. These are often referred to as market embedded expectations.

Ayala Corporation is currently being valued as if Uniform earnings were to grow by 5% per year over the next three years. What sell-side analysts expect for Ayala Corporation’s earnings growth is below what the current stock market valuation requires in 2021, but above that requirement in 2022.

The company has an earning power below 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 160bps. Together, these indicate that Ayala Corporation has a high dividend risk and moderate credit risk.

To conclude, Ayala Corporation’s Uniform earnings growth is well below peer averages but is trading above 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 month’s focus on the Metro High Dividend Yield 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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