Philippine Markets Newsletter

Uniform Accounting reveals that this fund is around 2x more profitable than what as-reported numbers suggest.

April 24, 2020

One of the country’s first non-American foreign banks offers different products such as unit trust investment funds (UITFs).

While there may be short-term concerns due to the COVID-19 pandemic, Uniform Accounting shows that this fund invests in companies with strong fundamentals, pointing to long-term upside.

In addition, we’re including 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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The Philippine Bank of Communications (PBCOM) started off on September 4, 1939 as the Philippine branch of a Tawainese bank called Bank of Communications.

In a banking industry dominated by the Americans at the time, PBCOM became one of the country’s first non-American foreign commercial banks.

In 1942, PBCOM and other banks in the Philippines were forced to cease their operations due to World War II. When the war ended in 1945, PBCOM resumed operations in Manila, and they opened their first provincial branch in Cebu two years later.

On June 21, 1974, Ralph Nubla and his company purchased a majority of the then Chinese-owned bank’s outstanding shares, which led to Filipino ownership of PBCOM.

Fast forward to September 2014, Lucio Co, owner of supermarket chain Puregold, became the largest shareholder in PBCOM.

PBCOM has grown to become one of the top 20 banks in the country, with around PHP 105 billion worth of assets, according to the Bangko Sentral ng Pilipinas. It provides investment products such as UITFs, which include the PBCOM Money Market Fund, Best Balanced Fund, and Value Equity Fund.

For this week, we’ll focus specifically on the PBCOM Value Equity Fund.

The PBCOM Value Equity Fund was established on December 8, 2010, with the goal of achieving long-term growth through investments in stocks (at least 80%) and fixed income securities.

After starting with a net asset value per unit (NAVPU) of PHP 100.00 in December 2010, PBCOM Value Equity Fund’s NAVPU fell to a historical low of PHP 86.07 in September 2011, a loss of 14%, due to fears of a global recession. Similarly, its benchmark, the Philippine Stock Exchange index (PSEi), dropped by 12% over the same period.

Thereafter, the fund’s NAVPU slowly rose to a peak of PHP 169.82 in January 2018, a gain of 97% that underperformed the PSEi’s 143% return. However, by November 2018, the fund’s NAVPU dropped to PHP 129.37. Both the fund and its benchmark fell by 24% due to concerns about Brexit, slowing growth, and trade wars.

Since rebounding to a NAVPU of PHP 145.36 by the end of 2019, its NAVPU is once again down to PHP 107.39 as of April 13, 2020, losing 26% due to fears about the COVID-19 pandemic. Comparatively, the PSEi dropped by 28% over the same period.

With the announcement of the extension of the enhanced community quarantine extending to at least May 15, 2020 in different areas of the country such as Metro Manila, short-term stock market volatility is expected to continue across multiple companies and industries, including the companies that PBCOM Value Equity Fund invests in.

While the PBCOM Value Equity Fund has historically underperformed the PSEi, the fund picks companies with sound long-term fundamentals.

However, by looking at as-reported numbers, investors won’t be able to understand the true underlying performance of companies. Worse, it could lead to skewed insights, negatively affecting the investment decision making process.

With Uniform Accounting, investors can see the real profitability and earnings expectations of companies.

The table below lists the top non-financial holdings of PBCOM Value Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

As-reported numbers show that most of PBCOM Value Equity Fund’s holdings are not generating economic profit, with as-reported ROA ranging below cost of capital returns. However, Uniform Accounting reveals that, in reality, most of these companies have above-average profitability.

In turn, traditional metrics would have made investors believe that this fund is subpar with an average as-reported ROA of 5%, below global corporate average returns of 6%. But the reality is, under the Uniform Accounting framework, this fund has actually delivered stronger earnings with an average Uniform ROA of 9%.

Uniform Accounting adjusts for the misrepresentations in companies’ financial statements brought about by the inconsistencies in the Philippine Financial Reporting Standards (PFRS) to reveal the true underlying performance of companies.

As such, it should not be surprising that when analyzing the non-financial holdings of the PBCOM Value Equity Fund, the figures that easily stand out are the double-digit 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 -23% to 164%, with Aboitiz Equity Ventures, Inc. (AEV:PHL), Ayala Corporation (AC:PHL), and SM Investments Corporation (SM:PHL) having distortions greater than a hundred percent.

As-reported ROA understates the earning power of Aboitiz Equity Ventures, treating it as a low-quality company with a 5% as-reported ROA. In reality, it is a high-quality firm with 13% Uniform ROA, higher than global corporate average returns.

Similarly, as-reported numbers incorrectly suggest that Ayala Corporation is a below average company with an as-reported ROA of 4%. In fact, it is an above average firm with 10% Uniform ROA. This leading conglomerate has actually never seen its profitability dip below 10% over the past decade.

This table shows the earnings growth expectations for the major company ownerships of PBCOM Value Equity Fund. It features three key data points:

  1. The 2-year Uniform 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 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 2-year Uniform EPS growth and market expected Uniform EPS growth.

On average, Philippine companies are expected to have 6% annual Uniform earnings growth over the next two years. Meanwhile, the PBCOM Value Equity Fund’s top holdings are forecast to surpass that with 17% projected Uniform earnings growth in the next two years.

The market, on the other hand, sees a decline in earnings for these companies with market-expected Uniform EPS shrinkage of 3% over the next two years.

Among these companies, PLDT Inc. (TEL:PHL) and SM Investments Corporation have the highest Uniform earnings growth dislocation.

The market is pricing PLDT Inc.’s Uniform earnings to grow by 5% in the next two years. However, sell-side analysts are forecasting it to accelerate by 40% going forward.

Similarly, the market is seeing SM’s uniform earnings to shrink by 12%, but analysts are projecting a robust 20% earnings growth for the firm in the next two years.

Given these, as-reported metrics understate the fund’s overall profitability, while markets express bearish earnings growth expectations over the funds’ major holdings in the face of the COVID-19 pandemic. This could lead to investors thinking that PBCOM Value Equity Fund is a subpar fund with unexciting earnings projections.

However, in reality, this fund has healthy profitability levels with an average Uniform ROA of 9% and a robust earnings growth potential with 17% Uniform EPS growth in the next two years.

With Uniform Accounting, investors can see through black swan events such as the COVID-19 pandemic, revealing the companies’ underlying fundamentals for what they truly are.

While this fund may see continued volatility in the short term, Uniform metrics reveal that this fund invests only in high quality companies with strong fundamentals, which could point to longer-term equity upside.

Aboitiz Equity Ventures, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in PBCOM Value Equity Fund—Aboitiz Equity Ventures, Inc.

As our Uniform Accounting tearsheet for Aboitiz Equity Ventures highlights, it trades at a Uniform P/E of 9.8x, well below global corporate averages and its historical averages.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of Aboitiz Equity Ventures, the company has recently shown a Uniform EPS shrinkage of 5%.

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 PFRS earnings as a starting point for our Uniform earnings forecasts. When we do this, Aboitiz Equity Ventures’ sell-side analyst-driven forecast shows that Uniform earnings will shrink by 24% in 2019 and grow by 78% in 2020.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 44.05 per share. These are often referred to as market embedded expectations.

In order to meet the current market valuation levels of Aboitiz Equity Ventures, the company would have to see Uniform earnings shrink by 12% each year over the next three years. Sell-side analysts’ expected 78% earnings growth for the company is well above what the current stock market valuation requires.

The company has an earning power around 2x the long-run corporate averages—based on its Uniform ROA calculation. However, with cash flows and cash on hand falling short of obligations within five years, Aboitiz Equity Ventures has a high dividend risk.

To conclude, Aboitiz Equity Ventures’ Uniform earnings growth is well below peer averages in 2019. However, the company is trading below peer average valuations.

About the Philippine Market Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living oftentimes 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 PBCOM Value Equity Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Daily
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