Philippine Markets Newsletter

Uniform Accounting reveals that this UITF makes the best things happen for its investors through its equity value fund’s high returns.

July 16, 2020

For the past five years, this unit investment trust fund (UITF) and the Philippine Stock Exchange Index (PSEi) have been neck-and-neck in terms of investor returns. For the most part, the PSEi has slightly outperformed the fund, with the largest gap in January 2018.

However, since March 2020, the UITF has slightly surpassed its benchmark as the PSEi took a beating from the market sell-off triggered by the pandemic-induced economic shutdown.

As-reported metrics would leave investors confused with this fund’s stock picks. However, Uniform Accounting financial metrics help make sense of the fund’s investments and how they continue to outperform their benchmark at this time.

In addition to examining the fund’s portfolio, we are 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 Bank of the Philippine Islands (BPI) is the oldest bank in Southeast Asia. It was established on August 1, 1851 as El Banco Español Filipino de Isabel II, and it laid the groundwork for the banking and finance industry in the Philippines.

The bank has played a pivotal role in the country’s economic expansion and evolution. Fast forward to today, BPI is one of the most profitable banks in the Philippines, with PHP 29.1 billion in net income for the year ended December 31, 2019.

Among the bank’s oldest and most established equity funds is the BPI Equity Value Fund launched in April 2005.

The fund invests in publicly traded companies in the Philippine stock market, with a focus on value stocks that have high capital growth potential to generate long-term investment returns.

This strategy has reaped benefits for BPI, who has recently been generating returns better than its benchmark, the PSEi.

The BPI Equity Value Fund rose from a PHP 50.85 net asset value per unit (NAVPU) on April 4, 2005, to a record PHP 193.16 on January 26, 2018, delivering a 380% investment growth since its inception.

However, that initial run was cut short due to various concerns such as Brexit and the U.S.-China trade war. The fund fell 31% from its January 2018 peak to PHP 147.87 in November 2018. Meanwhile, the PSEi recorded a 24% loss in the same period.

After ending 2019 with a NAVPU of PHP 166.92, the fund’s price dropped further to PHP 111.93, its lowest in eight years. It settled at PHP 135.18 as of July 10, 2020, due to the coronavirus pandemic-induced market downturn. Year to date, the fund and the PSEi are down by 19% and 21%, respectively.

Looking at BPI Equity Value Fund’s investments using as-reported metrics, it is not apparent that the fund invests in high-growth companies.

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

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

Most companies in the BPI Equity Value Fund show as-reported ROAs that range around and below global cost-of-capital levels, suggesting that they are not generating economic profit. However, Uniform Accounting reveals that these companies have strong returns, with Uniform ROA above the 6% global average returns except for PLDT Inc. (TEL:PHL).

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 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 -43% to 197%, with Ayala Corporation (AC:PHL), Aboitiz Equity Ventures, Inc. (AEV:PHL), JG Summit Holdings, Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) all having distortions above a hundred percent.

As-reported ROA understates the profitability of AC, suggesting a below-average company with an as-reported ROA of 4%. In reality, this leading conglomerate is a high-quality firm with an 11% Uniform ROA, almost thrice the as-reported number. Over the past 15 years, AC has never seen its Uniform ROA dip below 10%.

Likewise, AEV is not a 4% ROA company like what as-reported numbers show. It is, in fact, an above-average company with a 10% Uniform ROA, consistently generating above-average returns over the past decade.

By focusing on as-reported metrics alone, BPI would never pick most of these companies because they 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 the 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 2-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 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, BPI Equity Value Fund’s major holdings are forecast to underperform with a 4% projected Uniform earnings shrinkage in the next two years.

Meanwhile, the market is seeing a 2% Uniform EPS shrinkage for these firms in the next two years.

Among these companies, TEL and SM have the highest positive Uniform earnings growth dislocation.

The market is expecting TEL’s Uniform earnings to rise by 5%, but analysts are projecting a robust 34% earnings growth for the telecommunication company in the next two years.

Meanwhile, the market is pricing SM’s Uniform Earnings to plummet by 11% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 9% moving forward.

Overall, as-reported numbers would have investors incorrectly conclude that this portfolio consists of low-quality companies. While these firms are currently suffering from the adverse effects of the coronavirus pandemic, dragging down their short-term earnings growth expectations, Uniform Accounting metrics show that these companies are high quality with intact business models that would drive economic profitability moving forward.

SUMMARY and Ayala Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in BPI Equity Value Fund—Ayala Corporation (AC:PHL).

As the Uniform Accounting tearsheet for AC highlights, it trades at a Uniform P/E of 18.7x, below the global corporate average P/E but around its historical average of 17.8x.

Low P/Es require low EPS growth to sustain them. In the case of AC, the company has recently shown a 308% Uniform EPS growth.

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, AC’s sell-side analyst-driven forecast shows that Uniform earnings is expected to decline by 64% in 2020, before accelerating by 75% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 745.00 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 8% in each of the next three years and still justify current price levels. Sell-side analysts’ expected 75% Uniform EPS growth for AC is well above what the current stock market valuation requires.

The company has an earning power almost double global corporate averages—based on its Uniform ROA calculation. Since the combination of the company’s cash flows and cash on hand are at 113% of total obligations, AC has a low dividend risk.

To conclude, AC’s Uniform earnings growth is well below peer averages. 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 BPI Equity Value 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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