Philippine Markets Newsletter

Uniform Accounting reveals this fund’s holdings are 2x more profitable than what as-reported numbers show

April 3, 2020

This unit investment trust fund (UITF) from AB Capital Securities Inc. has consistently outperformed its benchmark, until recently.

Despite short-term fluctuations, the fund’s underlying fundamentals, as seen through Uniform Accounting, would warrant long-term upside.

In today’s Philippine Markets Daily (PMD), we take a look at AB Capital Equity Fund and assess its profitability and earnings growth potential.

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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AB Capital Securities Inc. (ABCSI) was one of the key players in the early stages of financial markets in the Philippines. ABCSI is one of the few firms that first introduced online stock trading in the country. It is also one of the first banks to offer an equity fund.

ABCSI launched AB Capital Equity Fund on December 4, 2006 with the primary goal of delivering long-term capital growth and investment returns better than the Philippine Stock Exchange Index (PSEi).

The fund outperformed PSEi during its first year by generating 59% investments returns, more than twice the 21% performance of PSEi during the same period.

However, the fund dropped 56% from around PHP 1.50 net asset value per unit (NAVPU) in December 2007 to a historical low of PHP 0.69 in November 2008 due to the global financial crisis.

AB Capital Equity Fund bounced back strong, reaching a record PHP 3.52 NAVPU in February 2015. This translated to a whopping 410% investment return since its historical low, outperforming the PSEi’s 292% growth over the same period.

However, in January 2016, the fund saw another huge decline in performance, dipping by 29% to PHP 2.50 NAVPU. Meanwhile, the PSEi fell by 21%. Both the fund and its benchmark were down due to the oil price crash at the time.

Thanks to the country’s improving macroeconomic fundamentals, the fund rebounded back to PHP 3.47 in July 2019, before ending the year at PHP 3.22.

As of December 31, 2019, AB Capital Equity Fund has provided 222% cumulative investment returns since inception, surpassing PSEi’s 180% growth over the same time frame.

However, due to the fears brought about by the ongoing COVID-19 pandemic, the fund plunged to PHP 2.20 on March 27, 2019, suffering an investment loss of around 31% YTD. This is in line with the PSEi, which incurred a loss of around 30% over the same period.

The uncertainties around the COVID-19 pandemic and the extreme measures the government has been implementing to contain it are expected to cause continued disruption in business operations. This will also result in further short-term volatility across multiple companies and industries, including the companies AB Capital Equity Fund invests in.

AB Capital Equity Fund picks companies with sound long-term fundamentals. This has been one of the reasons why the fund was able to recover following the Great Recession in 2008.

However, by looking at as-reported numbers, investors won’t be able to understand the true underlying performance of businesses. Worse, it could lead one to generating 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 AB Capital 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 AB Capital Equity Fund’s holdings are not profitable, with their below cost-of-capital level returns. However, Uniform Accounting reveals that, in reality, these companies are 2x more profitable.

In turn, traditional metrics would have 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 10%.

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 top non-financial holdings of AB Capital Equity Fund, the figures that easily stand out are the double-digit discrepancies between Uniform ROA and as-reported ROA for these companies.

While the difference in raw figures may not seem too distant, the distortion in percentage ranges from 49% to 155%, with Ayala Corporation (AC:PHL), International Container Terminal Services, Inc. (ICT:PHL), and SM Investments Corporation (SM:PHL) having distortions greater than a hundred percent.

As-reported ROA understates the earning power of Ayala Corp, treating it as a low-quality company with a 4% as-reported ROA. In reality, it is a high-quality firm with 10% Uniform ROA. This leading conglomerate has actually never seen its profitability dip below 10% over the past decade.

Meanwhile, as-reported numbers incorrectly suggest that ICT is an average firm with an as-reported ROA of 6%. In fact, it has consistently generated double-digit Uniform ROA over the past 10 years.

This table shows the earnings growth expectations for the major company ownerships of AB Capital 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, AB Capital’s equity fund holdings are forecasted to surpass that with 12% projected Uniform earnings growth in the next two years.

The market, on the other hand, sees a decline in earnings growth for these companies, with market-expected Uniform EPS shrinkage of 5% over the next two years.

Among these companies, SM Investments Corporation and JG Summit Holdings, Inc. (JGS:PHL) have the highest Uniform earnings growth dislocations.

The market is pricing SM’s Uniform earnings to plummet by 13% in the next two years. However, sell-side analysts are seeing earnings growth expansion for the firm, forecasting it to accelerate by 20% going forward.

Similarly, the market is seeing JGS’s Uniform earnings to decline by 2% moving forward, but analysts are projecting a robust 20% earnings growth for the firm in the next two years.

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.

On an as-reported basis, one might think that this fund is subpar with declining earnings. However, in reality, this fund has healthy profitability levels with average Uniform ROA of 10% and a robust earnings growth potential with 12% 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.

Uniform metrics reveal that this fund invests only in fundamentally sound and intrinsically undervalued firms, suggesting that AB Capital Equity Fund will bounce back strongly, similar to what it did 10+ years ago.

SM Investments Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in AB Capital Equity Fund—SM Investments Corporation.

As our Uniform Accounting tearsheet for SM Investments Corporation highlights, it trades at a Uniform P/E of 15.7x, 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 SM Investments Corporation, the company has recently shown a 1% Uniform EPS shrinkage.

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, SM Investments Corporation’s sell-side analyst-driven forecast shows that Uniform earnings will grow by 15% in 2020 and 26% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 805.00 per share. These are often referred to as market embedded expectations.

In order to meet the current market valuation levels of SM Investments Corporation, the company would have to see Uniform earnings shrink by 13% each year over the next three years. Sell-side analysts’ expected 26% earnings growth for SM Investments Corporation is well above what the current stock market valuation requires.

The company has an earning power at least 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, SM Investments Corporation has a high dividend risk.

To conclude, SM Investments Corporation’s Uniform earnings growth is around peer averages in 2020. Moreover, the company is trading above peer average valuations.

About the Philippine Markets 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 AB Capital Equity Fund interesting and insightful.

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


Angelica Lim & Joel Litman
Research Director & Chief Investment Strategist
Philippine Markets Daily
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