Philippine Markets Newsletter

Uniform metrics help pinpoint why this UITF has consistently underperformed its benchmark, the PSEi…also, SMPH tearsheet

September 3, 2021

This unit investment trust fund (UITF) from the first private Philippine universal bank has underperformed its benchmark, the Philippine Stock Exchange index (PSEi). Moreover, the average Uniform ROA for its holdings are 3%, which is above the as-reported average, but lower than global corporate average returns.

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 Daily:
Friday Uniform Portfolio Analytics
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UCPB, established in 1963, was the first private Philippine bank to become a universal bank, obtaining its expanded commercial banking license in 1981. At present, it offers a full range of commercial banking services to a diversified clientele.

Under UCPB’s financial markets segment are its investment and trust products, which include consumer finance, commercial credit, corporate and investment banking, trust banking, domestic and international trade finance, treasury and money market investment, cash management, and deposit services.

We’ve analyzed some of UCPB’s funds before: 

This week, we’ll be revisiting the UCPB High Dividend Fund.  

The UCPB High Dividend Fund was established on April 8, 2014. The Peso-denominated fund is invested primarily in equities with a portion allocated to dividend-paying common and preferred shares. 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 willing to invest a small portion of their portfolio for at least eighteen months. The fund is currently invested in at least 97% stocks, while the remaining is in time deposits. 

At its inception in April 2014, the UCPB High Dividend Fund’s initial net asset value per unit (NAVPU) was at PHP 1.00. After gaining 15% to reach a NAVPU of PHP 1.15 in April 2015, it dropped below the fund’s initial value to PHP 0.94 in January 2016 due to the oil price crash. The fund recorded a loss of 18%, outperforming its benchmark the PSEi, which incurred a loss of 25% over the same period.

The fund then recovered to its highest peak of PHP 1.20 in January 2018—recording an increase of 28%, but underperforming the PSEi’s gain of 49% over the same period.

After reaching this peak, the fund’s NAVPU then shrank to PHP 0.97 in November 2018 due to uncertainties regarding Brexit and the US-China trade war. The fund outperformed the PSEi, recording losses of 19% and 24%, respectively.

By the end of 2019, the fund had rebounded by 10% to a NAVPU of PHP 1.07 before falling to its record low of PHP 0.71 in March 2020, due to the coronavirus-induced market selloff. The fund recorded a 34% loss in this period, outperforming its benchmark’s 41% loss.

As of August 27, 2021, UCPB High Dividend Fund has recovered to a NAVPU of PHP 0.90, a 27% gain from its 2020 low, underperforming the PSEi’s gain of 47%.

Since its inception, UCPB High Dividend Fund has had a cumulative 10% loss versus its benchmark’s cumulative 3% gain.

As-reported metrics would have investors believe that the fund’s 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 top seven core non-financial holdings of the UCPB High Dividend 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 UCPB High Dividend 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 2%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better returns with an average Uniform ROA of 3%, 1.5x 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 UCPB High Dividend 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 -313% to 150%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and International Container Terminal Services, Inc. (ICT:PHL) having the highest positive 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% through 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%, when in fact, this is an average firm with a 6% Uniform ROA. It has consistently generated returns of at least 8% through 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, UCPB High Dividend Fund’s major holdings are forecasted to significantly outperform with a 72% projected Uniform earnings growth in the next two years, while the market is forecasting a slight outperformance with a 9% projected Uniform earnings growth.

All the companies in the UCPB High Dividend Fund have a positive Uniform earnings growth spread except for Jollibee Foods Corporation (JFC:PHL). 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 AC’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 241%.

Likewise, the market is pricing ALI’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%.

On the other hand, the market is pricing SM’s Uniform earnings to be immaterial in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 65%.

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 SM Prime Holdings, Inc. Tearsheet 

Today, we’re highlighting one of the individual stock holdings in the UCPB High Dividend Fund, SM Prime Holdings, Inc. (SMPH:PHL).

As the Uniform Accounting tearsheet for SM Prime Holdings highlights, the company trades at a Uniform P/E of 39.7x, above the global corporate average of 21.9x, but below its historical average of 48.9x.

High P/Es require high EPS growth to sustain them. In the case of SM Prime Holdings, the company has shown a 66% 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, SM Prime Holdings’ sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 46% in 2021 and by 78% 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 34.50 stock price. These are often referred to as market embedded expectations.

SM Prime Holdings is currently being valued as if Uniform earnings were to grow by 7% per year over the next three years. What sell-side analysts expect for SM Prime Holdings’ earnings growth is above what the current stock market valuation requires in both 2021 and 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. However, the company has an intrinsic credit risk of 20bps. Together, these indicate that SM Prime Holdings has a high dividend risk but low credit risk.

To conclude, SM Prime Holdings Inc.’s Uniform earnings growth is in line with peer averages and 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 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, 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 the UCPB High Dividend 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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