UnionBank is expanding its digital asset services, becoming the first PH universal bank licensed to do cryptocurrency trading, also GTCAP tearsheet
As the financial landscape is evolving at an unprecedented pace, UnionBank continues to build agile and tailored products to its customers’ evolving needs.
Following their issuance of PHP 11 billion first-ever digital peso bonds powered by blockchain technology in 2022, UnionBank combined Red Hat’s hybrid cloud capability with AWS to accelerate the migration from on-premises environments to AWS.
Meanwhile, UnionBank was the first universal bank to obtain a Virtual Asset Service Provider (VASP) license from the Bangko Sentral ng Pilipinas (BSP). Starting in October, the bank’s mobile platform users can directly buy and sell cryptocurrencies like Bitcoin and Ethereum.
Today, we look at one of the institution’s unit investment trust funds (“UITF”). On top of examining the fund’s portfolio, we will provide you with the current Uniform Accounting Performance and Valuation Tearsheet for one of the fund’s largest holdings.
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Friday Uniform Portfolio Analytics
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To keep up with the evolving needs of banking customers, UnionBank has been leaning towards financial innovations in blockchain technology and digital assets.
Last September, BSP approved UnionBank’s plan to infuse PHP 900 million into its digital unit, UnionDigital Bank. Less than a year ago, the bank has raised PHP 11 billion from its digital peso bond registered using blockchain technology.
Despite receiving skepticism and being viewed as a risky asset, UnionBank will introduce cryptocurrency trading on its mobile platform in late 2023. This is the first Philippine universal bank to receive a Virtual Asset Service Provider (VASP) license from the Bangko Sentral ng Pilipinas (BSP) offering secure access to digital assets alongside traditional banking services. This move democratizes virtual asset exchange and aligns with the bank’s strategy to future-proof its business.
After securing its VASP license, UnionBank is leveraging Red Hat OpenShift Service on Amazon Web Services (AWS) to expedite the transfer of vital workloads from on-premises systems to AWS. This harnesses the cloud’s agility for faster deployment of innovative financial services such as digital wallets, AI-driven financial assistants, and mobile payment applications, By utilizing AWS capabilities, UnionBank can quickly create security-focused and scalable applications.
The UnionBank PHP Equity Fund launched on March 1, 2005, is a UITF that uses a strategy that approximates the returns of the Philippine Stock Exchange Index (“PSEi”), while adding value through active stock selection.
The fund is suited for individual and corporate investors seeking higher returns from stock market investments but with a long-term time horizon and aggressive risk profile.
- At its inception in March 2005, UnionBank PHP Equity Fund’s beginning net asset value per unit (NAVPU) was PHP 100. The fund’s value peaked at PHP 818 or 7x in May 2013 due to investors’ reaction to the Wall Street rally, the positive US jobs data, and the Philippines’ second investment grade rating from the S&P.
- At the beginning of 2016, NVAPU shrunk by 38% from its climb in May 2013 while PSEi slightly shrunk by 18% following another sharp decline in U.S. oil prices and worries about a slowdown in the Chinese economy.
- In January 2018, the fund’s NAVPU grew by 39% from its shrinkage from a year ago while underperforming PSEi which grew by 49% given the higher infrastructure spending in the fourth quarter of 2017.
- However, in March 2020, with stocks in free fall, the fund quickly shrunk to PHP 370 or by 48% while the benchmark shrunk as well by 49%. This was after a two-day closure due to the Luzon-wide lockdown meant to contain the then-COVID-19 outbreak.
- The fund recovered in December 2021 at PHP 604 or 63% growth which outperformed PSEi with 59% growth. But in October 2022, the fund shrunk by 21% due to fare hikes and higher food prices caused by a typhoon from the previous month. The inflation accelerated at around 7%. The benchmark slightly underperformed by 20% at the same period.
- The World Bank anticipates that in 2023, the Philippines will experience the second-highest growth rate in Southeast Asia, even though the country’s economic expansion is projected to slow down due to weakening global demand. Despite the slowdown, the Philippines’ expected growth will still rank among the region’s fastest. Both the fund and the PSEi grew by 22% in January 2023.
- Since its inception, the fund outperformed its benchmark, recording a 403% growth versus PSEi’s 189% growth.
With the fund outperforming its benchmark, let’s take a look at the quality of the companies in its holdings. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that don’t appear to break even. Uniform Accounting reveals the truth behind the companies this fund invests in.
The table below shows the top eight core non-financial holdings of AB Capital Equity 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 UnionBank PHP Equity Fund show as-reported ROAs below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 5%, below the global corporate average returns of 6%.
However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered a Uniform ROA of 15%, a profitability above the global corporate average.
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 UnionBank PHP Equity 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 13% to 332%, with International Container Terminal Services, Inc. (ICT:PHL) and GT Capital Holdings, Inc. (GTCAP:PHL) having the highest positive distortions.
Among these holdings, no companies are below the as-reported ROA. Companies with Uniform ROA below the as-reported ROA present potential cause for concern. Companies such as this need to be closely monitored for drastic changes that could negatively affect the fund itself, especially when the support behind the stocks’ performance begins to wane.
As-reported metrics understate the profitability of International Container Terminal Services, Inc., suggesting an as-reported ROA of 11%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 45% above the average cost of capital. In addition, the company has consistently generated returns of at least 7% over the past decade.
Similarly, as-reported metrics understate the profitability of GT Capital Holdings, Inc. with an as-reported ROA of 5%. In fact, its Uniform ROA is at 20%, when its lowest was 4% over the past decade.
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:
- 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 when we convert consensus sell-side analyst estimates according to the Uniform Accounting framework.
- 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 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.
- 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, UnionBank PHP Equity Fund’s major holdings are forecasted to significantly outperform with a 23% projected Uniform earnings growth in the next two years, while the market is forecasting 6% Uniform earnings.
Most of the companies in UnionBank PHP Equity Fund have positive Uniform earnings growth. Among these companies, Ayala Corporation (AC:PHL) and GT Capital Holdings, Inc. have the highest positive Uniform earnings growth spread.
The market is pricing Ayala Corporation’s Uniform earnings to shrink by 4% in the next two years, while sell-side analysts are projecting 75% growth for the company’s earnings.
Moreover, the market is pricing GT Capital Holdings, Inc.’s Uniform earnings to shrink by 45% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 17%.
Overall, as-reported numbers significantly understate the expected earnings of these companies, as shown by the Uniform-adjusted sell-side estimates.
Uniform Accounting metrics show that these mature but high-growth and high-return companies have intact business models that should drive economic profitability moving forward.
SUMMARY and GT Capital Holdings, Inc. Tearsheet
Today, we’re highlighting one of the largest individual stock holdings in the UnionBank PHP Equity Fund, GT Capital Holdings, Inc. (GTCAP:PHL).
As the Uniform Accounting tearsheet for GT Capital Holdings, Inc. highlights, the company trades at a Uniform P/E of 2.1x, which is below the global corporate average of 18.4x but around its historical average of 2.5x.
Low P/Es require low EPS growth to sustain them. In the case of GT Capital Holdings, Inc., the company showed an 86% Uniform EPS growth last year.
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, GT Capital Holdings, Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 24% and 10% in 2023 and 2024, respectively.
Based on the current stock market valuations, we can back into the required earnings growth rate that would justify GT Capital Holdings, Inc.’s PHP 564 stock price. These are often referred to as market-embedded expectations.
Furthermore, the company has an earning power 3x the long-run corporate averages. Moreover, its cash flows and cash on hand consistently exceed its obligations within five years, and it also has an intrinsic credit risk of 370bps. Together, these indicate a low dividend risk and moderate credit risk.
Lastly, GT Capital Holdings, Inc.’s Uniform earnings growth is in line with peer averages and well below 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 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 week’s focus on the UnionBank PHP Equity Fund interesting and insightful.
Stay tuned for next month’s Friday Uniform Portfolio Analytics!
Regards,
Angelica Lim
Research Director
Philippine Markets Daily
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