Philippine Markets Newsletter

With an earning power 2x its as-reported metrics, this UITF from the country’s largest trust corporation outperformed the PSEi year to date

November 13, 2020

This unit investment trust fund (UITF) from the country’s largest standalone trust corporation has slightly outperformed its benchmark, the Philippine Stock Exchange Index (PSEi), year to date.

However, as-reported metrics would leave investors confused with the fund’s stock picks. Uniform Accounting financial metrics help make sense of the fund’s investments and how it continues to outperform its benchmark.

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), established on August 1, 1851, is the oldest bank in Southeast Asia and the 4th largest bank in the Philippines. It has over 800 branches and around 3,000 ATMs and CAMs (cash accept machines) across the Philippines, Hong Kong, and Europe.

BPI’s subsidiary, BPI Asset Management and Trust Corporation (BPI AMTC), is the country’s largest standalone trust corporation. Its offerings include institutional fund management solutions, investment funds, and Personal Equity & Retirement Accounts (PERA)—which we’ve talked about last month.

Among BPI AMTC’s funds are Odyssey Funds, or funds that BPI actively manages. We’ve written about BPI AMTC’s funds before: BPI Consumer Equity Index FundBPI Equity Value FundBPI Infrastructure Equity Index Fund, and Odyssey Philippine Equity Fund. This week, we’ll focus on another one of its Odyssey Funds, Odyssey Philippine High Conviction Equity Fund.

Odyssey Philippine High Conviction Equity Fund was launched on February 1, 2007. The fund aims to generate long-term capital growth by investing in exchange-listed stocks on the Philippine Stock Exchange (PSE). However, the weightings will not be based on the index, but on the fund manager’s outlook and conviction on the stocks. It also seeks to outperform its benchmark, the Philippine Stock Exchange Index (PSEi).

Odyssey Philippine High Conviction Equity Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its 2007 inception. After rising to PHP 126.64 in July 2007, it dropped to a historical low of PHP 44.69 in October 2008 due to the global financial crisis. With a loss of 65%, the fund underperformed its benchmark during this time, which recorded a loss of 55%.

The UITF then recovered and its NAVPU rose to a peak of PHP 217.61 in July 2012, before dropping to PHP 140.20 in June 2013 due to the reduced stimulus from central banks. The fund reported a higher loss of 36% compared to the PSEi’s loss of 30% during this period.

After years of volatile movement from the fund, it ended 2019 with a NAVPU of PHP 134.64. It dropped to as low as PHP 94.34 in March 2020 due to the downturn caused by the COVID-19 pandemic. Today, the fund has rebounded, recording a NAVPU of PHP 117.87 as of November 6, 2020. The fund’s 12% loss year to date has slightly outperformed its benchmark’s loss of 14%.

Looking at Odyssey Philippine High Conviction Equity Fund’s investments using as-reported metrics, it is not apparent that the fund invests in stable and established 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 Odyssey Philippine High Conviction Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most of the companies in Odyssey Philippine High Conviction Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. In 2019, the fund generated an as-reported average ROA of 5%, slightly below global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 10%, 2x the as-reported ROA average. These companies have strong returns, with Uniform ROA above 6% global average returns.

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 45% 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 of more than a hundred percent.

As-reported metrics understate the profitability of AC, suggesting a below-average company with an as-reported ROA of 4%. It is in fact a high-quality firm with an 11% Uniform ROA. In fact, it has consistently generated returns of at least around 10% over the past decade.

Likewise, AEV is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with a 10% Uniform ROA. Moreover, over the past decade, AEV has never seen its Uniform ROA dip below 10%.

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 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 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 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 two-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, Odyssey Philippine High Conviction Equity Fund’s major holdings are forecast to underperform with an 11% projected Uniform earnings shrinkage in the next two years, while the market is seeing a 1% Uniform earnings shrinkage.

Among these companies, only AEV and International Container Terminal Services, Inc. (ICT:PHL) have positive Uniform earnings growth dislocations.

The market is pricing ICT’s Uniform Earnings to shrink by 2% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 13% moving forward.

Furthermore, the market is expecting AEV’s Uniform Earnings to decline by 6%, while analysts are projecting immaterial Uniform earnings growth over the next two years.

Overall, as-reported numbers would have investors incorrectly conclude that this portfolio consists of low-quality companies. 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 these mature, low growth, but high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and International Container Terminal Services, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the Odyssey Philippine High Conviction Equity Fund—International Container Terminal Services, Inc. (ICT:PHL).

As the Uniform Accounting tearsheet for ICT highlights, it trades at a Uniform P/E of 17.4x, below global corporate averages but around its historical averages.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of ICT, the company has recently shown a 24% 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 Philippine Financial Reporting Standards (PFRS) earnings as a starting point for our Uniform earnings forecasts. When we do this, ICT’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 3% and 23% in 2020 and 2021, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 125.00 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 2% over the next three years and still justify current price levels. What sell-side analysts expect for ICT’s earnings growth is above what the current stock market valuation requires in 2020 and 2021.

The company has an earning power around 2x long-run corporate averages and has consistently been well above global long-run corporate averages. However, ICT’s cash flows and cash on hand fall short of obligations within five years, and the company has an intrinsic credit risk 300bps above the risk-free rate. This indicates that ICT has a moderate credit and high dividend risk.

To conclude, ICT’s Uniform earnings growth is well above peer averages, but is trading 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 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 Odyssey Philippine High Conviction 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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