Sunday, April 10, 2016

Phisix 7,250: More Proof of 2015’s EPS Fiasco: Crashes in JOLLIBEE and MEGAWORLD’s EPS Growth! PSEi’s Record 8,127’s First Anniversary

If you’re unhappy with what you’ve had over the last 50 years, you have an unfortunate misappraisal of life. It’s as good as it gets, and it’s very likely to get worse. It’s always wise to be prepared for it getting worse. Favorable surprises are easy to handle. It’s the unfavorable surprises that cause the trouble. In terms of monetary authorities, you can count on the purchasing power of money to go down over time. You can almost count on the fact that you’ll have way more trouble in the next 50 years than we had in the last. The technology is changing, so that a few nutcases could make the World Trade Center look like a picnic. We should all be prepared to adjust to a world that is harder.—Charles Munger, Vice Chairman of Berkshire Hathaway

In this issue

Phisix 7,250: More Proof of 2015’s EPS Fiasco: Crashes in JOLLIBEE and MEGAWORLD’s EPS Growth! PSEi’s Record 8,127’s First Anniversary
-JFC’s 2015 Net Income Growth Crashed Big Time on Dwindling Topline!
-Megaworld’s 2015 EPS Growth Nose-Dived by 52% from Real Estate Sales Slump!
-Signs of Strains Even in Government’s Income Statement? Fiscal Deficit Rise in 2015!
-March GIR: BSP’s Forex Inventory Skyrockets, Why?
-One Year Anniversary of April Record PSE Record 8,127: A Coming Successful Breakout of 7,400 or Déjà vu 2015?


Phisix 7,250: More Proof of 2015’s EPS Fiasco: Crashes in JOLLIBEE and MEGAWORLD’s EPS Growth! PSEi’s Record 8,127’s First Anniversary

JFC’s 2015 Net Income Growth Crashed Big Time on Dwindling Topline!

I have noted last week, that contra mainstream early predictions of double digits growth, 2015 has signified to be an earnings G-R-O-W-T-H FIASCO!

And the earnings growth debacle has mainly been brought about by pressures on corporate topline, or their respective NGDPs, which has evolved to become a systemic problem rather than just based on a few firms or industry.1

But does it matter? Earnings or no earnings stocks can only go UP!!!


Current divergence of record high stocks in the face of earnings degradation can be seen not only in some of the record high biggest market cap issues that has weightlifted the PSEi to its current level, like SM Investments and AEV (stunningly -4.33% 2015 and -12.71% 2014) but also in another top 15 ranked firm, specifically—the largest fast food chain in the Philippines, Jollibee Foods Corporation (PSE: JFC).

As a side note, JFC will most likely publish their annual report next week.

However, it has been interesting to see JFC exhibit at their February 9 press release that eps growth for 2015 actually CONTRACTED! (see upper window)

So like SM which income growth collapsed to ZERO, JFC even trekked to the NEGATIVE zone!

Well, who says stocks represent the discounted value of the stream of future cash flows or about income growth???

Like SM, in the case of JFC, smaller income growth translates to near record HIGH stock prices!!!!

JFC’s share price has been up 5.3% year to date as of Friday. The latest serial pumping entailed to a Price Earning Ratio (PER) of an eye popping or NOSE BLEED 45.4 (as of April 7) as well as, a staggering Price to Book (PBV) of 7.98!

And JFC has just been off by 2.2% from a new record (as of Friday)

As income growth materially decreases, stock prices skyrocket! Absolutely stunning.


On their broadcast, the company splurges on the G-R-O-W-T-H theme by focusing on the ‘growth’ aspects while leaving the decaying segment to a single paragraph.

Nonetheless, the press release did mention and blamed “extra-ordinary expense”, which totaled Php 903 million, for the decline in operating income of 31.8% for the quarter and 9% for the year. Basic eps growth actually crashed by an astounding 11.3% in 2015! (see lower window in the above chart)

Since the annual report has yet to be published, here is my guess, “extra-ordinary expense” has emerged from the firm’s massive expansion program to resuscitate its falling topline hence the dwindling eps.

JFC’s profit pressures can be traced to its topline woes.

JFC’s top line growth continues to ebb. In 2015, gross revenues grew by 11.15% which has been down from 12.94% and 12.98% in 2014 and 2013 respectively (see upper window of below chart). The peak in JFC’s growth was in 2011 at 17.2%. JFCs’ gross revenues/NGDP has been in gradual erosion for the past 4 years!

Note that about a quarter of gross revenues are from overseas operations. 
 

Perhaps the decline in the rate of store expansion, which has mirrored on the topline performance, has prompted for JFC’s officials to commit to a more ambitious expansion program.

Yet intriguingly, 2015’s pronounced decline in JFC’s topline occurred even when the company aggressively expanded (upper window). Total supply via worldwide stores of the JFC group ballooned by 9.4% in 2015. This excludes stores from affiliates, for instance, newly acquired Smashburger’s 352 outlets.

In the other words, JFC officials seem to think that the topline erosion has strictly been a supply side issue, hence the supply side response. The company stated that in 2016 capex budget would amount to Php 10.4 billion, with Php 7.5 billion allotted for new stores and the balance for renovations. They seem to think that demand trend would remain intact or static.

Yet JFC officials hardly seem to realize that their predicament may have been rooted from the law of diminishing (marginal) returns. And JFC’s diminishing marginal returns may be a function of mostly three major factors: demographics (JFC stores increasing faster than population/market), demand (JFC stores expanding faster than consumer’s income growth) and competition (aggregate supply growing faster than aggregate demand, or in layman’s terms, more and more fastfood stores competing for your peso).

Of course, JFC has a diverse, and not homogenous, line of food businesses. But still, the array of variegated retail food themes focuses on consumers, whose spending depends on those three economic factors.

So in spite of the 9% surge in JFC’s retail outlets, topline revenues continue to diminish.

Like SM, this extrapolates to the increasingly inefficient use of resources (as measured by output per store), or worst, growing signs of excess capacity. And if it is the latter, then throwing good money on even more wasteful activities will only lead to losses and eventually drain the firms’ savings (retained earnings)

JFC’s financial performance has manifested signs of misallocation of resources. Symptoms of malinvestments have become widespread and can now be seen from company to company.

And JFC’s 2015’s reduction of eps growth hasn’t been a deviance. It’s been the second year for JFC’s eps growth rate to decline.

JFC’s eps growth rate peaked in 2013 at 24.41%, but then sharply dropped in 2014 to 14.04%. Thus the -11.3% collapse in 2015 eps growth signifies a continuation of the 2014 momentum. (see lower window in the above chart)

Of course, the firm’s expansion programs have not been costless or cost free, which is likely the reason for “extra-ordinary expense”.

Yet if I am right, where JFC officials have blatantly misread or misdiagnosed on the economic prospects for the firm’s markets (both domestic and overseas), then it wouldn’t be farfetched that these adventurous expansions, or may I say JFC’s intrepid supply side gambit, risks transforming reduced earnings growth into earnings losses.

Moreover, the growing list of EPS growth casualties simply means that the cost to the BSP’s “trickle down” policies—that urges the elites and the “banked public” to borrow from the future to pump GDP—has arrived; the consumer mirage story has begun to unravel. And if consumer price inflation will be reignited, such will accelerate the unmasking of a populist myth.

But then again, Philippine stocks can only go up! Or so it seems…

Megaworld’s 2015 EPS Growth Nose-Dived by 52% from Real Estate Sales Slump!

Symptoms of malinvestments have become widespread and can now be seen from company to company. And the evidence just keeps pouring in.

Property firm Megaworld reported a 52% collapse in eps growth in 2015, again mainly from topline troubles.


Growth rate in real estate sales, which accounted for 61% of the firm’s NGDP or gross revenue sales, plunged to just 10.79% in 2015 from 15.79% in 2014 and 16.94% in 2013. In the context of % on the y-y growth, real estate sales dived by an incredible 32% in 2015!

In the management’s review of business performance for 2015, Megaworld didn’t seem to specify which projects accounted for the new inventories for this year (or I may have overlooked it if they have been noted in the footnote section)

Yet cascading real estate sales transfused into the bottomline: Sagging growth revenues had been met by the acceleration in the company’s business cost which ballooned 9.25% over the same year.

MEG’s bottomline was providentially rescued by a surge in rental revenue which blossomed by 23.46% in 2015 from 17.11% in 2014. Rental revenues had mainly been boosted by “escalation of rental rates and increase in demand for office space from BPO Companies”2 Rental revenues accounted for 19% of the firm’s gross sales.


And like the quintessential domestic property firms, what has been reported or recognized as “profits” have actually been largely uncollected installment sales from either NO or low downpayment financing schemes. This has been manifested by the continuing upsurge in receivables (left window) in MEG’s balance sheets.

Total current and non current receivables rose by 14.11% but this has slumped from 2014’s skyhigh 22.4%. Receivables have essentially tracked real estate sales performance.

On the supply side, real estate inventory growth exploded by 29.39% in 2015 but this has plunged from the crest of 2014’s growth rate at 43.35% and 2013’s 50%.

Slowing sales in the face of soaring inventory translates to EXCESS capacity.

Because property firms have largely been cash deficient in spite of reported “profits”, they increasingly rely on leverage to finance their business model: vendor financing scheme (sales or demand), business costs (operations) and inventory buildup (supply).

So Megaworld’s steepening leverage can be seen via the ballooning or 56.85% surge in total liabilities (right window). The firm appears to be shifting the mix of its loan bond portfolio tilted towards loans, or away from bonds. Bonds have accounted for 40% share of the firm’s total liabilities.

So firms like Megaworld are not only faced with the risk of losses from excess capacity from a deeper decline in the topline, but from increased credit risk or even from a systemic liquidity shortfall (whether incited here or from abroad)

Signs of Strains Even in Government’s Income Statement? Fiscal Deficit Rise in 2015!

If I am not mistaken many of the listed firm’s financial travails as revealed by their income statements may have already started to percolate into the government’s income statement.


Sure, from the annualized basis, 2015’s tax revenue growth rate of 11% (see top) was flat compared to the same number in 2014. With 2011 and 2012 serving as twin peaks after posting 13% growth rates a piece, however, tax revenue growth appears to have plateaued (blue trend line).

Meanwhile, government expenditures grew faster in 2015 than tax collections for the first time since 2012.

Yet seen from a monthly basis, tax revenues have been volatile in the 1H of 2015. The tax revenue surge in March (+32.33%) and May (+40.81%) has virtually buoyed and kept annual growth rates flat in 2015 relative to last year3.

But aside from such spikes, tax revenues had been in a sharp decline during the second half of the year. Tax collections even shrank by 5.5% year on year last December. December’s negative output represented the second negative growth or contraction (after April’s -6.84%) for the year.

Amidst falling revenues, the growth rate of government expenditures appears to have moderated in the 2H of 2015. But still, given that the growth rate of government expenditures had been higher than tax collections, the consequence was a bigger deficit.

As an old saw goes, there are many ways to skin a cat. And there are many ways to see view data. What’s even more interesting has been that seen from a quarterly basis, the six month decline in tax collections appears to have ‘smoothed out’ on the two monthly spikes during the 1H 2015.

Furthermore, I may be accused as looking for patterns here, but quarterly growth rates appear to be shaping a downtrend. If so, then the declining quarterly trend may eventually corroborate or confirm the plateauing momentum seen in the annualized tax revenues

It’s not difficult to discern that decelerating profits, a slowdown in consumption and economic activities will eventually ventilate its presence on taxes.

I plotted the Philippine NGDP to see if there was any pattern. Apparently the relationship hasn’t been airtight to make any comment.

But as noted above, falling tax collections in the face of greater demand for government services, such as infrastructure spending means bigger deficits
 

The BSP’s implicit subsidies to the government and to the firms owned by the elites, through “trickle down” negative real rates has impelled for the temporary closing of the budget gap from 2009 to 2014.

Of course, BSP’s subsidies have been transmitted through a credit boom that embellished GDP. The credit fueled GDP boom consequently translated into a tax collection boom which allowed government to offload her debt burdens.

But again, underneath the credit fueled GDP boom has been an orgy in the private sector’s uptake of credit, which essentially took the credit yoke from the government.

In short, the BSP’s implicit subsidies extrapolated to an embedded transfer of debt load from the government to the private sector. The fall in the government’s deficits and debt levels through a massive credit subsidy to the few “banked” entities, or mostly elite owned non-financial enterprises created an aura and imagery of exemplary standards of management by the government.

Moreover, the BSP’s implicit subsidies through artificially lowered interest means that the government has been paying less interest liabilities on its debt than it would when zero bound policies have not been in place.

Such invisible resource transfers through social policies are called financial repression

And vested interest groups which benefited from such invisible transfers vociferously lauded and promoted such scheme which they sold as ‘G-R-O-W-T-H’! And because most people think with their eyes, they bought into this simulacra and simulation hook, line and sinker.

And such populist mirage of fiscal discipline may have likely reached its turning or inflection point in 2015.

And if I am right, the sixth major costs from the BSP’s invisible transfers may be transitioning to reality. As I wrote two years ago4: (bold original)
A sixth major cost is that once the bubble implodes, government revenues will dramatically fall while government spending will soar as the government applies the so-called “automatic stabilizers” (euphemism for bailouts). This would also extrapolate to a phenomenal surge in debt levels. All these will unmask today’s Potemkin’s village seen in the fiscal and debt space.

Like government deficit, total debt (domestic plus foreign) had been on a downswing from 2009-2014.

Reduction in total debt may have climaxed in 2014 where the rate of growth of total debt inched up by only .95% during the said year. And for the first time since 2009, total debt was higher (in terms of %) in 2015 from the previous year. Total debt increased by 3.82%, which was mainly driven by foreign debt expansion at 8.12%.

Since the USD rose against the peso by 5.2% in 2015, then part the increase in the nation’s foreign debt levels stemmed from the weaker peso. The rest of the additions to debt must have accounted for the financing of the revival of deficits.

Should the momentum of faltering profits continue, then expect tax collections to stagnate as government expenditures remain ascendant. This means a widening of fiscal deficit. And the ramifications from such would be bigger government debt, greater inflation pressures and a weaker peso.

The incoming political leaders from the current national elections will be inheriting a terrible mess created and nurtured by the BSP that has benefited two previous administrations. Unfortunately, the coming administration will bear the brunt of the political backlash from the BSP engineered boom bust cycle.

March GIR: BSP’s Forex Inventory Skyrockets, Why?

Last week, the Bangko Sentral ng Pilipinas reported that March Gross International Reserves rose to $82.6 billion.


The bizarre part of March rise was that it featured a second monthly spike in the forex inventory of the BSP’s GIR.

March forex reserves eclipsed the December 2013 highs by 44%. And the $2.2 billion may signify a fresh record in the BSP’s forex holdings.

The BSP explained: This level was higher by US$0.72 billion than the end-February 2016 GIR of US$81.88 billion due mainly to net foreign currency deposits by the National Government (NG) (which include proceeds from its issuance of ROP Global Bonds amounting to US$495 million and from program loans extended by the Asian Development Bank), as well as the BSP’s income from investments abroad, and revaluation adjustments on the BSP’s foreign currency-denominated reserves.5

The National Government raised $2 billion in February of this year from the international markets. They also raised $2 billion in January of 2015, $1.5 billion in January 2014 and January 2012. In contrast to 2016, the BSP didn’t seem to incorporate deposits by the national government from the previous three international bond issuances. What seems to be the difference this time?

The March spike in forex inventory has accounted for a follow thru from a February spike (to $1.44 billion) which almost reached the December 2013 levels at $1.51 billion.

I suspected then that the BSP has resorted to derivatives in particular, forex swaps and forwards, similar to China, to window dress the GIR reserves6

Considering the USD Php February zenith of Php 47.64, has the BSP aggressively intervened in the USD Php market by selling its USD hoard or reserves? Perhaps such has been the reason for the substantial liquidations in foreign investments? And in order to offset the USD inventory loss and maintain or preserve on the GIR accounting position, has the BSP been borrowing foreign exchange through the swap markets and simultaneously hedged such borrowings with currency forwards?

Could it be that derivative forward cover contracts could soon be expiring that would lead to a hefty decline in GIRs for the BSP to have borrowed from the national government in order to cushion on the coming drop?

Interesting developments.

One Year Anniversary of April Record PSE Record 8,127: A Coming Successful Breakout of 7,400 or Déjà vu 2015?

April 10 marks the first anniversary of the landmark 8,127.48 high for the headline index the PSEi.

Yet in spite of the recent near vertical rally from end January lows, Friday’s close at 7,247.2 remains still a substantial 10.8% off last year’s feat.

Remarkably even at current levels, four issues—all of which have been holding firms, specifically, SM, JGS, AEV and GTCAP—carved fresh record highs last March and continues to drift at, or near such levels. And two of the record breakers belong to the top 3 biggest market cap while the other two have been part of the top 12.

Biggest year to date gains have accrued to the top 4 issues. (upper window) This reveals why PSEi 7,250 has been mainly emerged out of the phenomenal performance of a few elite or biggest market cap issues. Or seen from a different angle, PSEi 7,250 was partly a product of a manipulated “marking the close” pump which mainly focused on the four biggest issues.

As testament to the concentration of pumping activities, PERs of the top 4 have accounted for the most expensive (lower window).

Oddly, the current cavalcade of aerial acrobatics by these firms occurred even as earnings growth by most PSEi issues has significantly underperformed.

An example which I noted last week, SM’s ZERO earnings growth in 2015 has signified the THIRD year of earnings growth downtrend. 2015’s dismal performance was not an anomaly for the largest listed firm, it manifested a trend.

And SM’s ZERO income growth in 2015 was mostly attributable to the firm’s diminishing top line which was highlighted by her real estate’s negative growth performance. However in the current context, ZERO growth has translated to RECORD HIGH stocks!

This means that current actions at the PSE have brazenly accounted for price multiple expansions or ‘greater fools’ hoping to unload their inventories to yet bigger ‘greater fools’!

The deepening detachment between price chasing actions and fundamentals undergirds on the one directional expectations outlook, which implies of excessive optimism anchored on hope, and its corollary, the denial of strains from current accounts of underperformance.

Most importantly, price chasing actions reveals of the impassioned speculation (fear of missing out) predicated from such one directional expectations perspective

Such one directional expectation stance can clearly be seen from the PSEi’s parabolic move which occurred from the late January lows through the end of March. At no time during the last three years (or even from the last 7 years) has the PSEi behaved with such tenacity.

Yet the January to March sprint appears to have hit a wall—the May 2013 record high at 7,392 or the 7,400 psychological level—which appears to be a major resistance level. Of course, there is no such thing as resistance level for index managers or manipulators, who think that they, and not the markets, shape the charts.

Aside from the near vertical liftoff of the Phisix, in contrast to last year, a speculative rampage has engulfed activities at the broader market.


The two month ripfest has reached records of sorts in terms of the average number of daily trades (left upper window) and the average number of daily traded issues (left lower window).

Coupled with the overwhelming dominance by the advancing issues over declining issues over the said period (upper right window), the near record number of daily trades can be deduced to the frantic episodes of trade churning which involved a record high number of issues! Yet the near term supremacy of advancing issues over declining issues appear to be corroding.

And foreign trade seemed barely a factor. (lower right window)

While foreign trade reported a net buying Php 6.52 billion over the past 11 weeks, foreign buying accounted for a paltry 8% of total peso volume (Php 77.7 billion) over the same period. This means that the parabolic move by the PSEi and the wild broad market pump has largely been accounted for by domestic punters.

Moreover, while the PSEi zoomed in a near vertical fashion in the face of intensifying broad market manic speculation, the average daily volume remained substantially lackluster in relative context.

Differently put, in five occasions where 7,400 had been reached and tested (with one successful breach), from 2H 2014 through today, peso volume from current attempt has signified the LOWEST. This suggests that the frenetic pumping lacks substance.

So in perspective of the first anniversary of 8,127.48, will the fifth attempt to breach 7,400—characterized by the most ferocious pump backed by the lowest volume—be successful?

Or will the first year anniversary of record high serve as a déjà vu—another time resonant waterfall similar to its record antecedent?

_____
2 Edge.com.ph MEG 17 A with AFS and ACGR April 5, 2016

3 Debt and Fiscal data from the Bureau of Treasury
5 Bangko Sentral ng Pilipinas End-March 2016 GIR Level Reaches US$82.60 Billion April 7, 2016

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