An Update of Jollibee’s PacMan Strategy: In the Lens of 2Q and 1H Financial Performance

An Update of Jollibee’s PacMan Strategy: In the Lens of 2Q and 1H Financial Performance

From the Business Mirror (August 6): HOMEGROWN food giant Jollibee Foods Corp.’s (JFC) attributable profit dropped by half in the second quarter of 2019, dragged by losses in its recently acquired US burger chain Smashburger, alongside lower sales from Red Ribbon. In a disclosure to the stock exchange on Monday, the listed company said net income attributable to the parent fell to P1.12 billion from April to June, 50.2% lower than the P2.25 billion it posted in the same period a year ago. This followed a 6.7% increase in revenues to P43.67 billion.

Figure 1

Jollibee’s domestic sales growth, which dropped to multi-year lows, in the face of falling gross profit margins, played a crucial role in the halving of its bottom line.

Figure 2

And has Jollibee’s domestic sales growth somewhat mirrored the household consumption GDP, which peaked in 2016?

Falling margins may have prompted JFC’s management to look at volume expansion as a substitute, hence the decision to ramp up investment overseas*.

*Jollibee’s Fantastic Paradigm Shift: From Consumer Value to Aggressive Debt-Financed Pacman Strategy March 3, 2019

Figure 3

The share of domestic sales has dropped from a high of 81% in 2011 to nearly 74% in the 1H 2019. However, from its apex of 67.33% in 2015, the share of domestic assets has declined to 53.14% in the 1H of 2019.

Despite the lower share weight relative to the total, foreign sales have taken a pivotal role in determining JFC’s profitability.

Well, this Bloomberg article quoted a local expert rationalizing the steep fall of its share prices following the JFC’s announced acquisition of Coffee Bean, “Its aggressive push outside could be a signal its home market is getting saturated. And if you valued Jollibee for its Philippine focus, would you still give it the same value with its growing overseas business?”

As a wrote last March,

“JFC’s external recourse may be about the weak peso. As a means or a strategy to hedge against this, the company engaged in foreign FDI. However, JFC may be venturing into the unknown or to unfamiliar markets, where its competitive advantage may be deficient. It may not possess the same quality of knowledge and expertise in dealing with foreign consumers.”

And the “home market is getting saturated”? Well, has this been so hard to notice? JFC has been aggressively expanding horizontally through Mergers and Acquisition (M&A) financed by debt, benefiting from the BSP's easy money regime. And aside from falling margins, perhaps they have come to realize that the pockets of Filipino consumers have limits, and so the overseas M&A gambit.

Again from March, “And JFC’s monopolistic behavior, via its Pacman strategy, has been consistent with this.”

Figure 4

Following its international M&A binge, which has led to a massive buildup of debt, JFC’s interest expense has been rocketing (73.4% in the 1H)! So, with deepening exposure overseas, JFC portfolio becomes increasingly sensitive to overseas developments.

What happens when today’s slowdown in the global economy picks up speed and morphs into a recession? And what happens if the Philippines join the world?

Phoenix Petroleum Bailouts Ayala Land-SSI in FamilyMart, Why Have Consumer Loans Been Weakening?

Published October 9th, three listed companies announced the completion sale of the FamilyMart chain three Mondays later or on October 30, subject to the approval of the government’s Philippine Competition Commission (PCC).

Didn’t I say that the news was, in reality, a corporate press release which implicitly advertised the sale of FamilyMart?

Though presented as news, another way to read the article is to construe it as an advertisement in favor of the sellers. 

Ayala Land-SSI Group’s FamilyMart For Sale? Media Expert Utters an Economic Taboo: OVERSUPPLY! October 9, 2017

Wow, what a fast break; three weeks to sell a business worth hundreds of millions of pesos!

Isn’t this (press release cum news) a very effective advertisement medium?

I purposely labeled the FamilyMart sale a ‘bailout’. The buyer, Phoenix Petroleum essentially bailed out, the sellers, the Ayala Land and the SSI Group consortium, from their miseries in the convenient chain sphere. (I discussed the convenient store predicament then)

Why? Because the disclosures of the Ayala Land [PSE: ALI], the SSI Group [PSE: SSI], and Phoenix Petroleum [PSE: PNX] hardly mentioned any conduct of due diligence in the transaction process. Also, there had barely been clues, even from media, of preliminary discussions by the transacting parties, antecedent to the October news broadcast.

Mr. Dennis Uy led Phoenix Petroleum bought the company with seemingly scanty information!

It would appear that there had been little haggling or bargaining in the transaction.

Moreover, the buyer’s complete confidence and trust in the sellers could have been a factor in deal’s closing.

Or maybe the self-assurance displayed by Phoenix was due to its political backing.

Technically, because the approval of the government is required, the deal was reportedly completed through a Memorandum of Understanding. Perhaps, PNX would use the waiting period for the necessary due diligence. But then again the deal supposedly had been finalized.

As a side note, since the government arbitrarily defines of competition, which consequently means establishing which deal or deals falls within its allowable parameters, being a favorite of the administration assures a luscious payoff.

Moreover, stringently regulated competition hardly represents free market competition at all. Instead, it works as a protective wall favoring cronies against the free market competition. If I had been a part of PCC, I’d work to emasculate such legal barriers and promote genuine competition.

Of course, who else can afford to make such expeditious decision?

The buyer, a close ally of the administration, as I previously noted, seems on a grand buying spree.

Mr. Uy’s fortune is on a roll. The Duterte government’s Philippine Amusement and Gaming Corp. have reportedly awarded the businessman’s consortium a gaming license to operate an integrated casino in Cebu. Perhaps the firm will get listed too. This means more transfers from the public’s savings to Mr. Uy’s businesses. Of course, the BSP’s easy money policies will facilitate for such implicit subsidies.

The PSE’s Jinx, Political Entrepreneurship as a Winning Formula and Banking Fraud as Symptom of Market Tops, July 24, 2017

Mr. Uy’s flagship Udenna acquired listed logistic company 2GO early this year, which it tacked into its recently listed subsidiary Chelsea Logistics [PSE: CLC].

Mr. Uy’s Udenna also reportedly finalized a deal to acquire a company developing a $1-billion 177-hectare logistics hub called Global Gateway Logistics City in Clark City, just two weeks ago!

Bear in mind, because of its intricate process, Mergers & Acquisitions are a complex dynamic. But, Mr. Uy has strikingly truncated and simplified them. As testament, these mammoth deals were concluded in about 8 months! Ain’t these signs of ingenuity?!

Yet, one would have to wonder from whence the wherewithal of these deals has been sourced?!

So the acquisition of FamilyMart would most likely be financed by MORE debt or possibly by political money looking for legitimacy and or partly through public listings.

And according to the grapevine, the Sys have cozied up to Mr. Uy; BDO has accommodated a credit facility worth $300 million to Mr. Uy’s firms. 

Yet, who among the establishment outfits would refuse to partake of freebies from politically erected financial moats?  Of course, such opportunities would signify more than just about easy profits. Of greater importance would be access to political power.

Put differently, in a statist political economy, the privilege of the being close to the political leadership would be about access to rent-seeking economic opportunities and its protection.

Therefore, under these circumstances, wouldn’t it be intuitive that Mr. Uy should receive an avalanche of offers from various sources, a greater amount of credit and equity money?

To reemphasize what I wrote last July

This means more transfers from the public’s savings to Mr. Uy’s businesses. Of course, the BSP’s easy money policies will facilitate for such implicit subsidies

So have I not been validated?

The rapidity of the deal should likely benefit Ayala Land and the SSI group more than PNX.

Since there could have been little bargaining involved, ALI and SSI could have gotten more in value than had it sold to other buyers. Or, PNX bought FamilyMart with a lot less discount from the sellers. Prices are likely less elastic (or price sensitive) for politically motivated buyers.

Importantly, the ALI-SSI consortium sold at the top of the present business cycle.

Finally, with the majors giving up on the retail convenient chain sector, this should be a momentous (tipping point) event for the industry!

Why Have Consumer Loans Been Weakening?

On a related note, the Bangko Sentral ng Pilipinas published last Monday, the monthly loan activities of the banking system

While the rate of growth of industry loans (+20.68%) jumped to its highest level since November 2011, the rate of growth of consumer loans significantly weakened (20.05% in September, 22.76% in August, 22.3% in July and 22.54% in June)

 

Consumer loans had been plagued mainly by the declining rate of auto loans (24.47% in September, 30.22% in August and 28.14% in July) and by the plunging rate in payroll loans (15.3% in September, 18.85% in August and 23.52% in July) which had a 44% share and 13.23% in September, respectively.

Meanwhile, the growth rates of credit cards have rocketed to its highest level in the last 5 years.

The decline in auto bank loan portfolio dovetails with the substantially slowing rate of sales growth in units registered by the car industry as reported by CAMPI auto since mid-2016.

Payroll loans, which constitute the lower segment of the income group, have significantly slowed since July of 2016.

And customers of retail convenient chains have likely constituted this sector of bank borrowers.

On the other hand, raging growth in credit cards could signify two things; financial inclusion- more unbanked consumers seeking the access of formal credit - or consumers with bank accounts now tapping increased credit lines to expand their spending capacity.

 

The plummeting payroll loan growth rate has hardly supported the former. However, the latter could extrapolate to inadequate income growth in support of present lifestyle.

With spiraling real economy prices (upper window*), such lifestyle may now be under duress. Hence, to cover shortfalls in income growth consumers have now used credit cards.

*I am assuming here that government’s data is accurate.

Nevertheless, higher CPI leads to lower headline GDP. (middle window) That’s because Real GDP is derived from nominal GDP (NGDP) deflated by the PSA’s measure of inflation.

And as of the 3Q, the government’s CPI remains lofty.

Finally, the government’s measure of consumer spending seen via the national accounts or the Household Final Consumption Expenditure (HFCE) appears to lead the rate of change in the BSP’s consumer loans (lower window)

If the government data has some accuracy to the real world, then ALI-SSI’s exit makes them a genius!

And pressure on the consumer won’t be limited to convenient chain stores, there will be spillover effects.

At the end of the day, there is no such thing as a free lunch – forever.

Moody's Warns on Rocketing US High Yield Spreads as Raising Risks of Recession

I am no fan of credit rating agencies, but current developments appears to prompt even the establishment to worry about the unpleasant ramifications of  deteriorating credit spreads on the economy.

From John Lonski at Moody’s (bold mine)

Volatility is king. Markets have been indifferent to claims that the latest broad sell-off of equities, lower quality corporate bonds, and certain emerging market currencies exaggerate any worsening of observable fundamentals. However, observable is the key adjective in the prior sentence. The two latest recessions were partly the consequence of markets not knowing the full extent of deteriorations in household and business credit quality. Not everything can be quantified, if only because some very critical things are hidden. Never underestimate the importance of thorough accounting. For now, it’s hard to imagine why the equity market will steady if the US high-yield bond spread remains wider than 800 bp. Taken together, the highest average EDF (expected default frequency) metric of US/Canadian non-investment-grade companies of the current recovery and its steepest three-month upturn since March 2009 favor an onerous high-yield bond spread of roughly 850 bp. Recently, the high-yield spread approximated 800 bp. (Figure 1.)

A wider-than 800 bp high-yield spread reflects elevated risk aversion that will reduce capital formation and spending by non-investment-grade businesses. In addition, ultra-wide bond yield spreads favor a continuation of equity market volatility that should sap the confidence of businesses and consumers.

M&A’s record pace may prompt more M&A-linked downgrades As derived from data supplied by Bloomberg, mergers and acquisitions (M&A) involving at least one US company soared higher by 19% annually to a new zenith of $3.336 trillion for yearlong 2015. A cresting by M&A may offer valuable insight regarding the state of the business cycle. The two previous yearlong peaks for US company M&A were set in Q3-2007 at $2.213 trillion and in Q1-2000 at $1.745 trillion. Recessions struck within one year of each of those peaks. Also, both previous peaks for M&A preceded a topping off of the quarter-long average for the market value of US common stock. (Figure 2.) For 2015, US-company M&A approximated 162.3% of pretax profits from current production and a record 18.6% of US GDP. The erstwhile record high ratio of M&A to GDP was the 17.8% of the year-ended Q1-2000. Year-end Q3-2000’s 215.1% still serves as the apex for the ratio of M&A to profits. During the early stages of an upturn by M&A, M&A-linked credit rating revisions show more upgrades than downgrades. For example, M&A-linked rating changes showed more upgrades than downgrades during 2010 through 2012, or after M&A activity had bottomed in 2009. However, M&A figured in more downgrades than upgrades once new record highs were set for M&A in 2000, 2007 and 2014. (Figure 3.)

Read the rest here

Chart of the Day: Most Expensive Stocks—US and Emerging Asia

This chart from an article from the Telegraph reveals the cheapest and the most expensive stocks in the world (based on their own measures):

Some caveats noted by the article:

1 inadequate data:

The Mr Troue said this was useful for markets such as Britain and the US where there is plenty of data available, but for emerging market nations such as China and India, where data is not as widely available, it does not work so well.

2 reasons for 'cheapest'

Some stock markets will be cheap because the countries are in the midst of economic turmoil – this certainly rings true for Greece and Turkey, which both have fragile economies. Highly indebted Greece, in particular, has been trying to get its house in order.

As noted, the reason many are cheap has been because markets have priced heavy debt burdens as an obstacle to fundamentals. China's PBoC and Japan's BoJ for instance hopes to submerge fundamentals with manipulation of the markets via flooding the market with fiat money and by direct interventions.

3 reasons for the 'priciest'

The main reason for the lofty valuations is that these stock markets have performed well in recent years. This pulled in other investors and has left these markets substantially overpriced.

I’d have an opposite causal view of the above; “performed well” has been a function of “pulled in other investors” predicated on the mostly fallacious G-R-O-W-T-H story, which has mainly been underpinned by massive debt acquisition. 

In short, speculative frenzies financed by cheap money always looks for excuses to justify their actions. Excessive speculations or manias are symptoms of the bandwagon effect—the piggybacking on momentum—which leads to overvaluation.  

Simply said when stock market returns exceed growth in fundamentals then price multiple expansions are the logical outcomes. This implies that if growth has really been the story then there won’t be egregious mispricing.  

Proof of this can be seen in the pricey ASEAN equity markets: debt accumulation by several major companies has ballooned dramatically for the S&P to recently warn on increasing vulnerability to default. This is what I call as widening adaption of “Ponzi financing”. 

So whatever G-R-O-W-T-H seen in corporate (or even macro) fundamentals have mainly been a mirage brought by credit expansion. Take away credit and G-R-O-W-T-H vanishes.

The article doesn’t include the Philippine phisix, but if one takes a look at how Indonesia or Thailand has fared along with the Phisix (chart from Bloomberg), the Philippine index has outperformed her peers during the past 5 years. So I’d place the Phisix among the world’s most expensive along with her peers.

Oh by the way, as sign of credit expansion driving fundamentals, Global M&A financed by junk bonds are at record levels.

From the Wall Street Journal (bold mine)

As of last Thursday, junk-rated companies had borrowed $92.5 billion in the high-yield bond markets for acquisitions. That’s up 40% from the year-earlier period and the highest on record for any comparable stretch, according to Dealogic. 

US equity boom financed by M&A (but currently has been on a downturn)

M&A-related bond borrowing has accounted for roughly 30% of all new offerings in the U.S. bond market this year, said Marc Warm, head of U.S. high-yield capital markets at Credit Suisse Group AG . 

He pointed out, however, that such borrowing is down from previous M&A booms. “When we look back at times like 2005, 2006 and 2007, the M&A component of the market was 40% to 50%,” he said. “It was a meaningful difference than where it is today.” M&A activity has begun to slow recently. While global M&A value for the year stood at $2.90 trillion as of Thursday, the highest level since 2007, October’s deal value, at $227.1 billion, was the weakest for October since 2011, according to Dealogic. 

Highest level since 2007, doesn't this ring a bell?
Take away credit and G-R-O-W-T-H and its attendant equity BOOM vanishes.

Philippine Mining Index Surfs The Commodity Tide

Domestic mining issues have been one of the recent ‘darlings’ of the Philippine Stock Exchange for the second week.

The Rising Commodity Tide

And these have been happening on the backdrop of record metal prices mostly led by precious metals.

Sizzling hot silver (+51% year to date) has skyrocketed reportedly from a massive short squeeze[1] and so with also gold (+5.91%).

Meanwhile copper also drifts near its record price highs even if its year-to-date performance has been lacklustre (marginally down .63%).

Importantly, prices of commodity products lead mining issues, and this phenomenon seems to take place around the world as global mining issues (S&P/TSX), Emerging Market Mining Titans (EMT), Gold Bugs (HUI) and Industrial Metals ($DJAIN) can be seen in an ascending trend (red line).

Philippine Mining Index Surfs The Tide

Domestic Mining issues have likewise been markedly moving higher too.

Since mid-2010, major mining component issues as Philex (black candle), Semirara (blue), Lepanto (green), Atlas (violet) and Manila Mining (orange) have lifted the Philippine Mining Index (red line). These companies constitute about 89% of the Philippine Mining index and whose pecking order shown above are based on market capitalization.

Some may suggest that the current price actions have been prompted by corporate deals. For instance, the yet to be formalized joint venture agreement of Philex with Manila Mining [MA] for the combined development of Philex’s Boyongan with Manila Mining’s Kalayaan properties[2].

While this may be partly true, one should understand the function of the market is to discount the flow of information that are perpetually being disseminated through the ticker tape. I call this the diminishing returns[3] or the marginal value of information as market prices incorporate future expectations rather than the present or the past.

In other words, there are bigger forces than just mergers and acquisitions (M&A) or joint ventures that drive equity share prices. Although, M&A and JVs characterize the climate of the underlying bull market trend.

Looking at the bigger picture, chart actions reveal of the same narrative: Mining issues has been on an uptrend since 2009, but the actions differ in terms of degree and in timing.

As I earlier described in 2009[4], (bold emphasis original)

Since the domestic mining industry remains broadly underinvested and where current crops of mining firms lack the capital to expand or operate, the major catalysts for prospective runs would be speculations on joint ventures and or prospective M&A developments from new investors (they could be foreign or local godfathers)

Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.

A sustained bullmarket in commodities- arising from monetary “pass through” or from BRIC and emerging markets demand- is likely to underpin the secular case for investing in local mines.

Compared to other sectors mines are likely to generate ALPHA.

IT has not always been a boom, nonetheless nearly all of what we have described above been fulfilled.

And the rotation has not been limited to companies within the mining index but signifies largely a phenomenon of the general market, as different sectors flow in a single direction but gets differentiated by timing and by the degree of price motions.

Yet there will always wall of worries to climb.

Anti-Mining Politics, It’s Economics Stupid!

The recent landslide in Compostela Valley that has resulted to 3 fatalities, has largely been blamed on the mining activities.

In the understanding of the public’s anti-mining bias which has been buttressed by the Church, and the attendant environmental hysteria that has been promoted by mainstream media, accidents like this could lead to a political backlash that could risk political outcomes. Though I would say that this is likely to be attention-span based which means public’s attention is usually short term, fickle and limited and would shift to new controversies as they emerge.

Yet the anti-mining political hysteria fails to distinguish that the environmental hazards emanate NOT from market based mining activities but from underground based activities as consequences of the feckless prohibition laws.

As the Inquirer reports[5],

Many of these operations are illegal and unregulated, and there are frequent accidents, Reuters said in a report.

The point is: One CANNOT legislate away demand and supply. Politics can only shift them.

If resources, as mineral commodities, are there for the picking, and considering that these products has been generating higher values (ergo MORE profits), then either the markets or political means will resolve its extraction.

The essence is, since these politicized commodities have imputed economic values, then prohibition laws won’t stop the economics of mining.

It’s downright dimwittedness for anyone to suggest they can.

And if politics is the chosen option, then mining will become either an activity rewarded as concessions to the politically favoured—who would seek to please the political benefactors as their priority than of the environment—or an activity that will be implemented in a guerrilla warfare fashion. Of course, the latter would most likely operate under the inferred blessings of venal local officials.

In addition, in guerrilla type of mining operations, since illegal miners operate under temporary implicit licenses or are reckoned as completely underground, this implies that operators won’t care about the environment since they are illegal anyway.

Besides, illegal operators are most likely to be amateurs from within the locality or from the surrounding areas, instead of professional miners. Thus by rendering illegitimate the industry, this would lead to more frequency of accidents and of damages in larger scales.

Yet unknown to most, because economics is what drives the mining business, prohibition laws would only breed and nurture corruption. High profits and reduced competition would allow illegal operators to payoff politicians and the police.

Again it is all about economics.

So the more the prohibition, the more we can expect accidents from underground activities to take place.

Conclusion

Rising commodities prices have been filtering into global mining issues.

We see the same phenomenon impact the local market.

Momentum appears to favor a continued rise.

Political risks from recent catastrophe may affect mining sentiment on the short run but this should be muted.

In terms of politics, prohibition laws won’t ever succeed to stop the forces of demand and supply. It’s just the distribution that changes.

Yet the above dynamics has once again been validating my predictions since 2003, as published in safehaven.com[6] (there are two more articles I published thereafter[7])

The prospects of a continuing rise in commodity prices due to the tightening of supplies and possibly in combination with mounting demand from the rapidly expanding China and India, or from the steep fall of the US dollar, should highlight the potentials of mining and resource based companies in our region too.

No trend moves in a straight line. Yet, mining issues will function as the main beneficiary of inflationism and the emerging market consumption story.

So I’d stick by them. So should you. (My other favourite industry would be technology)

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[1] See Hi Ho Silver! April 23, 2011

[2] Philstar.com Manila Mining says deal with Philex on Kalayaan 'done', April 20, 2011

[3] See “I Told You So!” Moment: Being Right In Gold and Disproving False Causations, March 6, 2011

[4] See Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!) November 15, 2009

[5] Inquirer.net 15 buried miners saved, April 24 2011

[6] Safehaven.com The Philippine Mining Index Lags the World, September 26, 2003

[7] Safehaven.com Author Benson Te