URC’s Possible Change In Share Price Dynamics

(edited version from newsletter)

One of the outliers or exemplary performers of the Philippine Stock Exchange has been Universal Robina Corporation . It is one of the two stocks that has your investor analyst bemused all this time (in my radar screen since 2003) considering that it has significantly outperformed the market in general, the index or its industry contemporaries. Figure 3 shown below shows how URC has upstaged its colleagues.

Figure 3: URC (red line) has been consistently bested Alaska Milk (blue line) and San Miguel B (green line) over the past two years.

Consider this, since the bottom or the inception of the bullrun in 2003, from the yearend 2002 priced at Php 2.75/share until Friday’s close, URC has unnoticeably returned an astonishing 545% almost equivalent to gain of PLDT! In comparison over a similar period, measly returns can be found among URC’s peers, namely, Alaska Milk +63.6% and San Miguel B +25%. Ginebra San Miguel even posted a negative 40% defying the market’s buoyancy seen in the runup of mid 2003 to 1^st quarter of 2005.

So what has URC accomplished to merit above gravity returns? In my view, none. While URC has the best top line growth average for the past three years among its peers by a margin, it appears to be priced at the top-end of the industry, meaning URC cannot be construed as inexpensive relative to its industry leagues. I have to admit though that I haven’t scrutinized the annual report or financial papers of URC or its competitors and have instead depended on the financial valuation ratios provided for by pinoyfinance.com to make this curtly ‘generalization’. You’d have to give me the leeway for possible deficiencies.

However, another thing I’ve learned from my mentor (in some of his choice of stock investments~ of course, again this would be unorthodox or against your traditional or textbook way of selecting stocks) is the selection or positioning on issues by virtue of the so-called possible “drivers” or “jockeys” relative to particular issues. He believes that certain personalities (usually insiders or owners or associates thereof) would be engaged in M&A or Joint Venture (JV) or other corporate activities or at least a semblance of, that would eventually whet the investor’s imagination and/or appetite for a speculative punt in an attempt to drive up stock values.

For instance, in the case of URC, prior to the recently concluded secondary offering, according to some accounts, the company shares floated in the market ranged from 5 to 10%, or even to as low as about 3.0% according to the Philippine Daily Inquirer. Essentially, this means higher demand for unliquid issues can drive prices to stratospheric levels as that of URC and vice versa.

And here is where my theory goes...Since the owners of the company could have lined up a secondary offering way back as an early part of their corporate strategy, their objective could be as ingeniously simple: to optimize fund raising by driving up share prices to optimal levels. In essence, to sell more shares to the public it had to contrive an image of past success!

Maybe the owners of the company could have been partially responsible for levitating share prices indirectly (through varied associate firms or individuals) seconded by the bullish backdrop during the early leg of the bullish phase in 2003-2005. Simply put, they could have jockeyed up the shares from the lows of Php 2.75/share up to the 20’s (the bulk, of course, would cost below the price offering) and sold it back to the public at Php 17/share (including their additional 25 to 30% shareholdings equates to profits galore)! Since the market float then was about 5% of total capitalization, it would cost a minimum to drive up share prices considering the known war chest of the owners!

Using our back of the napkin tabulation, total shares traded from January 2003 until Friday’s closed was at more or less 198 million shares (inclusive of cross trades) compared to the recent float of 634 million shares or roughly 31% of the offering. That is to include last week’s activities; URC traded over 33 million shares during its relisting (inclusive too of cross sales). Excluding last week’s trade and assuming a 50% take up by our protagonists; at an average of P 12 per share (high side of estimates) it would roughly cost them in the range of P 800 million to Php 1 billion worth of buybacks (again high sides of estimates) during the past two years to achieve a return of about P 10 billion (the 25-30% float comes with a par value P1)! Amazing.

Of course, the natural advantage of a vastly market floated shares are manifold, such that it enables the company to reallocate or redirect profits to “maximize shareholder value” by investing on projects that may increase returns, to allow for more liquidity to enable foreign fund managers (institutions, mutual funds and hedge funds) to acquire significant shareholdings, such that the company maybe included in their portfolios~ for prestige and returns objectives, and to accommodate in strategic investors who may share their technical or technological expertise or gain entry to new markets.

The major disadvantage would be is that if my underlying assumption on the dynamics of URC’s share prices is accurate, then it has fundamentally changed. For one, motives to increase share prices by the abovementioned economic agents has now shifted to the market for determination. Second, given the larger supply of shares into the market, it would be more costly to drive share prices unless accompanying demand for the company’s shares rises in tandem, from which local speculators are unlikely to have the funds to finance for a punt. Third, in all likelihood, URC’s share performance would now shadow (plus or minus on a margin) that of the activities of the Phisix.

All told, my suggestion is not to project URC’s past into the future. You may likely get disappointed.