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Shares of JG Summit collapsed 10.64% this week mainly due to the $250 million worth of share sales announced by owner John Gokongwei for allegedly for estate planning purposes.
I will apply economic analysis predicated on 'demonstrated preference' on Mr Gokongwei’s actions and extrapolate from it the likely effect or consequences on JGS share prices
Austrian economist, Murray N Rothbard explained Demonstrated Preference as
The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man's preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis, and particularly of utility and welfare analysis.
In layman’s terms, revealed or demonstrated preferences are virtually about “actions speaking louder than words”.
The fact is that whether the publicly announced goal of estate planning has been true or not, from the sale, Mr Gokongwei’s actions expressed preference for cash over equities.
Q.E.D.
Some questions:
Why would Mr Gokongwei prefer cash through equity sales to a third party? And why would Mr Gokongwei prefer not only cash but in dollars worth of cash equivalent of JGS shares priced at week ago record levels?
After all, if such were about “estate planning” then why has Mr Gokongwei not just transferred such shareholdings to his desired heirs? But that’s if Mr Gokongwei sees more value in his flagship’s shares than cash. But this does not seem to be the case.
Again why?
Could it be because Mr Gokongwei sees increasing risks in the BSP’s silver platter or windfall to him and his family?
Of course, no elite would ever say that his company is overvalued. Why would they?
Overvaluation essentially inflates on the prestigiousness of their social status as measured by their net worth. The higher the share prices of companies they own, the bigger their net worth! Overvaluation translates to higher Forbes ranking in the global wealth profile. Mr Gokongwei has been ranked 270th among the world’s wealthiest and the SECOND richest in the Philippines based on Forbes calculations
Overvaluation enhances the collateral values of their companies from which they can use to obtain more credit for business operations or expansions or even for personal consumption.
Overvaluation enhances the moneyness (exchangeability or liquidity) of the shares of their companies which enables them to use or to conduct merger and acquisitions and other share backed or collateralized deals.
Overvaluation enhances their political clout or political capital in dealing with political agents to seal political deals or obtain political privileges.
And since no elite would generally admit to overvaluation of their company’s shares, would it not be better to see through their actions as a reflection of their insights?
Could it have been that because Mr Gokongwei sees today’s prices at PER of 31.81 as unsustainable, hence the sale? The proceeds of which would be used to buyback JGS shares when they fall to more rational levels in the future?
Could it have been that Mr Gokongwei sees uncertainty in the political economic environment for him to raise not only cash but cash in USD holdings? Has the proceeds of the sale been kept abroad?
Oh by the way, the above diagram represents JGS’ first quarter 2016 topline performance. At 6.2%, growth in JGS topline has accounted for the least in the last four years. JGS’s recent cash cow has basically been from his revitalized petrochem business (excluded from the chart) in the face of slower business conditions in 1Q 2016 relative to 1Q 2015.
Could this have been the reason or one of the reasons why cash was preferred to equities?
Yet if JGS share prices continue to advance, will the 82.1 level serve as a threshold for Mr Gokongwei to further sell shares for “estate planning purposes”?
If so, has Mr Gokongwei now served as a major resistance (as implicit seller) to any destabilizing speculation on JGS shares?
Or has Mr Gokongwei’s move been designed to self-regulate against speculators?
But JGS will be spending aggressively in 2016 according to media. Of course the devil is in the details. And minds can change, just look at the incoming president.
Nevertheless, if the sale has signified a politically oriented action, could it be that Mr Gokongwei may continue to hedge his wealth through even more share sales in the name of estate planning with proceeds stored abroad?
Very interesting developments.
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