Last weekend, I demonstrated how prices of Philippine stocks have risen vertically from an earnings placebo effect—panic buying over the delusion of G-R-O-W-T-H even when reality shows that fundamentals have almost nothing to do with it.
Fundamentals have really provided nothing but entertainment value.
But let me add to this entertainment.
This afternoon the largest listed company holding firm SM Investments released their 2Q and 1H 17-Q (financial statement).
The 17 Q Management discussion section divulged: “SM Investments Corporation and Subsidiaries (the Group) reported Revenues of P151.1 billion and Net Income Attributable to Owners of the Parent of P15.0 billion in 2016. This represents an 8.5% growth in Revenues and 11.1% growth in Net Income Attributable to Owners of the Parent.”
The actual numbers for the 1H were 8.75% for revenue growth and 10.28% eps growth, the highest in two years!
Nice recovery right? Well that’s what the surface says.
Last weekend I also propounded that subsidiary SMPH’s earnings have “largely emerged from accounting artifices, surging inventories, and importantly, skyrocketing leverage.”
Well the performance of the parent firm SM just confirmed on my suspicions.
Inventory.
The above chart shows of the % change of revenue contribution during the 1H by the largest segments of SM’s business units. Sales of retail (70% share), rental (13% share) and real estate (9% share) which constituted 91% share of 1H 2016 revenues, posted growth rates of 8.64%, 9.93% and 5.34% in the 1H respectively.
Now to the retail segment’s inventory.
For 1H 2016: “As of June 30, 2016, SM Retail had 328 stores nationwide, namely: 55 SM Stores, 47 SM Supermarkets, 147 Savemore stores, 45 SM Hypermarkets and 34 WalterMart stores.”
In 1H 2015: “As of June 30, 2015, SM Retail had 289 stores nationwide, namely: 51 SM Stores, 41 SM Supermarkets, 127 SaveMore stores, 43 SM Hypermarkets and 27 WalterMart stores.”
So for the year 2016, the inventory or number of stores in the retail segment grew by 13.49%!
In terms of relative growth performance, growth in retail outlets has surpassed by a huge margin growth in retail sales in the past 3 of the last 4 years.
The numbers: 2016 stores 13.49% versus sales 8.64%, 2015 stores 16.06% versus sales 6.07% and 2013 25.14% vis-à-vis 13.24%. Inventory grew by about double the sales growth in 2015 and 2013!
For 2016, 1.56% inventory growth generated 1% sales growth.
It’s only in 2014 where sales outclassed inventory 9.1% in contrast to 8.73%.
In short, the marginal additions of retail stores have critically driven retail sales. Yet the mammoth difference between growth rates of new stores and sales reveals of the huge unused capacity! This is a conspicuous sign of inefficiency in SM’s capacity utilization.
Now to the shopping malls.
1H 2016: “As of June 30, 2016, SM Prime had 58 malls in the Philippines and 6 malls in China”.
1H 2015: “As of June 30, 2015, SM Prime had 52 malls in the Philippines and 5 malls in China”.
It would have been more accurate if the company actually made their presentations in the context of number of malls PLUS actual gross selling area. Unfortunately this doesn’t seem to have been incorporated in the FS.
Nonetheless in 2016, the inventory of SM Malls expanded by 11.54%!
But sales grew by just 9.93%!
Now the above chart should be a better picture, or if not, a more splendid depiction of SM’s faltering business growth paradigm.
Yet has it not been a paradox to see the LARGEST increase in the rate of mall inventory growth in 1H of 2016 COINCIDE with the SMALLEST revenue growth in the past 4 years?
That’s right. SM’s magnificently growing surplus capacity or huge additions to malls have doneLITTLE to enhance on the marginal growth of the firm’s overall mall sales! In short, the trends above reveals of SM Malls suffering from DIMINISHING returns!!!
And there you have it folks…the rapid turnover and vacancies as illustrated by the widening abyss between performances of the topline and capacity!
Accounting gymnastics.
And one more thing, same store sales as reported by the company, for the past four year have surprisingly been steady or unwavering at 7%! (see chart above) Topline and bottom line numbers have changed but same store sales look like a numerical tautology or incantations by SM.
Such are signs of accounting acrobatics which seem to validate my earlier insights: “I have deep reservations when SMPH claims that there was a 7% same store sales in rent revenues. Reason? SM Malls have now plagued by massive store churning and rising accounts of vacancies.”
Astounding leveraging.
And we are not even talking about real estate (vertical condos) projects.
Nevertheless, the incredible rate of capacity expansions translates to SM spending MORE than it has been earning.
Since they have been spending more, then the financing gaps must be filled. So exactly how will this quandary be bridged?
Well, by DEBT of course.
SM’s use of gearing has steadily grown. Debt CAGR has been at 14.91% over the past 4 years! That would be 57% faster than the SM’s topline growth rate during the same period at 9.5%! Or SM has generated Php 1.57 for every peso revenue growth!
If debt has been growing faster than sales, then how much in terms of eps? In short, if such trend will continues this translates to lesser and lesser free cash to service debt, operations and expansions.
Eventually the accelerating size of SM’s debt will also contribute to the profit squeeze via higher debt servicing costs, aside from the ongoing deterioration in topline performance via diminishing returns and from growing surplus capacity (not limited to SM but to the industry).
Such kind of businesses models would hardly transpire under a sound money environment. Said differently, the BSP’s trickle down negative real rates policies have only been subsidizing unproductive engagements as this.
SM has already been hooked on this model. They cannot stop. The rate of expansions needs to grow faster, otherwise the chink in their armor will be revealed.
However, despite aggressive expansions, fierce industry competition expressed also via massive capacity acquisitions would also translate to weakening performance ahead for SM and for the industry as a whole. Or the law of diminishing returns on the industry points to even more inefficiencies and wastages that will be revealed in the form of even more store vacancies.
Nonetheless, since the rate of expansion has to be financed, then SM’s debt will likely swell as fast—as it has been doing today.
Such debt for growth models eventually hit a wall. Signs are already present in both numbers (widening chasm between topline and supply growth rates) and in the ground—turnovers and vacancies.
As with Troy, Achilles was exposed as vulnerable after all…through the unshielded heels. Lesson: what seems as insuperable isn’t.
SM would need to pray for a miracle to reverse the current trend.
But not to worry because SM prices have been drifting at all-time highs.
Finally, I don’t know if the PSE has become inept or has purposely neglected the required adjustment of SM’s PER ratio as part of their cheering propaganda campaign.
SM declared a 50% stock dividend that had a record date in August 3. It’s been 6 days from the announcement, yet the PER reflected at today’s closing price of Php 697 a share have been from the pre-dividend eps. Divide 697 by 35.68 to get the PER of 19.53.
Nonetheless at today’s close, 2015 based PER should be at 29.3. If based on 1H annualized earnings, SM’s PER should be at 28.01.
It’s bad enough for the PSE to have been converted into a grand casino den. It’s even worse when the PSE can't or won't do basic jobs.
Yet more signs of pivotal history in the making.
No comments:
Post a Comment