Phisix Surged to 8,000 even as Net Income Posted a CONTRACTION in the 2Q and Stagnated in the 1H!

Phisix Surged to 8,000 even as Net Income Posted a CONTRACTION in the 2Q and Stagnated in the 1H!

At the start of the year, the establishment experts predicted that the Philippine stocks would rise due to twin factors; namely, the “build, build, build” golden age of infrastructure combined with tax reforms AND corporate earnings.

The median of estimated earnings growth provided by institutional experts as reported by media was at 8.5%.

The Phisix now drifts at close to the 2015 record highs. Yes, while the consensus had been right, they were right for the WRONG reasons.

First, though GDP has risen above consensus estimates, the golden age of infrastructure has yet to have its grand appearance. (see earlier: 2Q and 1H GDP: What Happened to the Domestic Consumers? Government Spending and GDP Deflator Saves the Day!

As evidence, the cement and construction industry has strayed away from amplifying statistical growth.

And so goes with the promised effects from the still to be approved tax reforms.

Instead, uncharted amounts of leverage have ballooned in 1H.

Second, in contrast to the establishment’s estimates, net income of PSEi 30 crumbled in the 2Q (-3.57%) and was stagnant (+.15%) in the 1H.

 

Even if the weighted average would be applied, 1H 2017 net income has grown by only 4.52%!

So it would take roughly a doubling of the January estimated growth rates to attain the yearend target of 8.5%.

Moreover, non-core and nonrecurring income took up a significant part in the buttressing of the cumulative current net income.

In short, to bolster cumulative net income conditions, many have resorted to accounting wizardry.

As a side note, I used USD 49.92 for FGEN and ICT’s USD based disclosures

Of course, the outperformance by key companies depended mainly on acceleration of debt absorption! I tackled this earlier. [see SM Prime’s Growth Model: In 1H 2017, Every Peso of Growth Was Funded By SIX Pesos of DEBT! SMPH Bought Php 4.9 Billion of Related Party Shares! August 13, 2017]

Here’s more.

Based on its 2Q investor presentation, SMC acquired a shocking Php 49 billion of debt in the 1H year-on-year! That would amount to 80% of the company’s combined net income for the last two years!

SMC debt has grown by an astounding 12.62% CAGR!

And at Php 549 billion, SMC’s liabilities redound to 3.07% share of the banking system’s overall resource (as of June 2017). This doesn’t mean SMC borrows entirely from banks. The point here is to establish the proportionality of credit risk to the financial system, or SMC as a Systemically Important Institution.

Aside from the lackluster eps performance, negative breadth or companies that recorded eps deficits accounted for more than a third of the PSEi 30 (13 issues in 2Q, 11 in 1H).  

In short, the murky outlook of corporate earnings had been widespread. The above numbers don’t include companies with less than 5% net income growth.

 

Though losses were much evident in the industrial sector, the interspersed deficits from many companies affected sectoral net income variably.

Finally, stagnant net income in the face of a serial massive pumping means excessive valuations.

 

The annualized average PER translates to 18.11 based on Friday’s prices, while the weighted market cap average was at 21.54!

The real reason for the rise in the domestic stock market has hardly been about earnings and the economy but mainly about redistribution or invisible transfers enabled and facilitated by the BSP. Yes, too much money chasing a limited number of financial assets promoted by both the buy and sell side industry.

 

And the final reason why the Phisix stands at where it is today has likewise been because of the rampant price fixing process.