In today’s ambiance of free money, when earnings can barely grow organically, there is always the option to engineer it.
And that’s exactly the route taken by Alliance Global Group.
From their press release: “Alliance Global Group, Inc. (AGI), the investment holding company of tycoon Dr. Andrew L. Tan, has announced a two year share repurchase program of up to P5 billion. “The Board of Alliance Global has approved a share buyback of up to P5 billion over a 24-month period,” said Kingson U. Sian, president, AGI. “We are undertaking this corporate action because we believe that our shares are grossly undervalued. Our Group has been consistently profitable, with attractive growth prospects, and enjoys strong brand equity and therefore views this exercise as a means to enhance shareholder value over time.” (bold mine)
Despite the recent record breakout by the Phisix, would it not be a wonder that the market seems to have disagreed with the official AGI outlook of “undervalued” shares and “attractive growth prospects”?
A week ago, AGI was off 53% from its record highs. But because of the stock buyback announcement, the company’s share price had been jolted to rocket 15.5% over the week! Year to date returns suddenly spiked to 31.77%!
The company bought 2.487 million shares worth Php 39.4 million in two days which accounted for 5.7% of the shares and volume traded.
The buyback means the withdrawal from the outstanding, shares that were bought for the company’s treasury.
The company further boasted: “AGI posted new levels of revenues and core net profit in 2016 of P139.6 billion and P22.8 billion, respectively. Consolidated EBITDA grew at a healthy rate of 9% year-on-year to P38.8 billion, while attributable net income rose another 6% to P14.8 billion. “AGI continues to build on its strength with a business model that is time-tested and stress-tested,” according to Sian”
But that would represent only a segment of the story.
After all, the positives in today’s asset inflation environment have mostly been about the “framing” or “presentation”. Bad news would have to be buried.
Hardly anyone from the establishment would like to investigate what has been under the hood.
In reality, AGI has been drowning in debt!
Here are the numbers: The Company’s debt Compounded Annual Growth Rate (CAGR) since the end of 2012 to 2016 has been at a phenomenal 33.22%! Yes, THIRTY THREE percent!
Meanwhile, revenue CAGR was at a mediocre 8.16% over the same period. Moreover, net income CAGR has been at a lackluster rate of 2.72%!
Debt has grown over FOUR times revenue growth and TWELVE times net income growth!
In the 1H of 2017, the company borrowed a staggering Php 48.226 billion or 139% of its annualized net income. AGI posted a net income growth of Php 10.084 billion in the 1H
To put in perspective, 100% of AGI’s net income has inflated by debt. Or, AGI’s earnings have principally been dependent on debt! Said differently, AGI’s earnings have signified a mirage!
Since the company has operated in the same financial conditions for over 4 years, such underperformance cannot be discerned as anomalous. Worst, despite the supposedly upbeat sentiment by officials, the deterioration in financial conditions have only been intensifying!
AGI’s nominal outstanding debt level jumped to Php 187.888 billion in the 1H of 2017 from the Php 138.661 billion at the close of 2016. The 1H 2017 nominal level signifies a 34% increase over the company’s 2016 revenues at Php 139 billion. Stunning!
And this implies that the Php 5 billion share buyback will be financed by debt!
Fascinatingly, AGI has resorted to such financial engineering at a time when the company’s debt has escalated at a furious pace! Why?
The massaging of earnings per share by reducing the denominator or the number of outstanding shares to boost eps PLUS the company’s tinkering of its share prices corresponds to the milieu of the blatant practice of marking the close.
Yes, manipulate the markets to foster more unsustainable invisible transfers from the public to huge debtors, such as AGI
Perhaps, AGI will use the inflation of its share prices to pay down its ever-burgeoning liabilities.
However, the fact that AGI will use a significant amount of money to create a charade of superficial positives translates to the unproductive and inefficient use of capital. Worse, the leverage it uses for such exercise will translate to greater financial risks!
Many real estate-shopping mall firms such as AGI have embodied or exemplified the remarkable illusion of prosperity brought about by credit inflation.
As I have been saying here, these are signs of historic times.
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