To raise Php 20 billion, Robinsons Land Corporation [PSE: RLC] announced on Friday that (November 24) it would undertake a ‘stock-rights’ offering “to finance the acquisition of land located in various parts of the country for all its business segments”.
Since the offering would likely involve “1 Rights Shares for every [approximately 3.6 to 4.3] Common Shares”, the number of shares to be offered could approximately be 950,000,000 to 1,100,000,000. But the price of the stock rights had yet to be established by the company. Nevertheless, the proposed number of shares provided a clue: Php 21.05 for 950,000,000 shares and Php 18.18 for 1,100,000,000 shares.
For whatever reasons, the market reacted violently against the proposed offering. The news crushed RLC share prices by 14.63%. The market brought RLC shares (close) to its proposed offering prices. Losses of RLC share prices had been the largest for the day.
However, the decision to raise financing via stock rights offering didn’t emerge from a vacuum.
Though RLC reported a 28.8% spike in net income in the 3Q, the weakness during the prior quarters -7.86% in 2Q and -10.89% in the 1Q, dragged 9M net income growth to a paltry +1.54%.
Such sluggish net income performance had been offshoots to a considerably frail top-line.
9M rental revenues rose by a scant 4.66% despite the opening of 3 new malls and 2 mall expansions in 2016. Rental revenues accounted for 50.5% of RLC’s 9M sales. Rental revenue growth had been vulnerable in three quarters (Q3 +2.19%, Q2 +5.43% and Q3 6.59%).
Why so? Has the BSP’s historic free money done little to improve the mall’s occupancy rates? Have such been signs of more mall vacancies?
Real estate sales had likewise been dismal.
In 9 months, property sales plunged 16% from 3 consecutive quarters of sluggish sales (Q3 -22.49%, Q2 +6.3% and Q1 -27.89%).
With the emergent susceptibility of two major sources of revenues, 9M total revenues were down by 2.79% from last year, again mainly from consecutively fragile quarterly results (Q3 -9.62%, Q2 +3.14% and Q1 -.87%)
Has RLC failed to attract buyers despite the BSP’s inducement to increase the individual’s leveraging of their balance sheets? Or, has this been only a marketing problem? Or, perhaps a supply problem- insufficient property inventories for sale?
Even more, the conundrum RLC faces have hardly been confined to 2017. There were already signs of incipient financial feebleness in 2016; top-line and bottom-line turned considerably south. (see lower pane)
Debt financing has relatively been new to RLC. When it began to use debt, it became hooked on it.
And because the company relied heavily on leverage to finance its recent operations, in the face of floundering net income, financing conditions have reached a point of being strained.
So RLC officials had a choice. Tap more credit lines but increase exposure to interest rate risks and credit risks. Or, raise funds through the equity issuance from existing shareholders and let them bear the market risks.
As for the latter, since JGS controls 60.97% of RLC, then much of the Php 20 billion worth of financing from the prospective stock rights offering would emanate from the parent holding company.
If JGS uses debt for the subscription, this transfers the risk from leveraging to them
The stock rights offer may also be used by JGS to increase its control over RLC. If RLC’s share prices drop to the stock right’s price level, many stockholders may opt to pass or prefer to get diluted. JGS would then subscribe to these. If so, the question is why? Is JGS considering the option to take private RLC?
However, as a way out, I believe that this offering represents a step in the right direction to reduce RLC’s debt. If I were a part of their team I might have chosen this path too.
RLC should consider building up their strategic competitive advantages using their existing resources rather than go along with the carefree crowd in chasing returns through “increasing market share financed by leverage” - a formula for insolvency. They should instead conserve their resources and wait for opportunities.
A great too many people believe that current conditions have become immune to risk. So they readily absorb a prodigiously enormous amount of leverage to magnify returns.
And as I pointed out earlier, the BSP’s monumental free money environment has hardly helped the sales of major non-durable retail chains.
An escalation of the predicament of the consumer nondurable retail space may be triggered by two forces, one, by the market itself (massive losses from oversaturation/overcapacity), or two, from the BSP’s tightening. Feedback loops will likely to occur from the trigger point: losses lead to tightening and or tightening leads to losses.
And considering that the retail industry has been JOINED TO THE HIP with the real estate industry, losses in one of them will have a leash effect on the other. Another potential feedback loop mechanism.
RLC’s stock offering exposes this heightened fragility.
Aside from RLC, the Filinvest Megawide squabble over receivables should be another sign of mounting strains within the industry [Signs of Market Top: Financial Felony, Swindles and Fraud: Filinvest-Megawide Collection Troubles? Three Unprecedented Days of PSEi Magic! September 28, 2017]
And here’s more on the real estate.
An update of Philippine property prices, as of the 2Q, was provided by the Bank for International Settlements. The National Statistics Office (NSO) and an unspecified the private sector entity/-ies were the sources of the BIS data. I fused the BSP’s domestic liquidity data with them.
Property prices have risen almost conjointly with credit-driven M3 or with a little time lag.
This relationship exhibits the transmission mechanism of credit financed speculation on property prices. Rising prices have been popularly, but mistakenly, perceived as a productivity induced boom. It isn’t. It is clearly an inflationary (malinvestment) boom: a bubble (belief in attaining something out of nothing) pillared by credit expansion.
This exhibits why the BSP has been petrified of raising rates.
In fact, the BSP continues to fight pressures building on the real economy (price pressures, a.k.a. inflation), bond markets (rising yields/flattening curve) and the currency (falling peso).
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