The New Behavioral Paradigm: PSEi 30’s 9-Month Net Income Grew by 5%, Debt Expanded by 17.28%, But Year-to-Date Returns at 19%!

In this issue

The New Behavioral Paradigm: PSEi 30’s 9-Month Net Income Grew by 5%, Debt Expanded by 17.28%, But Year-to-Date Returns at 19%!

-The New Behavioral Paradigm: Market Upside is Unlimited

-3Q Net Income Jumps 18.15% Pushes 9-Month Growth to 4.94% Mostly from Non-Core Accounts

-3Q’s Poor Market Breadth and Rabid Price Multiple Expansions

-Grave Distortions on the Phisix

-PSEi 30’s 9-Month Debt Grows By a Staggering 17.28%!

-PSEi Annualized PER at 23.36!

The New Behavioral Paradigm: PSEi 30’s 9-Month Net Income Grew by 5%, Debt Expanded by 17.28%, But Year-to-Date Returns at 19%!

The New Behavioral Paradigm: Market Upside is Unlimited

Bill Blain of Mint Partners has a cogent description of the current financial market environment:

Something has changed. The downside feedback loop hasn’t functioned through 2017. Instead a new behavioural paradigm shift occurred. Investors now believe negatives don’t impact growth and that market upside is unlimited. The result has been massive gains for anyone who blithely accepts the new reality that nothing was going wrong.

So this week’s 2.64% drop in the Phisix had been a puzzle.

 

In fact, the PSEi experienced the second or third largest mark-the-close pump (in %) since 2014 on November 27!

To push the Phisix back to neutral, during the market intervention phase a whopping 79.06 points or .94% had been pumped! The grand coordinated scheme involved SM +.52%, AC +.98%, JGS +1.8%, AEV +5.0 (!), BPI +1.6%, SMPH +1.8% and ICT +3.3%.

The brazen use of market manipulations is a testament to such new behavioral paradigm where markets function as free lunch entitlements for the political patrons and their oligarch clients.

Yet, for the week, magical maneuverings intended to push up the domestic equity markets appeared to have lost their potency

Ironically, the Phisix ended the week slightly below September 14 breakout: 8,144.91

And Friday’s 8,144.02 had likewise been marginally lower than the 3Q close of 8,171.43.

3Q Net Income Jumps 18.15% Pushes 9-Month Growth to 4.94% Mostly from Non-Core Accounts

The published net income growth of the composite members of the PSEi 30 reveals to the public the evolving outrageous disconnect between markets and earnings which the former is supposed to represent.

First, the PSEi 30’s net income growth amazingly ballooned by 18.15% in the 3Q to push 9M months net income up by a measly 4.94%!

Second, the awesome 3Q net income expansion had been padded substantially by non-core operations and or by changes in accounting treatment to reflect on current deals 

For instance, Globe Telecoms (+78.44% 3Q, 10.79% 9M) reported in the 3Q 17Q: “Globe’s YTD September consolidated net income reached close to P13.0 billion, up 11% from the P11.7 billion net income reported in the same period last year. This outstanding result was maily due to the recognition of a one-time gain related to the fair value of retained equity interest of Globe in Globe Fintech Innovations, Inc. (GFI/Mynt), arising from the investment of Ant Financial Services Group and Ayala Corporation. This one-time gain offset Globe’s share in equity losses and spectrum amortization related to the SMC telco asset acquisition, higher interest expenses, and depreciation charges booked during the period.”

From PLDT’s 3Q 17Q (+57.62% 3Q, +38.0% 9M): “Consolidated Core Income for the period amounted to Php23.2 billion, 7% higher than last year’s figure. This result includes gains from the sale of our shares in Beacon Electric (Php6.9 billion) and SPi technologies (Php1.4 billion).”

From Metro Pacific’s 3Q 17Q (+35.08% 3Q, +8.0% 9M): The Company’s revenues increased by 67% to Php 18,997 million for the third quarter of 2017, reflecting (i) consolidation of GBPC which contributed 57% or Php 6,476 million to the group’s revenues…

From San Miguel’s 3Q 17Q (+97.73% 3Q, -3.52% 9M): “The increase in interest income was primarily due to higher average US dollar denominated placements of the Parent Company and average peso placements of SMB and SMC Global. The increase in cash in bank balance came from the proceeds on the sale of the investment in shares of stock of Vega Telecom, Inc. (Vega), cash generated from operations of SMB and balance of the proceeds from the P42,000 million 12-year term loan of SMC Global. The increase in equity in net earnings in 2017 primarily represents the share of SMC Global in the lower net loss of Angat Hydropower Corporation (Angat Hydro), share of San Miguel Properties Inc. (SMPI) in the higher net income of Bank of Commerce, net of provision by Ginebra San Miguel Inc. (GSMI) for future losses in Thai San Miguel Liquor Co. Ltd. The gain on sale of investments and property and equipment in 2017 pertains to the sale of service stations by Petron Malaysia to Mass Rapid Transit Corporation Sdn Bhd. Certain service stations of Petron Malaysia were closed since the lot they are occupying will be used for the Mass Rapid Transit project of Malaysia.

3Q’s Poor Market Breadth and Rabid Price Multiple Expansions

Third, even after the incredible boost in net income growth in the 3Q, the breadth of income changes remained vulnerable. In 9 months, eight firms had a reduction of net income growth reduction. Three firms registered net income growth below 5%. Finally, five issues saw net income grow by a range of above 5% to less than 10%.

 

Needless to say, despite the record rate of bank credit expansion in 9 months of the year, backed by partial BSP’s monetization of government’s expenditures, over a THIRD of the composite members of the PSEi underperformed (8 negatives +3 below 5%)!

And the skewed sectoral distribution reinforces this: the Industrials and Holding firms severely underperformed. PSEi 30 banks posted a drab net income growth, despite the BSP’s subsidies to them.

The service sector’s shining net income growth was mainly from ‘non-core’ events. Finally, the property sector, stimulated by record credit expansion, was the sole outperformer for this year!

The other stellar performer draws from mining sector’s solo representative, Semirara.

Note: I used a USD conversion rate of 50.23 (average for 9 months) for the net income of FGEN and ICT in 2017. Anyway, to reduce complexities from USD php disparities, I applied the same rate for 2016.

Fourth, “negatives don’t impact growth and that market upside is unlimited” has been embodied by the rabid price multiple expansions

 

Net earnings by the Phisix grew by only 4.94% through 9 months, yet year-to-date returns have expanded massively by 19.02% (from a high of 23.3%) in early November!

The Phisix generated a shocking excess in returns amounting to 285% of the earnings growth attained in 9 months of the year! Or, people frantically bid the PSEi by Php 3.85 for every peso earned this year!

At the current rate of net income growth, present market price levels would require at least 2.5 years to digest these

And we are to believe that the Phisix is supposedly driven by earnings growth????

Grave Distortions on the Phisix

And here’s more.

Fifth, the distribution of the Phisix has been vastly distorted.

Such benchmark is widely known for its representation of the 30 largest or most significant listed firms in the country. But such makes for a representative bias.

Because only the top 5 issues control 40% of the share, the headline index becomes vulnerable to price manipulation.

Such representation bias percolates on earnings performance as well. Most have come to believe that the financial performance of the top 5 constitutes the performance of the rest.

The lower pane in the chart above demonstrates the concentration of gains (returns), in spite of the earnings performance.

True, hyperbolic returns have not been confined to the top 5. However, the dispersion of these has been uneven.

Applied to this week’s actions, about 40% of this week's 2.64% decline was from the 6-10 ranked market cap issues. The top 5 accounted for only about 20%, mostly from the Ayala’s firms. That’s because losses by the SM group were negligible.

That said, the Sy group’s combined market weight share catapulted to 29.16% share, the highest ever, as losses incurred by the PSEi components were relatively larger

Let me further clarify what I have been saying as SMPH having allocated Php 6.35 billion in related share purchases through September. Part of the surge in SMPH’s Available-For-Sale Investments (AFS) on related party interest may have been used to push the company’s shares. Part of this likewise reflects on the inflation of Sy group share prices. Nevertheless, the SMPH’s AFS account remains pivotal in the bolstering the prices of their companies. [Charts of the Day: ROP Yields Surge! SMPH’s Php 1.44 Billion 3Q Push of Sy Owned Stocks and the Institutionalization of Price Rigging November 24, 2017]

Take SM for instance. The Sy flagship company has registered net income growth of 10.4% in 9 months of 2017. Yet, SM’s share prices have returned 47% YTD, as of Friday. Said differently, at current price levels, SM buyers paid 352% more than the 9m earnings!

Outside the manipulating of its share prices, why the frantic race to buy its shares?

SM’s median earnings in 6 years (including 9m 2017) have been 9.89%. SM’s net income CAGR has been at 9.6% in 5 years. And that’s just the surface. Or that is without taking into perspective the deterioration in sales performances in the face of such aggressive expansions.

With share prices up 352% beyond the 2017 earnings, if SM’s net income grows at the current pace, current price levels deduce to 3.5 years from which to absorb them.

The farther it would move beyond its historical fundamentals should its share prices continue to fly.

As it stands, SM earnings have become increasingly fragile from a systemwide credit expansion slowdown. Such vulnerability also implies that the company’s earnings growth may have already plateaued.

And since the zeitgeist of the Phisix is the SM Group, the same logic can be applied. That is unless the broader Phisix will take the baton from the Sy group.

PSEi 30’s 9-Month Debt Grows By a Staggering 17.28%!

And here’s what is unseen.

Sixth, debt matters a lot.

SM’s 6-year median debt has grown by 11.51%. The CAGR of debt has been at 14.29% or FORTY EIGHT percent MORE than its net income growth.

 

Because the SY group is an embodiment of the Phisix, the same dynamic applies: the 9-month debt of non-bank PSEi firms has expanded 17.28%! This growth rate is about 250% the net income growth rate of 4.94%!

In peso terms, net income of the PSEi 30 grew by Php 22.8 billion, however, debt (short+ long term including bonds) expanded by Php 386 billion! Or, the PSEi 30 borrowed Php 16.91 for every peso of net income it generated!

The good news: the aggregate 9-month debt had been whittled down by Php 52.3 billion from the 1H.

It’s not just non-banks.

To raise funds, banks have aggressively borrowed from the marketplace. Sorry, I don’t have the 3Q data.

In November alone, BPI and SECB raised Php 12.2 billion and Php 8.6 billion respectively in Long-Term Negotiable Certificates of Time Deposit (LTNCTDs). Non PSEi Union Bank also successfully solicited USD 500 million from the public in Senior Notes for its Medium Term Note Programme (“MTN Programme”).

Everyone seems to think that the escalation of systemic leveraging is COSTLESS. Risks have been pushed to oblivion or have become extinct

This discourse has been focused only on 30 biggest listed companies.

PSEi Annualized PER at 23.36!

 

Lastly, the third quarter provides a purview of the Price Earnings Ratio of the PSEi 30 for the full year, or for 2017.

Frequently cited by media and by their favored experts have been the average forward earnings.

Curiously, the PSEi 30, the benchmark frequently used, represents a free float market cap weighting system. Haven’t media and their experts realized that they are comparing apples-to-oranges? Or has it been purposely designed this way?

The most likely raison d'être for this has been that the average signifies a visual prophylaxis to reality.

Because the benchwarmers had been bid least, these issues have LOWER PERs.  An equally weighted calculation of the PER effectively diminishes the PSEi 30's exorbitance. Hence, an apples-to-oranges use of statistics could justify and encourage systematic frenzied bidding!

For an apples-to-apples comparison, a market cap weighted PER would have a striking 23.36 (Phisix 8,144)! The reason, as noted above is obvious, much of the index dressing has been about embellishing the profile of the PSEi.

So even if we discard, for the moment, the mounting maladies transmitted by FALSE price signals on the economy, viz. overcapacity, overleveraging, price instability and more, the fact that prices have been racing ahead far beyond their fundamental underpinnings represents a symptom of such deepening plague.

The comment of author, analyst and former President Ronald Reagan Director of the Office of Management and Budget, David Stockman on the US stock markets have actually been germane here,

the casinos are digesting no information except the price action and are relentlessly rising on nothing more than pure momentum. The mania has gone full retard.