The consensus holds that the prices of the stock market are a reflection of the health of the economy and corporate conditions
How valid has this been?
SM delivered a staggering 51.15% return in 2017!
So what were SM punters actually paying for?
From the Company’s Press release for 2017 (dated February 28) [bold added]
SM Investments Corporation (SM) reported a 6% growth in net income to PHP32.9 billion in 2017 from PHP31.2 billion in 2016. Consolidated revenues rose 9% to PHP396.1 billion from PHP363.4 billion last year.
Huh? Some people frantically bid up SM shares by 51.15% for only a SIX percent Growth???!!!
Or, some people paid for 8.5 years of the firm’s earnings. How rational is this?
It gets better.
From the 9 months or 3Q Performance in 2017 (November 8, 2017)
SM Investments Corporation (SM) reported consolidated net income rose 8% to PHP23.8 billion for the first nine months of the year. Recurring net income, net of one-time items, climbed 13%. Consolidated revenues likewise grew 8% to PHP272.2 billion for the period from PHP252.7 billion in the same period last year.
Going into the final quarter of 2017, SM reported an 8% in net income growth (9 mos), yet for the entire year, net income growth skidded to a mere 6% growth!
These numbers reveal that SM’s 4Q performance has been SIGNIFICANTLY DISMAL to have PULLED down the 9-month net income growth numbers. Through their press releases, I estimate that Net Income in the 4Q registered a slight contraction (-1.09% y-o-y)! The slack in 4Q activities came at the time when SM share prices went berserk, breaking records upon records and pulling along with it, the Phisix!
From the Press release for 2016 (March 1, 2017)
SM Investments Corporation (SM) reported an 8% growth in net income to PHP31.2 billion in 2016. Property accounted for 39% of total earnings, with banks comprising 37% and retail 24%. SM’s consolidated revenues grew 9% to PHP362.8 billion for the period, up from PHP332.8 billion in 2015. This was driven by an 8% increase in retail revenues and a 12% growth in property revenues.
And 2017’s net income growth was slightly lower than 2016’s!
The upper chart showcases the divergence of SM’s share prices with its fundamentals.
SM’s share prices soared in 2015 (+6.01%), 2016 (+13.72%) and 2017 (+51.15%) in the face of stagnant revenue growth (2015 +7.0%, 2016 +9.01%, 2017 +9.0%) and lackadaisical income growth (2015 unchanged, 2016 +8% and 2017 +6%). If inflation is factored in these numbers shrink by even more!
SM’s real growth is in its DEBT! As of 9 months, SM’s debt expanded a staggering 15.54% or more than double the net income growth of 6% to a massive Php 49.7 billion (or 50% more than the Php 33 billion net income growth)
Ballooning debt on decaying fundamentals.
SM core retail stores swelled by 11.92% in 2017. Core retail stores are SM Stores, Supermarkets, Hypermart, Savemore, and Waltermart.
Total retail stores went down by 3.7% to 2,032 in 2017 from 2016’s 2,110. That’s because SM pruned its specialty outlets by 16.5% to 1,299 from 2016’s 1,556. Some growth eh?
And as Ayala-SSI dumped Familymart, SM’s 24/7 Indonesian franchise Alphamart ballooned by 65% to 348 outlets in 2017 from 210 in 2016.
In 2017, SM was silent about changes in retail net income performance.
Operations under SM Retail Inc., which consist of non-food (THE SM STORE and specialty stores) and food stores (SM Markets), reported total revenues grew 7% to PHP297.4 billion, while net income stood at PHP10.4 billion.
In 2016, SM reported a Php 10.6 billion increase.
Operations under SM Retail Inc., which consist of non-food (THE SM STORE and specialty stores) and food stores (SM Markets), reported sustained growth in total revenues of 8% to PHP276.5 billion, while net income grew 7% to PHP10.6 billion from PHP9.9 billion the previous year.
So SM Retail’s net income fell by 1.9% year on year!
In the 3Q of 2017, SM retail’s net income was up by 10%
Retail operations under SM Retail Inc. reported growth in total sales of 6% to PHP197.9 billion while net income rose 10% to PHP7.7 billion. Revenues from Specialty Retail grew 9%
In the 3Q of 2016, SM’s retail net income was up by 6%
Retail operations under SM Retail Inc. reported sustained growth in total sales of 9% to PHP186.0 billion while net income grew 7% toPHP7.0 billion. Revenues from recently acquired specialty retailers grew 13%.
A back of the envelope calculation tells us that 2017’s net income of Php 10.4 billion minus 9-month net income of Php 7.7 billion totaled Php 2.7 billion net income in the 4Q 2017.
Since SM Retail’s 2016 net income was Php 10.6 billion and 9m net income was Php 7.0, the difference or 4Q 2016 net income was Php 3.6 billion. (2.7/3.6=.75)
Thus, SM Retail’s 4Q income growth TUMBLED by a whopping 25%, which led to a 1.9% decline in net income growth in 2017!!!
So the additional inventory of retail outlets led to ironically a decline rather than income growth.
Remember, TRAIN took effect only in January 2018
So has SM retail reached peak growth???????????
SM Malls have been growing in number, but smaller in sizes. SM Malls expanded 11.67% to 67 malls in 2017 as against 60 malls in 2016. However, Gross Floor Area (GFA) in sqm grew by 3.9% to 8 million from 7.7 million in 2016.
So far, revenue growth of SM Malls has remained at a steady 9% over the past two years. The company has not provided explicit details indicating the net income contribution of the malls. Nevertheless, additional inventories have barely been augmenting the company’s topline performance.
This information should be available once the company’s annual report is published (probably by next week).
Eventually, what happens in the retail space should be reflected on the malls.
The detachment of SM’s share prices with its fundamental performance represents a prima facie evidence of the massive impairment of the domestic stock market’s pricing system.
And how has SM attained its fabulous feat in the context of returns despite stagnating fundamentals?
In a word: Manipulation
SM has been a major beneficiary of organized pumping at the PSE since late 2014.
Friday’s magical pump, which eviscerated 1% of losses, had partly been due to a massive 1.3% pump on SM. The other major recipients of coordinated and engineered bids were SM’s subsidiaries: BDO (+2.1%) and SMPH (+2.4%)
For the week, these end-session pumps-and-dumps accrued to staggering 296.06 points or 3.5% of the Phisix based on the close of February 23!
SM’s 51.15% return in 2017 was accompanied by a colossal jump in its share weight in the PSEi 30 to 12.88% from 11.31% or an increase of 13%.
As of last Friday, the SY group accounted for 28.56% share of the Phisix. It reached a high of 29.27% in the second week of January. At the close of 2016, the combined share weight was only 25.21%. The index has been beholden to the performance of the Sy group
Day in day out, the PSEi 30 has been experiencing intensifying price spikes as the PSE, the SEC, and the BSP continue to keep their eyes wide shut.
With thousands of highly paid experts, there has been no realization that when you mess with the pricing system of the markets, you foster imbalances from which eventually prices will have to clear. Expecting free lunch forever; everyone seems fixated on the present.
Yet, the festering of imbalances has begun to escalate. SM’s fundamentals should be a noteworthy example.
And no amount of price fixing will forestall its day of reckoning.
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