PSEi 30 9-Month Performance: Stagflation Rules! Non Bank Borrowed Php 18.5 for Every Peso of Income Growth!
Figure 1
If there is anything that characterizes the 3Q and the 9m financial performance of member firms of the PSYEi 30 it would be stagflation.
First, the headline numbers.
The companies composing the national equity benchmark, the PSEi 30, reported an income growth of 6.87% or Php 10.95 billion in the 3Q and 6.43% or Php 31.2 billion in the 9-months of 2018.
Second, the perspective provided by its comparison with the GDP
Nominal (current priced) GDP grew by 10% in the 3Q and 10.6% in the three quarters of the year.
The comparable figure to the NGDP would be the gross revenues.
The aggregate revenues of the elite 30 would account for 33.22% of the 9-month Nominal GDP (current priced) and 33.7% of the 3Q NGDP. Such comparative numbers demonstrate the scale of the actual performance of listed companies compared to the estimated economy contrived through econometrics.
And because the revenue share of the 30 firms signifies about a third of the NGDP, a better illustration of the conditions of the real economy may be derived from their financial health.
Revenue growth had been higher at 16.38% and 16.12% relative to the NGDP growth, covering the same period.
Third, the inflation-adjusted net income performance.
Because the average CPI (2012 base) was 6.25% and 4.96% over the same period, in real terms (CPI adjusted), the PSEi 30’snet income grew by ONLY .62% and 1.47%, respectively!
You see now why the stagflation? The heady topline numbers concealed the meager value-added component. Primarily because of inflation, growth was stagnant. The money illusion worked its wonders.
Fourth, the sectoral contributions
By sector, net income of the Properties and Industrials were sharply higher at 22.28% and 21.2% in 3Q to boost net income to 17.97% and 11.14% over the 9-month period.
The Bank’s net income catapulted to 18.92% which lifted the 9-month net income to 4.75%. Their combined net income share to the total net income was 42.2% in the 3Q and 39.4% in the 9-months.
The underperformance of the holding sector at 1.89% and 6.46%, which has the largest contribution to the total at 48.6% and 49.3%, weighed most on the index. The decline of the service sector at -.34% and -3.81% also helped offset the stellar performance of the best performers.
In the 9-month period, 18 firms registered net income growth of over 10%, 5 had less than 10% and 7 recorded net income shrinkage.
The biggest winners were LT Group (+79.63%), Robinsons Land (+43.55%), First Gen (+38.31%) and Puregold (+18.45%).
The largest income contraction were recorded by PLDT (-25.6%), JG Summit (-24.01%) Semirara Mining (-22.89%) and Universal Robina (-17.03%)
Fifth, the path towards a neo-socialists state meant massive interventions.
Such interventions, particularly TRAIN, build, build and build, mining ban and inflation spurred distortions which contributed substantially to the changes in revenues and earnings performances
To name some.
As stated above, in general, gross revenue conditions have been amplified by inflation. But what inflation gave, it subsequently took away.
Inflation shifted economic activities towards property speculations. Perhaps, many bought into the marketing hokum that properties serve as a hedge against inflation. Since most property acquisitions have been funded by credit, buyers forgot that the nemesis of leveraging is higher rates, mainly a product of inflation! You can’t have it both ways!
The recently imposed excise taxes bolstered by higher world prices of energy products powered the sector’s top line that filtered to the bottom line.
Inflation is a tax. It redistributes resources. If the benefits fell into the laps of the properties and energy sectors, the costs had been borne by someone. In the present case, it is the consumers.
The spending stimulus from TRAIN’s income tax cuts on consumer and consumer-related firms have begun to erode in the 3Q
This press release from Philippine Seven Corporation captures part of such distortions: “The new TRAIN law which took effect at the start of 2018 favorably affected sales. The lower personal income tax strengthened the purchasing power of the middle class and the excise tax on sugar-sweetened beverages increased selling price but no significant decline in volume occurred. The latter brings to mind the steep increase in tobacco taxes in 2013, which also resulted in increased sales. In our view, this is because excise taxes narrow the relative price difference between premium and mass market products, and we overweight in the former. This was most evident in Q1 ‘18 with its 12.9% sssg, before inflation dampened spending.”
Philippine Seven didn’t directly say that the surge in the 3Q CPI caught up with the company’s cost of goods and administrative expenses reduced its net income growth to only .14%, its lowest 3Q growth since at least 2012, which pulled down its three-quarter growth to 13.42%. To consider, SEVN grew its stores by 12.4% over the same period!
SEVN’s top line reflected on its store expansion and INFLATION! The stimulus boom in the 1H, gone in the 3Q!
Inflation offset the benefits from the early tax stimulus to gnaw at the net income conditions of the firm!
The effects of inflation and TRAIN varied as time aged.
The same impact can be seen on other consumer and consumer-related firms: Puregold’s 3Q net income dropped to 8.93% which weighed on Jan-September growth to 18.45%. Robinsons Retail 3Q 2.23% and 9M 11.2%. Shakey’s 4.86% and 6.16%. Metro Retail -25.78% and -17.3% (aggravated by the closure of department store due to fire last January) Food and beverage producers. Sardine manufacturer Century Pacific -6.43% and +2.71%. Pepsi Cola -117.3% and -112.4%
Inflation weighed significantly in the sales slowdown of aviation services Macro-Asia’s [PSE: MAC] financial performance. From the company’s 17Q: “The decrease in consolidated RNS is a result of lower profits in MACS and MASCORP which were both impacted by higher direct costs this year, partly due to the spiraling costs of commodities due to record inflation and supply disruptions, and to the increase in manpower and nonrecurring business startup costs arising from new clients and new stations. While the revenues of both entities grew substantially by 3QYTD, the costs that were recorded in Q1 and Q2 this year were significant and could not be offset solely by 3Q results. There were also marked shortages on agricultural commodities in 3Q due to adverse weather conditions that disrupted the supply chain in Manila, resulting into higher costs of catering due to supply scarcity of a number of vegetables and fruits.” RNS-Return on Net Sales
Inflation became a significant component of sales, costs and the bottom line.
You see, price instability has become the new normal!
Meanwhile, to wangle profits from a regime of higher rates, several banks responded by loosening their credit standards significantly that pushed loan revenue growth at an unprecedented pace! Despite the splendid numbers for some banks, in reality, they were merely products of accounting gymnastics and gambling by throwing money away! In the 3Q, the banking system barely improved!
Policies against the mining industry affected many firms.
The contortions from significant policy interventions will have time-inconsistent effects so earnings performances can be expected to remain volatile or highly fluid. Time-inconsistent means that the impact of the policy today will be different tomorrow. From the US Federal Reserve: Time Inconsistency: Today’s actions = Tomorrow’s regrets!
Sixth. Debt and the Minsky Cycle
A fast rule of thumb: when firms insatiably devour on debt with constancy, published growth figures can be expected to be artificial.
Figure 2
Net income for the non-bank PhiSYx composite members grew by Php 28.121 billion or 6.67% in January to September. The same firms acquired a staggering Php 515.4 billion of debt or a growth rate of 14.07% more than 110% the net earnings growth! Or non-bank firms borrowed Php 18.5 for every peso of net income growth generated!
Holding firms borrowed Php 29.7 for every peso income growth, properties Php 3.85 and industrial Php 2.28.
Including banks where the 9-month net income growth registered Php 31.2 billion, PSEi 30 firms borrowed Php 16.5 to generate Php 1 of net income growth!
This extreme debt buildup would be the Minsky Model in action.
Minsky’s Financial Instability Hypothesis cycle as described the BSP-led Financial Stability Coordinating Council on their FSRreport:
The FIH argues that a stable economy experiencing a protracted period of economic growth will eventually transit to being comprised of financial relations that make for an unstable system. This is so because economic agents become (overly) optimistic about profitability being assured by the prolonged economic growth. This sense of security encourages them to engage more and more in debt financing as well as in speculative investments. Their increasing leverage eventually becomes unsustainable and affects the viability of investments, causing their optimism to turn into pessimism and loss of confidence. What follows is a vicious cycle of deleveraging, falling asset prices and drying up of the credit market
SMC added a monstrous Php 246 billion to take up a commanding 47% share of the total borrowings. In 2018, the company borrowed Php 172 billion in the 1Q, Php 33 billion in the 2Q, and Php 23 billion in the 3Q for a total of a humungous Php 777 billion of debt equivalent to 3.8% of the entire banking resource as of September. (figure 3)
Even if we exclude SMC’s debt, the non-banks borrowed Php 9.52 for every net income growth generated. How sustainable is this?
These firms were habituated and imbued a “borrow and spend” growth model by the BSP's Financial Repression subsidy from record low-interest rates.
And with emergent stagflation, meaning stagnant growth, new debt is being acquired to finance or rollover existing debt. Everyone’s hope is that the current environment is just temporary. Perhaps, contingency planning has been embraced by a few. For the rest, it is a “nothing can and will go wrong” mentality.
Figure 3
Debt has grown more than earnings even for SM Prime. It has been rolling along this path for the last few years. Fundamentally, SMPH serves a model to many PSEi firms. Interestingly, the firms with the highest market capitalization, have the largest gearing!
And one must not forget, the growth in revenues and net income are products of debt.
Figure 4
Finally, Pricey PER even at 7,100
The projected annualized 2018 PER from the 9-month earnings per share shows that based on Friday’s close, the average Price Earnings Ratio (PER) at 16.02, while the market cap weighted PER at 20.53.
As many have come to think, net income, PERs and or debt levels don’t matter all.
As the FSR, rightly described:
Stock market price-to-earnings ratios, on the other hand, have been persistently well past their textbook warning thresholds but there seems no evidence that investors believe the stock market to be overvalued. Whether this is a Minsky moment waiting to happen is certainly an important thought but the absence of clear-cut valuation measures for the market as a whole leaves the issue without an empirical resolution.
Well, it ain’t about empirical resolutions without clear-cut valuations measures, but rather about the easy money financed speculations, the one-way trade mentality and the deliberate gaming of market prices.
Borrowing Php 18.5 to generate Php 1 earnings in the face of rising rates? Minsky must be smiling!
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