San Miguel’s Stunning Race to Reach Php 1 Trillion Debt!

San Miguel’s Stunning Race to Reach Php 1 Trillion Debt!

San Miguel Corporation has spent over Php 13 billion to help people affected by the ECQ. That seems to be a cause-worthy mission.

But philanthropy isn’t the issue here.

Instead, San Miguel’s financial case proves the severe distortion of the stock market’s role as a discounting mechanism.

 

Of the twenty-six companies that have reported their respective 17-Qs for the 1Q, aside from Jollibee declaring an actual loss, the infrastructure and food holding firm San Miguel posted the largest (91%) decline in published income.

SMC’s income dived to Php 1.093 billion from Php 12.83 billion the same period a year ago, but it also reported a loss of 1.25 in earnings per share, its first in at least a decade.

Though it would be unsurprising to see declines in revenues and earnings in the period when the National Government imposed a rigorous lockdown in the latter half of March, in the face of the increasing strains on the topline, what is striking was that SMC’s debt skyrocketed by 20% or by a staggering Php 162.25 billion to Php 971.03 billion from Php 810.783 billion a year ago! On a quarter to quarter basis, SMC’s debt ballooned by an incredible Php 119 billion from Php 852 billion in 4Q 2019 to Php 971 billion in the 1Q this year!

As this happened, SMC’s interest coverage ratio (EBIT/interest expense) fell to 1.3%, below the crucial standard threshold 1.5, which should have raised doubts on the firm’s ability to meet interest expenses.

 

Curiously, the firm’s interest rate expense even dropped 3.18% despite the Php 43.25 billion of loans tacked into its liabilities in the last three quarters of 2019.

Lower interest rates must have been a crucial contributor, or actual financing expenditures may not have been declared.

Nevertheless, low rates exhibit how a company up to the eyeballs with debt can kick the proverbial can down the road.

But the day of reckoning is nigh.

  

Operating under normal conditions in 2 and a half months in Q1, SMC suffered a nasty 14.7% plunge in sales to Php 214.07 billion from Php 250.9 billion a year ago. Considering two additional months of shutdown in Q2, the loss of sales would translate to debt topping its annual sales in 2020!

Due to lack of demand, the Bataan refinery of SMC's subsidiary Petron was temporarily shut last May.

Tumbling profit margins, an extant trend since 2016, have compounded on SMC’s 1Q sales.

SMC faces escalating incredible risks (interest rate, credit, currency, and economic). About to escalate on its balance sheets woes is the interest expense from the Q1 2020 Php 119 surge in debt, as the faltering topline saps on the company’s liquidity. 

Moreover, the financing of the National Government’s record deficit in competition with banks may begin to pressure rates higher, aggravating the firm’s interest rate burden. And even though interest rates may persist at current levels, weak sales and lower prices (inflation) and compression in profit margins should aggravate the firm’s capacity to service its debts.

The ECQ, which has suspended collection of interest rates, may provide a reprieve on its beleaguered balance sheets in the 2Q. But SMC can’t hide from this.

 

In perspective, SMC’s debt would signify a stunning 4.23% of the Php 22.927 trillion domestic financial system’s resources, as of the 1Q, a historic high!

Put differently, because SMC's rate of debt growth has eclipsed the growth of the entire financial system’s resources, the size of the SMC's debt has now signified a bigger % share of the latter, thereby, raising concentration risks on a systemic scale.

Even more, SMC’s debt is not just about statistics and ratios.  Including banks, chains of local and international creditors overlap to provide financing SMC, including retail savings through bonds.   Creditors are consumers too. Some also play a role in the production and service provision side. So disruptions on credit flows may result in dislocations in many parts of the real economy.

While SMC may not be entirely representative of the entire system, the common denominator is that debt has increasingly been relied on by big-league companies to satisfy the deficit in liquidity, reflecting the banking system’s condition.

And how can an increasingly fragile SMC provide confidence to the health of the financial system?

Yet the magnification of risks has barely been incorporated in SMC’s financial prices (including stocks).

This reveals how the mainstream dismisses or glosses over the role of debt as a component of economic operations. It also demonstrates how prices have become disfigured from endless manipulations to lose functionality as a communication system of economic conditions.

Moving along to the political aspect, has San Miguel been part of the lobby group representing a large group of companies that solicited capital infusion assistance from the National Government, under the DoF sponsored PH Progesso bill?

Has SMC's philanthropic approach been designed to curry favor with the administration to bail them out?

How can the economy strongly recover when the diversion of scarce resources into unproductive, debt-soaked, capital consuming zombie companies will only escalate?