Speculators often prosper through ignorance; it is a cliché that in a roaring bull market knowledge is superfluous and experience is a handicap. But the typical experience of the speculator is one of temporary profit and ultimate loss—Benjamin Graham
In this issue
Operation PSEi 7,000: WLCON’s Mania Anchored on the Mirage of the Statistical Low-Base Effect!
I. WLCON’s Mania Anchored on the Mirage of the Statistical Low-Base Effect
II. Surging Profit Margins as Construction Wholesale Price Rages!
III. Interest Expense Booms! WLCON Snared 20th Spot of the PSEi 30 Toppling PGOLD!
IV. Operation 7,000: Pumping WLCON, JFC, The Fantastic Four and the Big 6
Operation PSEi 7,000: WLCON’s Mania Anchored on the Mirage of the Statistical Low-Base Effect!
I. WLCON’s Mania Anchored on the Mirage of the Statistical Low-Base Effect
Wilcon Depot [PSE: WLCON] is one of the first among members of the PSEi 30 to report on its 3Q 17Q.
But first, some excerpts from our previous notes…
Because the ACEN and CNVRG model have worked initially, WLCON appears to be hurriedly incorporated into the elite PSEi 30 to boost the lackadaisical shares of its retail peers, PGOLD and RRHI.
In anticipation of the entry of WLCON, the parabolic moves likewise diffused into retail stocks.
So pushing sectors in rotation signified the overall strategy in the quest of 7,000-7,200.
PSEi 30 7,200: The Financial Bubble Triggered, The Race Between the PSEi and Bond Yields October 18
The negative policy rate regime from the BSP’s zero-bound and liquidity policies have triggered a bidding spree on select PSEi 30 issues, including WLCON.
And it is incredible how media rationalizes such bubbles.
From CNN, October 27: Wilcon Depot saw earnings spike from January to September, thanks to higher sales during the period given relatively looser quarantine restrictions, it reported on Wednesday. In a regulatory filing, the home and construction essentials retailer disclosed a net income of ₱622 million for the third quarter of 2021 — a 16.7% annual growth. It brought Wilcon’s income for the nine-month period ending in September to ₱1.87 billion, way up from the ₱984 million last year. The listed firm attributed the larger figure to “higher net sales and gross profit margin partly offset by increased operating expenses.” Net sales during the timeframe rose to ₱20.04 billion, climbing by 27% annually, according to Wilcon.
From the Businessworld, October 28: WILCON Depot, Inc.’s net income for the third quarter rose by 16.7% to P622.14 million, higher than the P533.21 million logged in the same period last year despite net sales inching down because of mobility restrictions imposed during the quarter. In a disclosure to the exchange on Wednesday, the listed home retailer reported a 1.9% dip in net sales to close the quarter with P6.62 billion from P6.75 billion year on year “in view of the almost two months of mobility restrictions as the Philippines recorded the highest number of daily cases, so far since the pandemic started.” Wilcon’s comparable sales for the quarter also declined by 9.3%. Meanwhile, gross profit for the three-month period amounted to P2.52 billion, up by 8.8% from P2.31 billion. The company’s gross profit margin rate stood at 38%.
While it is true that sales of WLCON dropped 1.9% over the quarter, attributing such slack to mobility restrictions may not be entirely accurate.
Figure 1
Perhaps fatigued from the strains brought about by the pandemic, the public seems to have forgotten that authorities also re-imposed ECQ in August 2020.
And based on the (our world in data) stringency index and (apple) mobility index, the degree of restrictions and mobility activities were almost the same.
That is to say, the effects of the ECQ have been marginal or inconsequential in comparing 3Q of 2021 and 2020.
Figure 2
In contrast, the substantial sales and profit jump in the 2Q had primarily been a function of the low base effect that embellished the 9-month performance.
That is, comparing sales in a period where the economy endured a substantial shutdown against the same period the following year where the economy had been more open.
Thus, distortions from the original 2Q 2020 ECQ magnified WLCON’s top and bottom line of 2021.
Yet, the benefits of the opening of new stores in 2021 appear to be fading.
But there is a more crucial facet to cover. That is, if the increased sales represent a value-added component or if they only signify a consumer response to the shift from office to stay-at-home work.
For instance, some of my neighbors undertook substantial renovations of their residences to accommodate in-home work this past two years.
So if it is the latter, then the recent boost in sales, aside from the low-base effect, should highlight an ephemeral event than a trend.
II. Surging Profit Margins as Construction Wholesale Price Rages!
What is most interesting is that WLCON’s profit margins ballooned in the last two quarters even as price inflation has crescendoed and has spilled over to the construction sphere.
From the Philstar, October 27: Retail and wholesale prices of building materials in Metro Manila surged in September as business activities resumed with the easing of quarantine measures in the capital, the Philippine Statistics Authority (PSA) said. The Construction Materials Retail Price Index (CMRPI) in the National Capital Region went up to two percent from 1.6 percent in August. Likewise, the latest Construction Materials Wholesale Price Index (CMWPI), which is used as a reference in the costing of government projects, rose at a faster pace of 4.6 percent from the month-ago mark of 4.3 percent.
As a caveat, the PSA’s wholesale price index constitutes public spending on construction. Nonetheless, as a proxy, wholesale prices rising above retail prices signify a margin squeeze. So from the standpoint of the PSA’s data, while construction retailers may enjoy a marginal increase in sales, it is likely counteracted by the shriveling of profit margins.
And that’s not all.
The peso also started to decline in August, amplifying higher prices of imports already affected by rising international prices.
Not all of WLCON’s products are about construction, though. As a supermarket for household and office supplies, wares, furnishings, equipment, and appliances, imports constitute a significant array of their products.
That said, some of the ramifications of the falling peso may be felt over time.
So it is fascinating to see how the company managed to lower its Cost of Goods (COG) and improve its margins substantially under this climate.
III. Interest Expense Booms! WLCON Snared 20th Spot of the PSEi 30 Toppling PGOLD!
Anyway, with huge profits, WLCON should be wafting in liquidity.
But surprise, since 2019, rate of growth of interest expenses have been escalating faster than its profits from burgeoning lease liabilities. The company incorporates its lease liabilities with long-term debt (17Q, Note 14).
The company likewise declared that Php 564 million worth of property, equipment, and investment properties as collateral to related party transactions (17Q, Note 21), which possibly extrapolates to off-balance sheet leverage.
That said, based on the annualized 2021 eps of .6133 and Friday’s price of Php 31.2, WLCON’s PER has zoomed to an astronomical 50!
From a different angle, marginal trading participants have valued the firm at about 4x its published assets!
As of October 29th, WLCON ranked 20th in the context of full market capitalization topping PGOLD, GTCAP, MPI, RRHI, and more. (As a side note, ACEN surpassed JGS as the sixth largest full market capitalization member of the PSEi 30! Amazing!)
Stunningly, the casino has priced WLCON as more valuable than PGOLD!
In 2020, PGOLD had Php 101 billion in total assets against Php 28 billion of WLCON. Or WLCON’s assets accounted for only a third of PGOLD.
PGOLD also generated P 123.5 billion in annual sales against WLCON’s Php 22.63 billion. Or, WLCON’s sales signified only one-fifth of PGOLD.
At the current rate, WLCON may end 2021 with annual sales of Php 27-29 billion.
True, PGOLD and WLCON have different markets and business models. Granted that WLCON may outperform PGOLD over the long term (which may not be true), nonetheless, the casino has presently priced WLCON as more valuable than PGOLD!
IV. Operation 7,000: Pumping WLCON, JFC, The Fantastic Four and the Big 6
As a high-flyer, WLCON’s entry to the PSEi may not have emerged out of a vacuum. Prior to its inclusion in the PSEi, surging share prices massively expanded its full market capitalization, transaction volume and liquidity, fulling the requirements as a member.
Possibly designed to reach and breach the PSEi 30 threshold of 7,000-level, WLCON's abrupt entry may have been enlisted, along with ACEN and CNVRG, to support the Big-6.
Figure 3
Signs of increased upside volatility on the share prices of WLCON contemporaries PGOLD and RRHI, as well as food chain JFC, occurred about a week before the announcement of its inclusion to the PSEi 30.
WLCON’s inclusion, and the subsequent gains, propelled the free-float market capitalization of the retail segment to the highest level ever.
In closing, thanks to the market makers/index managers and rationalizing of the establishment, WLCON’s mania stands on the mirage of projecting the low-base effect as an extended rewarding feature of the firm’s business model.
And the gullible have been mesmerized to go about wildly chasing WLCON’s share prices.
I think that the first mantra of Morning Porridge author, Mr. Bill Blain, will soon be realized:
The Market has but one objective – to inflict the maximum amount of pain on the maximum number of participants.
Yours in liberty,
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