Robinsons Retail and Robinsons Land 2023 Performance: Assessing the Health of the Philippine Consumer

  

The only way to make an economy richer per capita is by increasing per capita productivity, which means investing in productivity-enhancing research and technology and in needed infrastructure. Surging asset prices increase the wealth of individuals, but not of the system—Michael Pettis

 

In this issue:

Robinsons Retail and Robinsons Land 2023 Performance: Assessing the Health of the Philippine Consumer

I. Robinsons Retail’s 2023 Record Sales and Profit Margins Anchored on Negative Real Growth as Net Income Fell

II. RRHI’s Topline Performance in the Lens of the Consumer’s Health

III. RRHI Expands Leverage to Finance Increased Exposure to Banks as Liquidity Issues Emerge

IV. Robinsons Land’s 2023 Rental Revenues Soar to Historic Levels (Diverging from RRHI’s Performance)!

V. Record RLC’s Net Income Levels Despite Consumer Health in Question

VI. Robinsons Land’s Real Estate Sales Under Pressure; Increasing Leverage Means Escalating Fragility

 

Robinsons Retail and Robinsons Land 2023 Performance: Assessing the Health of the Philippine Consumer

Underneath the bullish headlines, the 2023 performances of Robinsons Retail and Robinsons Land unveil substantial signs of fragility.  

I. Robinsons Retail’s 2023 Record Sales and Profit Margins Anchored on Negative Real Growth as Net Income Fell

Figure 1

 

In 2023, one of the leading retail chains, Robinsons Retail Holdings [PSE: RRHI], reported an increase of 7.44% in revenues to a record PHP 192.13 billion, which was driven by a 3.71% store expansion. (Figure 1, topmost chart)

 

The 2023 revenue growth was less than half the pace of the 16.6% in 2022.

 

In 2023, its blended same-store sales registered at 3.91%, which was about a third of the 11.8% in 2022.

 

The thing is, with the annual CPI at 6%, the real revenue growth of 1.44% mainly came from new stores, as identical store sales registered a contraction. (Figure 1, middle window)

 

Interestingly, boosted by inflation, RRHI's profit margins reached a record high in 2023, which increased its buffers.

 

Nonetheless, its net income plunged by 28% in 2023 to Php 4.7 billion, or net income attributable to equity holders plummeted 29.9% to Php 4.1 billion "weighed down by foreign exchange losses, equitized losses from investment in associates and interest expense on loans," according to its annual report. (p.38) (Figure 1, lowest image)

 

II. RRHI’s Topline Performance in the Lens of the Consumer’s Health

 

Figure 2

 

In the context of the GDP, aside from benefiting from rising inflation through higher margins, the deceleration in household GDP resonated with the firm's sales per store and overall revenue growth. (Figure 2, topmost and second to the highest graphs)

 

However, the slowdown in RRHI's revenue growth was broad-based, with only the drug segment, the company's second-largest contributor after the supermarket, showing improvements in growth rates, i.e., from 10.6% in 2022 to 13.4% in 2023. (Figure 2, second to the lowest window)

 

Interestingly, the fluctuations in the CPI mirrored the fluctuations in RRHI's quarterly revenues. (Figure 2, lowest chart)

 

Said differently, the consistency of the relationship depicts causality.

Figure 3

 

And the brisk but peaking household credit boom (23.97% in 2023) appears to have contributed significantly to the slowing of its sales growth or the "law of diminishing returns".

 

Unsurprisingly, consumers increased their use of credit to offset the decline in their purchasing power, which allowed RRHI to boost its margins.

 

III. RRHI Expands Leverage to Finance Increased Exposure to Banks as Liquidity Issues Emerge

 

Curiously, RRHI increased its equity exposure in BPI to 4.4%, funded with a long-term Php 15.5 billion (Php 10.65 billion and Php 4.84 billion) loan (p.48).  (Figure 3, topmost diagram)

 

In January 2023, the Bank of the Philippine Islands merged the company's bank, Robinsons Bank, into its fold. (p.5)

 

RRHI increased its exposure to BPI to 6.5% with the recent share acquisition, which comprised about a tenth of the firm's Php 155 billion assets in 2023.

 

Consequently, the firm's interest expense soared to an all-time high of Php 3.122 billion, as the company's debt load also spiked to an unprecedented Php 21.4 billion. (Figure 3, middle chart)

 

Additionally, as the firm's cash reserves plunged from Php 17.8 billion to Php 13.2 billion, the gap between the short-term debt continues to narrow. (Figure 3, lowest chart)

 

The increasing burden of the firm's debt levels, supporting its non-retail expansion, coincides with mounting strains in credit-financed consumer spending. This suggests increasing uncertainty and risks.

 

Moreover, the retail industry appears to be undergoing an "investment boom" despite a slowdown in consumer spending, as evidenced by retail sales and income.

 

Such divergence or developing mismatches exemplify "malinvestments" resulting from the mispricing caused by inflation.

 

IV. Robinsons Land’s 2023 Rental Revenues Soar to Historic Levels (Diverging from RRHI’s Performance)!

 

Figure 4

 

RRHI's sister firm, Robinsons Land Corp [PSE: RLC], posted a 19.1% surge in rental income, the percentage share of the total soaring to 44.5%.  (Figure 4, topmost graph)

 

However, due to the 51% plunge in real estate (RE) sales, RLC's total sales growth contracted by 7.7%. (Figure 4, middle pane) 

 

Moreover, mall rental margins exploded to a record 70.5%, which powered its % share of the total significantly higher. (Figure 4, lowest two images)

 

These advances occurred even as the company's shopping mall occupancy rate was reported at 92% (or an elevated vacancy rate of 8%).

 

Once again, the soaring margins amidst rising CPI benefited big property firms like RLC, which have relied extensively on credit expansion for operations.

 

Figure 5

 

The lending growth rates of Universal Commercial Bank (UC) to the trade and real estate industry have paralleled RLC's debt growth. UC bank lending to these industries grew by 9% in 2023, while RLC’s debt expanded by 5.5%. (Figure 5, topmost image)

 

Additionally, the spike in credit card growth (30.1% YoY) has had a significant impact on RRHI and RLC's sales growth. (Figure 5, second to the highest diagram)

 

More pointedly, demand for the retail and real estate industries has been heavily reliant on bank credit.

 

V. Record RLC’s Net Income Levels Despite Consumer Health in Question

The substantial improvements in margins from the shopping mall rental and hotel businesses contributed the most to RLC's record net income levels (Php 13.4 billion) in 2023—on the back of easing growth rates. (Figure 5, second to the lowest and lowest graphs)

 

In any case, consumer conditions ultimately determine the feasibility of the retail industry and, subsequently, the leasing operations business of shopping mall operators, as well as real estate sales.

 

Unless supported by productivity growth or increases in real savings (production less consumption), credit-financed spending only draws from the future and is therefore unsustainable.

 

Worst, the crowding-out effect of the unproductive colossal government deficit spending only weakens private-sector consumption.

 

That is to say, if the retail industry struggles to increase or maintain its profit rates, this race-to-build supply or "build and they will come" precept, anchored in the assumption of unfettered consumer spending, will likely result in considerable vacancy rates and rising accounts of "white elephants."

 

VI. Robinsons Land’s Real Estate Sales Under Pressure; Increasing Leverage Means Escalating Fragility

Figure 6

 

Moving into the RLC's real estate operations, while their operations in China (Chengdu Xin Yao project) bore the brunt of the plunge in real estate sales, the slump also includes local operations, particularly the 38% cascade in the firm's horizontal projects (Robinsons Homes). (p.264) (Figure 6: highest and second to the top windows)

 

Although real estate margins soared in 2023, the decrease in sales led to a decline in its share contribution. (Figure 6: second to the lowest diagram)

 

Consistent with our earlier theme of credit-driven demand, RLC reported historic debt levels of Php 46.96 billion.

 

With a rising debt stock and higher-for-longer rates, the firm's financing costs, like its retail counterpart, also hit an all-time high at Php 1.91 billion. (Figure 6, lowest graph)

 

All of these factors have evidently been overlooked by the consensus. Essentially, increased reliance on leverage translates to weaker future demand and greater credit risks.

 

And given the interconnectedness of everything, mounting sectoral fragility translates to escalating systemic risks

___

References:

Robinsons Retail Holdings, 17-A Annual Report, PSE.com.ph, March 27,2024

Robinsons Land Corporation 17-A Annual Report, PSE.com.ph, March 25, 2024 

More Signs of Cracks in the Shopping Mall and Real Estate Bubble: Robinsons Land’s Stock Rights Offering

To raise Php 20 billion, Robinsons Land Corporation [PSE: RLC] announced on Friday that (November 24) it would undertake a ‘stock-rights’ offering “to finance the acquisition of land located in various parts of the country for all its business segments”.

Since the offering would likely involve “1 Rights Shares for every [approximately 3.6 to 4.3] Common Shares”, the number of shares to be offered could approximately be 950,000,000 to 1,100,000,000.  But the price of the stock rights had yet to be established by the company. Nevertheless, the proposed number of shares provided a clue: Php 21.05 for 950,000,000 shares and Php 18.18 for 1,100,000,000 shares.

For whatever reasons, the market reacted violently against the proposed offering. The news crushed RLC share prices by 14.63%. The market brought RLC shares (close) to its proposed offering prices. Losses of RLC share prices had been the largest for the day.

However, the decision to raise financing via stock rights offering didn’t emerge from a vacuum.

 

Though RLC reported a 28.8% spike in net income in the 3Q, the weakness during the prior quarters -7.86% in 2Q and -10.89% in the 1Q, dragged 9M net income growth to a paltry +1.54%.

Such sluggish net income performance had been offshoots to a considerably frail top-line.

9M rental revenues rose by a scant 4.66% despite the opening of 3 new malls and 2 mall expansions in 2016. Rental revenues accounted for 50.5% of RLC’s 9M sales. Rental revenue growth had been vulnerable in three quarters (Q3 +2.19%, Q2 +5.43% and Q3 6.59%).

Why so? Has the BSP’s historic free money done little to improve the mall’s occupancy rates? Have such been signs of more mall vacancies?

Real estate sales had likewise been dismal.

In 9 months, property sales plunged 16% from 3 consecutive quarters of sluggish sales (Q3 -22.49%, Q2 +6.3% and Q1 -27.89%).

With the emergent susceptibility of two major sources of revenues, 9M total revenues were down by 2.79% from last year, again mainly from consecutively fragile quarterly results (Q3 -9.62%, Q2 +3.14% and Q1 -.87%)

Has RLC failed to attract buyers despite the BSP’s inducement to increase the individual’s leveraging of their balance sheets? Or, has this been only a marketing problem? Or, perhaps a supply problem- insufficient property inventories for sale?

Even more, the conundrum RLC faces have hardly been confined to 2017. There were already signs of incipient financial feebleness in 2016; top-line and bottom-line turned considerably south. (see lower pane)

 

Debt financing has relatively been new to RLC. When it began to use debt, it became hooked on it.

And because the company relied heavily on leverage to finance its recent operations, in the face of floundering net income, financing conditions have reached a point of being strained.

So RLC officials had a choice. Tap more credit lines but increase exposure to interest rate risks and credit risks. Or, raise funds through the equity issuance from existing shareholders and let them bear the market risks.

As for the latter, since JGS controls 60.97% of RLC, then much of the Php 20 billion worth of financing from the prospective stock rights offering would emanate from the parent holding company.

If JGS uses debt for the subscription, this transfers the risk from leveraging to them

The stock rights offer may also be used by JGS to increase its control over RLC. If RLC’s share prices drop to the stock right’s price level, many stockholders may opt to pass or prefer to get diluted. JGS would then subscribe to these. If so, the question is why? Is JGS considering the option to take private RLC?

However, as a way out, I believe that this offering represents a step in the right direction to reduce RLC’s debt. If I were a part of their team I might have chosen this path too.

RLC should consider building up their strategic competitive advantages using their existing resources rather than go along with the carefree crowd in chasing returns through “increasing market share financed by leverage” - a formula for insolvency. They should instead conserve their resources and wait for opportunities.

A great too many people believe that current conditions have become immune to risk. So they readily absorb a prodigiously enormous amount of leverage to magnify returns.

And as I pointed out earlier, the BSP’s monumental free money environment has hardly helped the sales of major non-durable retail chains.

An escalation of the predicament of the consumer nondurable retail space may be triggered by two forces, one, by the market itself (massive losses from oversaturation/overcapacity), or two, from the BSP’s tightening. Feedback loops will likely to occur from the trigger point: losses lead to tightening and or tightening leads to losses.

And considering that the retail industry has been JOINED TO THE HIP with the real estate industry, losses in one of them will have a leash effect on the other. Another potential feedback loop mechanism.

RLC’s stock offering exposes this heightened fragility.

Aside from RLC, the Filinvest Megawide squabble over receivables should be another sign of mounting strains within the industry [Signs of Market Top: Financial Felony, Swindles and Fraud: Filinvest-Megawide Collection Troubles? Three Unprecedented Days of PSEi Magic! September 28, 2017]

And here’s more on the real estate.

 

An update of Philippine property prices, as of the 2Q, was provided by the Bank for International Settlements. The National Statistics Office (NSO) and an unspecified the private sector entity/-ies were the sources of the BIS data. I fused the BSP’s domestic liquidity data with them.

Property prices have risen almost conjointly with credit-driven M3 or with a little time lag.

This relationship exhibits the transmission mechanism of credit financed speculation on property prices. Rising prices have been popularly, but mistakenly, perceived as a productivity induced boom. It isn’t. It is clearly an inflationary (malinvestment) boom: a bubble (belief in attaining something out of nothing) pillared by credit expansion.

This exhibits why the BSP has been petrified of raising rates.

In fact, the BSP continues to fight pressures building on the real economy (price pressures, a.k.a. inflation), bond markets (rising yields/flattening curve) and the currency (falling peso).