If
you’re unhappy with what you’ve had over the last 50 years, you
have an unfortunate misappraisal of life. It’s as good as it gets,
and it’s very likely to get worse. It’s always wise to be
prepared for it getting worse. Favorable surprises are easy to
handle. It’s the unfavorable surprises that cause the trouble. In
terms of monetary authorities, you can count on the purchasing power
of money to go down over time. You can almost count on the fact that
you’ll have way more trouble in the next 50 years than we had in
the last. The technology is changing, so that a few nutcases could
make the World Trade Center look like a picnic. We should all be
prepared to adjust to a world that is harder.—Charles
Munger, Vice Chairman of Berkshire Hathaway
In
this issue
Phisix
7,250: More Proof of 2015’s EPS Fiasco: Crashes in JOLLIBEE and
MEGAWORLD’s EPS Growth! PSEi’s Record 8,127’s First Anniversary
-JFC’s
2015 Net Income Growth Crashed Big Time on Dwindling Topline!
-Megaworld’s
2015 EPS Growth Nose-Dived by 52% from Real Estate Sales Slump!
-Signs
of Strains Even in Government’s Income Statement? Fiscal Deficit
Rise in 2015!
-March
GIR: BSP’s Forex Inventory Skyrockets, Why?
-One
Year Anniversary of April Record PSE Record 8,127: A Coming
Successful Breakout of 7,400 or Déjà vu 2015?
Phisix
7,250: More Proof of 2015’s EPS Fiasco: Crashes in JOLLIBEE and
MEGAWORLD’s EPS Growth! PSEi’s Record 8,127’s First Anniversary
JFC’s
2015 Net Income Growth Crashed Big Time on Dwindling Topline!
I
have noted last week, that contra mainstream early predictions of
double digits growth, 2015 has signified to be an earnings
G-R-O-W-T-H FIASCO!
And
the earnings growth debacle has mainly been brought about by
pressures on corporate topline, or their respective NGDPs, which has
evolved to become a systemic problem
rather than just based on a few firms or industry.
But
does it matter? Earnings or no earnings stocks can only go UP!!!
Current
divergence of record high stocks in the face of earnings degradation
can be seen not only in some of the record high biggest market cap
issues that has weightlifted the PSEi to its current level, like SM
Investments and AEV (stunningly -4.33%
2015 and -12.71% 2014) but also in another top 15 ranked firm,
specifically—the largest fast food chain in the Philippines,
Jollibee Foods Corporation (PSE: JFC).
As
a side note, JFC will most likely publish their annual report next
week.
However,
it has been interesting to see JFC exhibit at their February 9 press
release that eps growth for 2015 actually CONTRACTED! (see upper
window)
So
like SM which income growth collapsed to ZERO, JFC even trekked to
the NEGATIVE zone!
Well,
who says stocks represent the discounted value of the stream of
future cash flows or about income growth???
Like
SM, in the case of JFC, smaller income growth translates to near
record HIGH stock prices!!!!
JFC’s
share price has been up 5.3% year to date as of Friday. The latest
serial pumping entailed to a Price Earning Ratio (PER) of an eye
popping or NOSE BLEED 45.4 (as of April 7) as well as, a staggering
Price to Book (PBV) of 7.98!
And
JFC has just been off by 2.2% from a new record (as of Friday)
As
income growth materially decreases, stock prices skyrocket!
Absolutely stunning.
On
their broadcast, the company splurges on the G-R-O-W-T-H theme by
focusing on the ‘growth’ aspects while leaving the decaying
segment to a single paragraph.
Nonetheless,
the press release did mention and blamed “extra-ordinary expense”,
which totaled Php 903 million, for the decline in operating income of
31.8% for the quarter and 9% for the year. Basic eps growth actually
crashed by an astounding 11.3% in 2015! (see lower window in the
above chart)
Since
the annual report has yet to be published, here is my guess,
“extra-ordinary expense” has emerged from the firm’s massive
expansion program to resuscitate its falling topline hence the
dwindling eps.
JFC’s
profit pressures can be traced to its topline woes.
JFC’s
top line growth continues to ebb. In 2015, gross revenues grew by
11.15% which has been down from 12.94% and 12.98% in 2014 and 2013
respectively (see upper window of below chart). The peak in JFC’s
growth was in 2011 at 17.2%. JFCs’ gross revenues/NGDP has been in
gradual erosion for the past 4 years!
Note
that about a quarter of gross revenues are from overseas operations.
Perhaps
the decline
in the rate of store expansion, which has mirrored on the topline
performance, has prompted for JFC’s officials to commit to a more
ambitious expansion program.
Yet
intriguingly, 2015’s pronounced decline in JFC’s topline occurred
even when the company aggressively expanded (upper window). Total
supply via worldwide stores of the JFC group ballooned by 9.4% in
2015. This excludes stores from affiliates, for instance, newly
acquired Smashburger’s 352 outlets.
In
the other words, JFC
officials seem to think that the topline erosion has strictly been a
supply side issue, hence the supply side response.
The company stated that in 2016 capex budget would amount to Php 10.4
billion, with Php 7.5 billion allotted for new stores and the balance
for renovations. They seem to think that demand trend would remain
intact or static.
Yet
JFC officials hardly seem to realize that their predicament may have
been rooted from the law
of diminishing (marginal) returns.
And
JFC’s diminishing marginal returns may be a function of mostly
three major factors: demographics (JFC stores increasing faster than
population/market), demand (JFC stores expanding faster than
consumer’s income growth) and competition (aggregate supply growing
faster than aggregate demand, or in layman’s terms, more and more
fastfood stores competing for your peso).
Of
course, JFC has a diverse, and not homogenous, line of food
businesses. But still, the array of variegated retail food themes
focuses on consumers, whose spending depends on those three economic
factors.
So
in spite of the 9% surge in JFC’s retail outlets, topline revenues
continue to diminish.
Like
SM, this extrapolates to the
increasingly inefficient use of resources
(as measured by output per store), or worst, growing
signs of excess capacity.
And if it is the latter, then throwing good money on even more
wasteful activities will only lead to losses and eventually drain the
firms’ savings (retained earnings)
JFC’s
financial performance has manifested signs of misallocation of
resources. Symptoms
of malinvestments have become widespread and can now be seen from
company to company.
And
JFC’s 2015’s reduction of eps growth hasn’t been a deviance.
It’s been the second year for JFC’s eps growth rate to decline.
JFC’s
eps growth rate peaked in 2013 at 24.41%, but then sharply dropped in
2014 to 14.04%. Thus the
-11.3% collapse in 2015 eps growth signifies a continuation of the
2014 momentum. (see
lower window in the above chart)
Of
course, the firm’s expansion programs have not been costless or
cost free, which is likely the reason for “extra-ordinary expense”.
Yet
if I am right, where JFC officials have blatantly misread or
misdiagnosed on the economic prospects for the firm’s markets (both
domestic and overseas), then it wouldn’t be farfetched that these
adventurous expansions, or may I say JFC’s intrepid supply side
gambit, risks transforming reduced earnings growth into earnings
losses.
Moreover,
the
growing list of EPS growth casualties simply means that the cost to
the BSP’s “trickle down” policies—that urges the elites and
the “banked public” to borrow from the future to pump GDP—has
arrived; the consumer mirage story has begun to unravel. And if
consumer price inflation will be reignited, such will accelerate the
unmasking of a populist myth.
But
then again, Philippine stocks can only go up! Or so it seems…
Megaworld’s
2015 EPS Growth Nose-Dived by 52% from Real Estate Sales Slump!
Symptoms
of malinvestments have become widespread and can now be seen from
company to company. And the evidence just keeps pouring in.
Property
firm Megaworld reported a 52% collapse in eps growth in 2015, again
mainly from topline troubles.
Growth
rate in real estate sales, which accounted for 61% of the firm’s
NGDP or gross revenue sales, plunged to just 10.79% in 2015 from
15.79% in 2014 and 16.94% in 2013. In the context of % on the y-y
growth, real estate sales dived by an incredible 32% in 2015!
In
the management’s review of business performance for 2015, Megaworld
didn’t seem to specify which projects accounted for the new
inventories for this year (or I may have overlooked it if they have
been noted in the footnote section)
Yet
cascading real estate sales transfused into the bottomline: Sagging
growth revenues had been met by the acceleration in the company’s
business cost which ballooned 9.25% over the same year.
MEG’s
bottomline was providentially rescued by a surge in rental revenue
which blossomed by 23.46% in 2015 from 17.11% in 2014. Rental
revenues had mainly been boosted by “escalation of rental rates and
increase in demand for office space from BPO Companies”
Rental revenues accounted for 19% of the firm’s gross sales.
And
like the quintessential domestic property firms, what has been
reported or recognized as “profits” have actually been largely
uncollected installment sales from either NO or low downpayment
financing schemes. This has been manifested by the continuing upsurge
in receivables (left window) in MEG’s balance sheets.
Total
current and non current receivables rose by 14.11% but this has
slumped from 2014’s skyhigh 22.4%. Receivables have essentially
tracked real estate sales performance.
On
the supply side, real estate inventory growth exploded by 29.39% in
2015 but this has plunged from the crest of 2014’s growth rate at
43.35% and 2013’s 50%.
Slowing
sales in the face of soaring inventory translates to EXCESS capacity.
Because
property firms have largely been cash deficient in spite of reported
“profits”, they increasingly rely on leverage to finance their
business model: vendor
financing
scheme (sales or demand), business costs (operations) and inventory
buildup (supply).
So
Megaworld’s steepening leverage can be seen via the ballooning or
56.85% surge in total liabilities (right window). The firm appears
to be shifting the mix of its loan bond portfolio tilted towards
loans, or away from bonds. Bonds have accounted for 40% share of the
firm’s total liabilities.
So
firms like Megaworld are not only faced with the risk of losses from
excess capacity from a deeper decline in the topline, but from
increased credit risk or even from a systemic liquidity shortfall
(whether incited here or from abroad)
Signs
of Strains Even in Government’s Income Statement? Fiscal Deficit
Rise in 2015!
If
I am not mistaken many of the listed firm’s financial travails as
revealed by their income statements may have already started to
percolate into the government’s income statement.
Sure,
from the annualized basis, 2015’s tax revenue growth rate of 11%
(see top) was flat compared to the same number in 2014. With 2011 and
2012 serving as twin peaks after posting 13% growth rates a piece,
however, tax revenue growth appears to have plateaued (blue trend
line).
Meanwhile,
government expenditures grew faster in 2015 than tax collections for
the first time since 2012.
Yet
seen from a monthly basis, tax revenues have been volatile in the 1H
of 2015. The tax revenue surge in March (+32.33%) and May (+40.81%)
has virtually buoyed and kept annual growth rates flat in 2015
relative to last year.
But
aside from such spikes, tax revenues had been in a sharp decline
during the second half of the year. Tax collections even shrank by
5.5% year on year last December. December’s negative output
represented the second negative growth or contraction (after April’s
-6.84%) for the year.
Amidst
falling revenues, the growth rate of government expenditures appears
to have moderated in the 2H of 2015. But still, given that the growth
rate of government expenditures had been higher than tax collections,
the consequence was a bigger deficit.
As an old saw goes, there
are many ways to skin a cat. And there are many ways to see view
data. What’s even more interesting has been that seen from a
quarterly basis, the six month decline in tax collections appears to
have ‘smoothed out’ on the two monthly spikes during the 1H 2015.
Furthermore,
I may be accused as looking for patterns here, but quarterly growth
rates appear to be shaping a downtrend. If so, then the declining
quarterly trend may eventually corroborate or confirm the plateauing
momentum seen in the annualized tax revenues
It’s
not difficult to discern that decelerating profits, a slowdown in
consumption and economic activities will eventually ventilate its
presence on taxes.
I
plotted the Philippine NGDP to see if there was any pattern.
Apparently the relationship hasn’t been airtight to make any
comment.
But
as noted above, falling
tax collections in the face of greater demand for government
services, such as infrastructure spending means bigger deficits.
The
BSP’s implicit subsidies to the government and to the firms owned
by the elites, through “trickle down” negative real rates has
impelled for the temporary closing of the budget gap from 2009 to
2014.
Of
course, BSP’s subsidies have been transmitted through a credit boom
that embellished GDP. The credit fueled GDP boom consequently
translated into a tax collection boom which allowed government to
offload her debt burdens.
But
again, underneath the credit fueled GDP boom has been an orgy in the
private sector’s uptake of credit, which essentially took the
credit yoke from the government.
In
short, the
BSP’s implicit subsidies extrapolated to an embedded transfer
of debt load from the government to the private sector.
The
fall in the government’s deficits and debt levels through a massive
credit subsidy to the few “banked” entities, or mostly elite
owned non-financial enterprises created an aura and imagery of
exemplary standards of management by the government.
Moreover,
the BSP’s implicit subsidies through artificially lowered interest
means that the government has been paying less interest liabilities
on its debt than it would when zero bound policies have not been in
place.
Such
invisible resource transfers through social policies are called
financial
repression
And
vested interest groups which benefited from such invisible transfers
vociferously lauded and promoted such scheme which they sold as
‘G-R-O-W-T-H’! And because most people think with their eyes,
they bought into this simulacra
and simulation hook, line and sinker.
And
such populist mirage of fiscal discipline may have likely reached its
turning or inflection point in 2015.
And
if I am right, the sixth major costs from the BSP’s invisible
transfers may be transitioning to reality. As I wrote two years ago:
(bold original)
A
sixth major cost is that once
the bubble implodes, government revenues will dramatically fall while
government spending will soar as the government applies the so-called
“automatic stabilizers” (euphemism for bailouts). This would also
extrapolate to a phenomenal surge in debt levels. All
these will unmask today’s Potemkin’s village seen in the fiscal
and debt space.
Like
government deficit, total debt (domestic plus foreign) had been on a
downswing from 2009-2014.
Reduction
in total debt may have climaxed in 2014 where the rate of growth of
total debt inched up by only .95% during the said year. And for the
first time since 2009, total debt was higher (in terms of %) in 2015
from the previous year. Total debt increased by 3.82%, which was
mainly driven by foreign debt expansion at 8.12%.
Since
the USD rose against the peso by 5.2% in 2015, then part the increase
in the nation’s foreign debt levels stemmed from the weaker peso.
The rest of the additions to debt must have accounted for the
financing of the revival of deficits.
Should
the momentum of faltering profits continue, then expect tax
collections to stagnate as government expenditures remain ascendant.
This means a widening of fiscal deficit. And the ramifications from
such would be bigger government debt, greater inflation pressures and
a weaker peso.
The
incoming political leaders from the current national elections will
be inheriting a terrible mess created and nurtured by the BSP that
has benefited two previous administrations. Unfortunately, the coming
administration will bear the brunt of the political backlash from the
BSP engineered boom bust cycle.
March
GIR: BSP’s Forex Inventory Skyrockets, Why?
Last
week, the Bangko Sentral ng Pilipinas reported that March Gross
International Reserves rose to $82.6 billion.
The
bizarre part of March rise was that it featured a second monthly
spike in the forex inventory of the BSP’s GIR.
March
forex reserves eclipsed the December 2013 highs by 44%. And the $2.2
billion may signify a fresh record in the BSP’s forex holdings.
The
BSP explained: This
level was higher by US$0.72 billion than the end-February 2016 GIR of
US$81.88 billion due mainly to net foreign currency deposits by the
National Government (NG) (which include proceeds from its issuance of
ROP Global Bonds amounting to US$495 million and from program loans
extended by the Asian Development Bank), as well as the BSP’s
income from investments abroad, and revaluation adjustments on the
BSP’s foreign currency-denominated reserves.
I
suspected then that the BSP has resorted to derivatives in
particular, forex swaps and forwards, similar to China, to window
dress the GIR reserves
Considering
the USD Php February zenith of Php 47.64, has the BSP aggressively
intervened in the USD Php market by selling its USD hoard or
reserves? Perhaps such has been the reason for the substantial
liquidations in foreign investments? And in order to offset the USD
inventory loss and maintain or preserve on the GIR accounting
position, has the BSP been borrowing foreign exchange through the
swap markets and simultaneously hedged such borrowings with currency
forwards?
Could
it be that derivative forward cover contracts could soon be expiring
that would lead to a hefty decline in GIRs for the BSP to have
borrowed from the national government in order to cushion on the
coming drop?
Interesting
developments.
One
Year Anniversary of April Record PSE Record 8,127: A Coming
Successful Breakout of 7,400 or Déjà vu 2015?
April
10 marks the first anniversary of the landmark 8,127.48 high for the
headline index the PSEi.
Yet
in spite of the recent near vertical rally from end January lows,
Friday’s close at 7,247.2 remains still a substantial 10.8% off
last year’s feat.
Remarkably
even at current levels, four issues—all of which have been holding
firms, specifically, SM, JGS, AEV and GTCAP—carved fresh record
highs last March and continues to drift at, or near such levels. And
two of the record breakers belong to the top 3 biggest market cap
while the other two have been part of the top 12.
Biggest
year to date gains have accrued to the top 4 issues. (upper window)
This reveals why PSEi 7,250 has been mainly emerged out of the
phenomenal performance of a few elite or biggest market cap issues.
Or seen from a different angle, PSEi 7,250 was partly a product of a
manipulated “marking the close” pump which mainly focused on the
four biggest issues.
As
testament to the concentration of pumping activities, PERs of the top
4 have accounted for the most expensive (lower window).
Oddly,
the current cavalcade of aerial acrobatics by these firms occurred
even as earnings growth by most PSEi issues has significantly
underperformed.
An
example which I noted last week, SM’s ZERO earnings growth in 2015
has signified the THIRD year of earnings growth downtrend. 2015’s
dismal performance was not an anomaly for the largest listed firm, it
manifested a trend.
And
SM’s ZERO income growth in 2015 was mostly attributable to the
firm’s diminishing top line which was highlighted by her real
estate’s negative growth performance. However in the current
context, ZERO growth has translated to RECORD HIGH stocks!
This
means that current actions at the PSE have brazenly accounted for
price
multiple expansions
or ‘greater fools’ hoping to unload their inventories to yet
bigger ‘greater fools’!
The
deepening detachment between price chasing actions and fundamentals
undergirds on the one directional expectations outlook, which implies
of excessive optimism anchored on hope, and its corollary, the denial
of strains from current accounts of underperformance.
Most
importantly, price chasing actions reveals of the impassioned
speculation (fear of missing out) predicated from such one
directional expectations perspective
Such
one directional expectation stance can clearly be seen from the
PSEi’s parabolic move which occurred from the late January lows
through the end of March. At no time during the last three years (or
even from the last 7 years) has the PSEi behaved with such tenacity.
Yet
the January to March sprint appears to have hit a wall—the May 2013
record high at 7,392 or the 7,400 psychological level—which appears
to be a major resistance level. Of course, there is no such thing as
resistance level for index managers or manipulators, who think that
they, and not the markets, shape the charts.
Aside
from the near vertical liftoff of the Phisix, in contrast to last
year, a speculative rampage has engulfed activities at the broader
market.
The
two month ripfest has reached records of sorts in terms of the
average number of daily trades (left upper window) and the average
number of daily traded issues (left lower window).
Coupled
with the overwhelming dominance by the advancing issues over
declining issues over the said period (upper right window), the near
record number of daily trades can be deduced to the frantic episodes
of trade churning which involved a record high number of issues! Yet
the near term supremacy of advancing issues over declining issues
appear to be corroding.
And
foreign trade seemed barely a factor. (lower right window)
While
foreign trade reported a net buying Php 6.52 billion over the past 11
weeks, foreign buying accounted for a paltry 8% of total peso volume
(Php 77.7 billion) over the same period. This means that the
parabolic move by the PSEi and the wild broad market pump has largely
been accounted for by domestic punters.
Moreover,
while the PSEi zoomed in a near vertical fashion in the face of
intensifying broad market manic speculation, the average daily volume
remained substantially lackluster in relative context.
Differently
put, in five occasions where 7,400 had been reached and tested (with
one successful breach), from 2H 2014 through today, peso volume from
current attempt has signified the LOWEST. This suggests that the
frenetic pumping lacks substance.
So
in perspective of the first anniversary of 8,127.48, will the fifth
attempt to breach 7,400—characterized by the most ferocious pump
backed by the lowest volume—be successful?
Or
will the first year anniversary of record high serve as a déjÃ
vu—another time resonant waterfall similar to its record
antecedent?
_____
