Debt Troubled Alliance Global (AGI) Resorts to Financial Engineering to Boost Earnings and Share Prices!

In today’s ambiance of free money, when earnings can barely grow organically, there is always the option to engineer it.

And that’s exactly the route taken by Alliance Global Group.

From their press release: “Alliance Global Group, Inc. (AGI), the investment holding company of tycoon Dr. Andrew L. Tan, has announced a two year share repurchase program of up to P5 billion. “The Board of Alliance Global has approved a share buyback of up to P5 billion over a 24-month period,” said Kingson U. Sian, president, AGI. “We are undertaking this corporate action because we believe that our shares are grossly undervalued. Our Group has been consistently profitable, with attractive growth prospects, and enjoys strong brand equity and therefore views this exercise as a means to enhance shareholder value over time.” (bold mine)

Despite the recent record breakout by the Phisix, would it not be a wonder that the market seems to have disagreed with the official AGI outlook of “undervalued” shares and “attractive growth prospects”?

 

 

A week ago, AGI was off 53% from its record highs. But because of the stock buyback announcement, the company’s share price had been jolted to rocket 15.5% over the week! Year to date returns suddenly spiked to 31.77%!

The company bought 2.487 million shares worth Php 39.4 million in two days which accounted for 5.7% of the shares and volume traded.

The buyback means the withdrawal from the outstanding, shares that were bought for the company’s treasury.

The company further boasted: “AGI posted new levels of revenues and core net profit in 2016 of P139.6 billion and P22.8 billion, respectively. Consolidated EBITDA grew at a healthy rate of 9% year-on-year to P38.8 billion, while attributable net income rose another 6% to P14.8 billion. “AGI continues to build on its strength with a business model that is time-tested and stress-tested,” according to Sian”

But that would represent only a segment of the story.

After all, the positives in today’s asset inflation environment have mostly been about the “framing” or “presentation”. Bad news would have to be buried.

Hardly anyone from the establishment would like to investigate what has been under the hood.

Here are AGI’s annual reports: 2016, 2015, 2014, 2013 and 2012

 

In reality, AGI has been drowning in debt!

Here are the numbers: The Company’s debt Compounded Annual Growth Rate (CAGR) since the end of 2012 to 2016 has been at a phenomenal 33.22%! Yes, THIRTY THREE percent!

Meanwhile, revenue CAGR was at a mediocre 8.16% over the same period. Moreover, net income CAGR has been at a lackluster rate of 2.72%!

Debt has grown over FOUR times revenue growth and TWELVE times net income growth!

In the 1H of 2017, the company borrowed a staggering Php 48.226 billion or 139% of its annualized net income. AGI posted a net income growth of Php 10.084 billion in the 1H

To put in perspective, 100% of AGI’s net income has inflated by debt. Or, AGI’s earnings have principally been dependent on debt! Said differently, AGI’s earnings have signified a mirage!

 

Since the company has operated in the same financial conditions for over 4 years, such underperformance cannot be discerned as anomalous. Worst, despite the supposedly upbeat sentiment by officials, the deterioration in financial conditions have only been intensifying!

AGI’s nominal outstanding debt level jumped to Php 187.888 billion in the 1H of 2017 from the Php 138.661 billion at the close of 2016. The 1H 2017 nominal level signifies a 34% increase over the company’s 2016 revenues at Php 139 billion.  Stunning!

And this implies that the Php 5 billion share buyback will be financed by debt!

Fascinatingly, AGI has resorted to such financial engineering at a time when the company’s debt has escalated at a furious pace! Why?

The massaging of earnings per share by reducing the denominator or the number of outstanding shares to boost eps PLUS the company’s tinkering of its share prices corresponds to the milieu of the blatant practice of marking the close.

Yes, manipulate the markets to foster more unsustainable invisible transfers from the public to huge debtors, such as AGI

Perhaps, AGI will use the inflation of its share prices to pay down its ever-burgeoning liabilities.

However, the fact that AGI will use a significant amount of money to create a charade of superficial positives translates to the unproductive and inefficient use of capital. Worse, the leverage it uses for such exercise will translate to greater financial risks!

Many real estate-shopping mall firms such as AGI have embodied or exemplified the remarkable illusion of prosperity brought about by credit inflation.

As I have been saying here, these are signs of historic times.

Bank for International Settlements: Global Risk ON Financed by Record Leveraged Carry Trades and Margin Debt as Balance Sheets Deteriorate, Parabolic PSEi!

In their Quarterly Review (September 2017) released yesterday, the Bank for International Settlements (BIS) or the central bank of central banks described the latest global RISK ON phase

Excerpted from the BIS: (bold and underline mine)

A “risk-on” phase

As is typical for periods of low volatility and a falling dollar, a “risk-on” phase prevailed.

Against the backdrop of persistent interest rate differentials and a depreciating dollar,returns from carry trades rose sharply and EME equity and bond funds saw large inflowsduring the period under review (Graph 7, first panel). Speculative positions also pointed topatterns of broader carry trade activity: large net short positions in funding currencies, such as the yen and Swiss franc, and large net long positions in EME currencies and the Australian dollar (Graph 4, right-hand panel).

Equity market investors also employed record amounts of margin debt to lever up their investments. In fact, margin debt outstanding was substantially higher than during the dotcom boom and around 10% higher than its previous peak in 2015 (Graph 7, second panel).

 

While margin debt levels breached new records, traditional valuation benchmarks, such as long-run average price/earnings (P/E) ratios, indicated that equity valuations might be stretched. Recent market moves pushed cyclically adjusted P/E ratios for the US market further above long-run averages. Cyclically adjusted P/E ratios also exceeded this benchmark for Europe and for EMEs, though by a smaller amount (Graph 7, third panel). That said, given the unusually low bond yields, valuations may not be out of line when viewed through the lens of dividend discount models. Indeed, estimates of bond yield term premia remained unusually compressed, well below historical averages in the United States and drifting further into negative territory in the euro area (Graph 7, fourth panel). This suggests that equity markets continue to be vulnerable to the risk of a snapback in bond markets, should term premia return to more normal levels.

There were also some signs of search for yield in debt markets, as issuance volumes of leveraged loans and high-yield bonds rose while covenant standards eased. The global volume of outstanding leveraged loans, as recorded by S&P Global Market Intelligence, reached new highs (above $1 trillion). At the same time, the share of issues with covenant-lite features increased to nearly 75% from 65% a year earlier (Graph 8, left-hand panel). Covenant-lite loans place few to no restrictions on the borrowers’ actions and as such might signal a less discriminating attitude on the part of lenders while potentially fostering excessive risk-taking on the part of borrowers. According to Moody’s, the covenant-lite share in the high-yield bond market also increased while covenant quality declined to the lowest levels since Moody’s started to record these numbers in 2011.

While corporate credit spreads were tightening, the health of corporate balance sheets deteriorated. Leverage of non-financial corporates in the United States, the United Kingdom and, to a lesser extent, Europe has increased continuously in the last few years (Graph 8, first panel). Even accounting for the large cash balances outstanding, leverage conditions in the United States are the highest since the beginning of the millennium and similar to those of the early 1990s, when corporate debt ratios reflected the legacy of the leveraged buyout boom of the late 1980s. Anddespite ultra-low interest rates, the interest coverage ratio has declined significantly. While the aggregate interest coverage ratio remained well above three, a growing share of firms face interest expenses exceeding earnings before interest and taxes – so-called “zombie” firms(Graph 8, third panel).4 The share of such firms has risen especially sharply in the euro area and the United Kingdom. At the same time, the distribution of ratings has worsened (Graph 8, fourth panel). The share of investment grade companies has decreased by 10 percentage points in the United States, 20 in the euro area and 30 in the United Kingdom from 2000 to 2017. 5 The relative number of companies rated A or better has fallen especially sharply, while the share of worst rated (C or lower) companies has increased. Taken together, this suggests that, in the event of a slowdown or an upward adjustment in interest rates, high debt service payments and default risk could pose challenges to corporates, and thereby create headwinds for GDP growth.

Based on the BIS’s description, the Risk-ON climate can be summarized as record yield chasing asset boom financed by surging leverage as balance sheets deteriorates

Rings a bell?

Oh, the BSP’s free money has sparked a bacchanalian orgy at the PSE!

The Asia's most expensive stock market has just become even more offensively expensive!

OFW Remittances, Merchandise Trade and Industrial Production (The Revenge of Economics)

The government released a raft of data last week.

Most were bad news. Because I’m in a rush, there won’t be lengthy elaborations

First the good news.

Personal remittances surged by 8.7% in July, which lifted year-to-date growth to 5.9%. Cash remittances posted a 7.1% increase for the same month and 5% in 7 months.

In 2016, personal remittances accounted for 14% of the Household Financial Consumption.

Remittances growth rates continue to drift incrementally lower to reflect on diminishing returns.

An uptick in remittances tells a vastly different story from that which has been propagated by the media and experts.

A real economic boom will induce more people to stay and work from HOME than suffer the social cost of being apart from the family.

Next, merchandise trade

July exports rebounded 10.4%.

However, imports contracted for the second straight month to post a -3.14% in July. Total July merchandise trade was up by a measly 2.25% yoy.

The big difference between July’s exports and imports helped reduce the 7-months trade deficit by 4.6% or from US$ 15.4 billion in 2016 to US$ 14.7 billion in 2017

Imports are supposed to reflect domestic demand. So what just happened?

And please do take note that the trend of growth rates of both exports and imports have been materially slowing down. Exports merely bounced off from the recent weakness.

Lastly, the PSA’s industrial production.

I talked about the ongoing weakness in the auto sector. I also discussed the continued softening of the cement industry.

The overall July industrial production index fell by -2%. Industrial production has peaked in December 2016 and steadily declined throughout 2017.

What’s striking has been the net sales value and volume which plummeted by -9% and -8% in July.

The negative net sales and volume seem to presage August’s performance.

Nikkei’s PMI seems to confirm the PSA’s revelation.

From the almost always bullish Markit on the Philippines August Production Index: (bold mine)

After a subdued start to the third quarter, the Philippines manufacturing economy lost further momentum in August. Growth rates in both output and new orders slowed noticeably from July and weighed on the PMI. That led to a fall in employment levels. On the price front, peso depreciation stoked further inflationary pressures. Encouragingly, business optimism remained elevated.

The seasonally adjusted Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI™) came in at 50.6 in August ─ the weakest reading in the survey history ─ down from 52.8 in July. The latest reading signalled only a marginal improvement in the health of the sector, contrasting with the solid growth seen in the first half of the year.

Signs of a softening in demand through the third quarter continued to emerge. There was a considerable slowdown in order book growth to a level well below the historical survey average.

The weakening was not limited to domestic markets: a fall in export sales was also responsible for the slower sales trend. The decline in new export orders was only the second in the 20-month survey history ─ and ended an 18-month expansion run. Firms noted that shortages of raw materials led them to turn away some overseas orders.

Manufacturing production increased further during August but at a noticeably slower rate (the weakest on record). Anecdotal evidence indicated that a lack of raw materials disrupted production schedules.

August’s data indicated an ongoing lack of pressure on capacity despite lower employment; backlogs of work declined for an eighteenth month, although the rate of contraction was slower than July.

So industrial production was BROADLY weaker (sales, export orders, production, employment and capacity utilization) in August. And exports will likely drop as well. Employment weakness can be seen in jobstreet’s manufacturing job openings. Curiously, credit growth has increased even as manufacturing output has been turning down. Where has the money been spent?

Interestingly, “optimism” is being challenged by economics.

Bottom line: Distort prices (by monetary inflation), prices get back at you!

The revenge of economics!