Why investor perception counts in San Miguel
MANILA, Philippines - Early this month I got the chance to watch the movie Pacific Rim with my sons and got to learn what a KaiJu was. It was a gigantic sea-born Godzilla that was lethal mainly because of its humongous size and movement, but equally so because of the sheer unpredictability of its next attack.
So the movie struck a chord close to my heart, mainly because I make my living in the capital markets and the ability to predict the next KaiJu occurrence isn't any different from the need to anticipate major market moves or corrections, if not potential black swan events.
The big question now for SMC's stakeholders is: What was all that KaiJu-like turmoil and what does it all mean for us going forward?
Let me try to break it down for you.
You can almost tell, in our billboard-infested Philippines, that something's off when tweets regarding 'MyHusbandsStockPortfolio' briefly surpasses 'MyHusbandsLover' amongst those I follow. For last Thursday, July 18, my Twitter update page was filled with blogs about conglomerates that may have been alluded to by an IMF report with its implicit but disguised warnings on highly leveraged Philippine conglomerates.
The IMF report warned of the massive financial repercussions of a defaulting major conglomerate on the whole country, similar to a "Lehman Brothers" event post-QE. What then followed at the PSEi was many listed conglomerates collapsing at opening bell, piercing key support lines.
Amidst the bedlam, it was perceptively funny that even Lopez Holdings Corp. (LPZ), my favorite senior citizen stock, but which had almost nil borrowings after completing a major debt restructuring, also collapsed below its critical support price of P5.
The alleged culprit of that IMF note, which is still a bit of a stretch in my view, was San Miguel Corporation (SMC).
SMC share prices went south by more than P10/share (or a dive of more than 10%) wallowing below P80 /share which was rather unnerving. Perhaps the nerves eventually got into SMC's CEO Ramon Ang (RSA), enough for him to go on a press offensive and offer to buy back SMC shares, which in his view, had gone too cheap. (Read: Why San Miguel shares tanked)
This is where 20 years of dabbling in Philippine capital markets instinctively prompts me to further analyze the obvious. I have been involved in multiple companies before, taking them public, making them perfectly comprehensible to the investing public.
I have learned to value both corporate finance analytics and behavioral finance concepts to guide my clients. Today, one cannot do without the other.
Something in this whole KaiJu-like turmoil may actually provide valuable lessons for everyone — financial regulators, SMC's management and stakeholders, newly listed firms, even newbie stock players.
Initial stock price analysis
Let's move away from that IMF note which was more like an hypothetical warning shot of what may happen by some IMF analyst who is paid to work on various sensitivity scenarios anyways, most of which also do not always happen.
But what has happened is all quite clear since January 2011. See SMC's price chart below.
From there we simply draw our conclusions.
SMC's share price since its January 2011 peak has sauntered southwards, specifically from P188/share to P125/share by Mid-May 2013 — even before this whole IMF thing unraveled.
From the chart above, it is clear that SMC had been on a prolonged downtrend, depreciating by as much as 33% from its highs in the beginning of January 2011.
In contrast, the PSEi and most Philippine stocks have moved up remarkably during the same time period. In fact, PSEi went up by as much as 70% from that same time period, specifically PSEi at 4,200 in January 2011, to a PSEi level of over 7300 by mid-May 2013.
Obviously, PSEi's +70% rise vs SMC's -33% price depreciation within the same time period are the numbers the SMC team must look at, and not that one time, misplaced 10%+ price collapse attributed to most likely a different company, or much less, to a totally different time period.
To put it in perspective, let me paraphrase a basic stock trader's mantra: The trend is your friend. Unfortunately it can also be the hardest enemy to conquer.
Clearly, SMC's major concern should be its long-term chart which not only shapes long term investor perceptions, but as we have seen, can set up triggers for irrational crowd behavior when you least want it.
Perhaps the confusion starts here. If you were a newly minted CPA joining P/A Ernst & Young Corporate Finance Manila, an advisory team I once managed, you could be concerned. Based on 2012 numbers, SMC's Current Ratio seem acceptable.
But, inventories and non-trade receivables accounted for as much as P130 billion which may not be as liquid if we face a massive economic downturn.
Moreover, while SMC makes almost P55 billion plus in 2012 net income, it is not clear what can be relied as free cash going forward if you consider almost P160 billion has to be earmarked for debt repayment in the next 3 years.
This yearly income pales in comparison to the SMC's 2012 Total Liabilities of P680 Billion, etc. But this is about where your jitters should subside, and where you abandon your CPA hat and start wearing your capital markets cap.
SMC is not a simple, one-dimensional cash flow operating business. It is now also a major investment holding company, or "asset player" where the future ability of its assets, like MERALCO should remain valuable and saleable.
Hence, initial concerns that SMC may not be liquid enough have been partly deferred with its recent decision to sell its 5.7% stake in MERALCO, which generated P17 billion easy. Thereafter, sale of all MERALCO shares can still raise over P100 Billion.
SMC can also sell down other portions of its core assets if it needs, too. For now, given our ample domestic liquidity and now up trending PSEi, SMC has other cash generating tools at its disposal besides its hefty cash balance.
The issue now is when should SMC best consider disposing off some assets to shrink debts if it needs to or wants to? Does SMC even have the luxury to sell assets for good value and without a loss in the middle of a KaiJu-like black swan event in the near future?
For me, these are the key questions that SMC stakeholders should try figure out first. I have a different take.
Why another KaiJu Wall
Public investor goodwill is like that major critical and impenetrable wall in case of another KaiJu-like event in the future. Please bear with me as I rationalize further to reluctant Pacific Rim metal workers why building another expansive KaiJu Wall is even necessary for an SMC at this point in time.
My quick and simple answer is that the next KaiJu event would certainly be much bigger than the last one that we all experienced in 2008. We do not know exactly when, but it will happen and it is not helped by the unprecedented level of money and leveraging that has been printed globally which could lead to major upheavals, especially when inflation or stagflation, rears its ugly head, and QE isn't just tapered off, but actually goes into full reverse.
Uncanningly similar to the movie, there is something about financial markets history that will tell you we are inadvertently setting ourselves up for bigger KaiJus. The last financial bubble is always resolved with more stimulus, until the next one unfolds and so on.
Perception becomes reality
Disregarding textbook financials, my core concern as an investment banker is this: the public investor market doesn't seem to be comprehending SMC's transition into a mega holding company.
Rightly or wrongly, SMC share price do not reflect a public investor market that is keen on its vision yet, at a time when major Philippine conglomerates are not only attracting capital but are enjoying unprecedented share price appreciations.
Call a spade a spade, but this is the issue which SMC — their qualified handlers, investment bankers, finance and risk officers — must answer other than a proposed "buy back" which makes it all sound off tangent.
For any investment banker worth his salt will conclude that "buy backs" work when the market as a whole is collapsing, and companies with huge cash positions can take advantage of a market induced situation, and actually enhance shareholder value thereafter by minimizing the number of shares outstanding vis-a-vis earnings, and hence, positively impact that EPS number.
Moreover, buy backs may further deplete the cash coffers of SMC at this point in time, and which is why this whole generic issue came about in the first place.
Having said that, in the short term, it may have been RSA's brilliant poker move at a time of chaos, and one designed to ward of unscrupulous short sellers. One may also therefore surmise that the well-timed sale of 5.7% in MERALCO, was perhaps akin to a poker strategist's 'raise'.
In the long term, further "buy backs schemes and privatizing SMC" talks may not really help us in anyway plan and execute the right KaiJu Wall that needs to be constructed for the next KaiJu event.
A major Philippine conglomerate that is caught unprepared — not necessarily SMC — can affect the whole country and ruin that PNoy party and after-party for everyone. The investing public and regulators need to figure out what the implications are of a 50% reduction in stock market valuations, 20% plus interest rates in a stagflation type KaiJu environment and how that will affect leveraged Philippine companies in general.
So it may have been the right solution to the wrong problem given the chaotic circumstances for SMC on that day, but in the end its all for the better if it triggers all of us to do some serious "soul searching".
SMC and that 'butterfly effect'
If you will allow me to digress a bit further, consider these actual "news items" which may have psychologically set up SMC's "butterfly effect," even way before IMF's blue sky warning came about, namely:
- LTG complete $900-M share sale (equity), BizMirror, April 13
- SMC completes $800-M bond sale (debt), Inquirer, April 19
- SMC at 4 month low ahead of deletion from MSCI, Reuters, May 27
- MPIC replaces SMC in the MSCI global standard index, Reuters, May 27
- PAL Holdings ends 1 year under SMC w/ P4B losses, Rappler, July 15
The sequence of news like these above, in many cases completely random, in behavioral finance can set off a "butter fly effect" with disastrous consequences even outside of that generic IMF-Tiglao reportage. In fact, it's too early in the ballgame to even call it.
In chaos theory, the sequencing above is enough fuel to set up the next Pacific Rim storm, unknowingly to the untrained eye. Yet, none of the news above — a virtual snap shot of a very short time frame — really matters in the context of SMC's solid financial shape and the quality of its assets at this point in time.
It's just that rightful or wrongful perception shapes reality.
When the next KaiJu-like event occurs, everybody will wish he has access to the capital markets as debt markets shrink and that his share prices haven't collapsed allowing him other capital market liquidity mechanisms vs. bondholders.
Moreover, as pointed out by George Soros himself, who coined this whole phrase about perception and reality, declining share prices create negative sentiments which eventually affect fundamentals, such as when banks hold off credit lines and quality managers abandon ship.
As share prices collapse, people question the sanest moves and smarts of management, that ripples thru the other corridors of the financial markets and pretty soon, bond holders and what have you start their back exodus.
Instead of a "buy back," SMC's cash is perhaps better spent explaining the vision going forward so that the appropriate institutional investors or big moneyed capital market participants can be attracted.
Money is better spent hiring the right staff or investment bankers, risk officers, capital market advisors, who can help draw up an SMC that is better insulated from a KaiJu event, including a realignment of its portfolio.
Of course we all know that taking SMC "private" doesn't add up simply because the future game plan of SMC given its clearly outlined strategy, is better served by a sophisticated but effective capital markets strategy. SMC desires to go into capital intensive infra projects and have the ability to raise funding for bigger projects later on.
In hindsight, we should all be thankful that no KaiJu event has unfolded, but it clearly doesn't mean it won't happen again. The best thing for SMC to do now is to prepare for such a 'black swan' occurrence, and lovingly accept how it got to this vulnerable spot to begin with.
In short, SMC must just deal with it — rebalance what needs to be rebalanced and move on. It must use this "intermediate bottom" in its share price (a technical analyst's you-can-only-rise-from-here spot), to start working on a more acceptable but "up trending" SMC storyline.
SMC must use this experience, as a valuable lesson on capital markets chaos and be prepared adequately for the next one to come, and one where options may be more limited for everyone.
Last week was like that early KaiJu fire and earthquake drill, and from there, we all have both time and money to recalibrate going forward. Time is clearly on SMC's side. - Rappler.com
The author is Managing Director for Corporate Finance for the Center for Global Best Practices (CGBP). He was formerly connected with PNB Capital & Investment Corp. as President & CEO and with Punongbayan & Arraulo where he set up the first P&A/Ernst & Young Corporate Finance practice in the Philippines in 2001. Tony is active on Twitter for stock market newbies: @Tony88981.