Quo vadis, San Miguel?

8
Emeterio Sd. Perez

Emeterio Sd. Perez

Readers write or comment to seek some clarifications on certain issues that I take up in this space. It is seldom that they suggest topics for Due Diligencer. But when they do, I could not ignore their suggestions. I did, in fact, admit to Karl, a reader of The Manila Times, that I was not in a position to analyze the possible effects of the Greek financial crisis simply because I am not an expert on the subject.

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Then came another reader who asked: “Can you tell us what’s going on with SMC?”

The acronym stands for San Miguel Corp. The question came from Teddy Sevilla, also a reader of The Manila Times. To be frank with him, I am also wondering what could be happening inside San Miguel that the public ought to know. It seems, though, that every event affecting SMC has been disclosed thru postings on the website of the Philippine Stock Exchange (PSE).

Available information
Like the rest of the public, I also rely on filings for information although sometimes I ask some sources for crucial data about listed companies. In the case of SMC, I must admit I have long ago lost my “inside connections” within the company.

Yet, if only readers of The Manila Times would review SMC’s disclosures over the years, they would see where San Miguel could be going. There is no other way for the company to go but expand. I did not say “up” to refer to the direction that the company’s stocks would take.

Going back to Sevilla’s poser as to what’s going on with SMC, I suggest that he review the company’s capital stock. When he emailed me that “I have seen my investment in SMC plunge to less than half at today’s valuations,” I could only sympathize with him but not with Ramon Ang, who is SMC vice chairman, president and chief operating officer.

Back in July 2013, Ang bought, in a series of transactions, 3.4 million SMC shares at an average price of P86.19 each. At SMC’s closing price of P60 on July 20, 2015, he lost an average of P26.19 per share, or P88.96 million. That’s a huge paper loss if he is still holding those shares.

Highest-paid executive
But I do not pity him because he could potentially cover said paper loss from his pay and perks as one of SMC’s highest-paid executives, whose compensation as a group would amount this year to P334.3 million, which could even go higher than the P389.6 million and P362.1 million that he and the other top execs received in 2014 and 2013, respectively.

If you go by the history of SMC’s capital-raising activities, you would not invest in SMC common shares unless, of course, you happen to be a company insider and exposed to the stock for loyalty. As investors, you do not go by the brand but by fundamentals, the most basic of which are contained in financial filings.

Consider this: Has anyone ever read the composition of SMC’s outstanding capital stock? Perhaps the company did not mean what it actually said in a PE posting on July 20 but which sent the wrong message to the public: That it had 2.4 billion outstanding common shares and “amount of debt outstanding” consisting of SMCP1, 279.4 million shares; SMC2A, 721 million shares; SMC2B, 90.4 million shares; and SMC2C, 255.5 million shares.

Preferred shares
Again, I have to assure the public that SMC did not mean the way I interpret the contents of its disclosure.

Then you turn to SMC’s first-quarter financial report, which would tell you that the company valued its preferred shares at P10.2 billion. If you are a CPA or a lawyer who specializes in equities, you may not agree with me that preferred shares are wrongly classified as a form of ownership. To me, they are debts and as such should be defined as liabilities.

As liabilities, why are preferred shares reported in financial statements under equity? Doesn’t SMC pay interest on them but, like other issuers of preferred shares, consider said payments as dividends?

Yes, it is dividend because the classification allows SMC to source the money from retained earnings, the reason why the company has so many kinds of preferred shares in its outstanding capital stock. More on this in another piece.

esdperez@gmail.com.

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8 Comments

  1. I have always considered SMC as speculative, not blue chip because of it’s hard to decipher earnings sources. Similar to conglomerates in the US, they have low P/Es because earnings are consolidated. The use of preferred shares as “equity” is stretching it also. They must be classified as long term liabilities. Maybe it they’re convertible preferred, they could end up as capital stock in the future, only if they’re converted. What SMC is doing reminds me of the shenanigans of some of the bloated banks in 2008 where they had dual balance sheets. Risky securities would be “reclassified” and taken off th books. Leaving a clean balance sheet which would be for shareholders to analyze. SMC is using smoke and mirrors, and Ramon Ang is leveraging to the hilt. Sell SMC and stay away.

  2. Amnata Pundit on

    There is something to the argument that preferred shares are liabilities, but unlike real liabilities these species does not have a redemption date. After the financial crisis of 2008 banks were allowed to carry the original value of their assets even if the real market value was much lower. This was done to prevent the collapse of many banks which would have been the result if banks were forced to “mark to market” these assets in their books as before. If companies listed in the stock market were forced to treat these as liabilities what will happen to their balance sheets and consequently to the stock market? I think some things are better left untouched.

    • Teddy Sevilla on

      Mr. Perez, can you please clarify the classification of SMC2A, SMC2B and SMC2C shares? SMC calls them “preferred shares” but they DO HAVE redemption dates. What kind of animals are these?

  3. Teddy Sevilla on

    Ouch! Mea culpa. I should pay attention to the disclosures but to a non-accountant they are not sexy reading. I just look at the low P/E ratios, and interpret this with the rose-colored glasses of a naive investor as a potential to make big bucks with an undervalued company. I read Big Buzz though and other stuff with business tsismis. Again, mea culpa. What I have been reading as tsismis were also screaming not to touch SMC. Just my stubborn streak I guess.

  4. Felimon A. Soria on

    After reading your article sir, I am glad I did not invest my meager savings. Thank you very much for this very informative article.

    • Food is always a good bet, it’s defensive. Stay away fro property, utilities and banks because most banks have interlocking directorates. Food is the only pure play.

  5. Johnny Ramos on

    I am bit worried that SMC is heavily indebted because of its ventures on road building like the skyway extension where the returns could take years. Petron income could also suffer some set back because of the glut of oil prices worldwide. If Iran will be allowed in the oil market next year this will further bring down oil prices. The investment alone of SMC could take a hit and its financial obligations might be affected anytime since they are all interest bearing obligation.

    • Teddy Sevilla on

      Well, Petron is mainly a trader, not a producer of oil products. I am hoping their margins will improve as they adjust to a regime of low-priced crude.