Cebu Pacific Q3 profit: P1.3-B (+150%); Filinvest REIT Q3 profit: P160-M (-54%); MONDE: Readers react to the "top-up" (Tuesday, November 14)

[ignissus]

Happy Tuesday, Barkada --​

Shout-out to bob trillo for helping new readers understand the order of the stocks listed on the MB IPO Index chart (it's in reverse chronological order, with the newest IPO at the top), to /@butterflyja for getting hype about the fat stacks getting thrown off by the domestic airline industry, to all the readers who wrote in to give their feedback on the MONDE top-up (more on that below), and to Jing and arkitrader for the Monday pick-me-up.

▌In today's MB:​

• Cebu Pacific Q3 profit: P1.3-B (+150%)
• Filinvest REIT Q3 profit: P160-M (-54%)
• MONDE: Readers react to the "top-up"

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▌Market Data​

▌Main stories covered:​

• [Q3] Cebu Pacific Q3 profit: ₱1.3-B (+150% y/y)... Cebu Pacific [CEB 32.75 ▲1.2%; 165% avgVol] reported a Q3 net income of ₱1.28 billion (+150% y/y) and a 9M net income of ₱5.0 billion (+141% y/y). CEB said that it recorded ₱23.3 billion in Q3 total revenue, up 39% y/y, and up 23% from CEB’s Q3 performance back in 2019 before the COVID pandemic re-arranged the face of the airline industry as we knew it. CEB flew 5.3 million passengers (+27% y/y) in Q3 on 35,000 flights (+18% y/y), with a seat load factor of 83.7% (+13% y/y). The international segment saw the greatest improvement, with a 228% increase in passengers flown to 1.3 million as compared to a 5% increase in domestic passengers flown to 4.0 million.
  • MB: It feels almost sentimental to see CEB posting a substantial profit again after what COVID did to the airline industry across the world, and it feels wild for CEB to be joined by its main rival, Philippine Airlines [PAL 5.40 ▲2.1%; 171% avgVol], in this turnaround to material profitability. Both CEB and PAL are noting significant upticks in demand for air travel, but it will be interesting to see how the ripples from the COVID catastrophe continue to impact the recovery of the two airlines going forward. CEB and PAL approached the COVID problem differently, with CEB raising capital internally and conducting a follow-on offering to stay afloat, and PAL basically dying and getting resurrected by a mountain of Lucio Tan’s personal cash. It will also be interesting to see if the demand continues to grow, and how the two management teams handle the global constraints on new airplanes, used airplanes, and airplane parts. It’s not like the old days when CEB and PAL could just predictably buy planes to establish new routes or maximize existing routes. Results will depend on the quality of the management team, and in particular, the quality of the operations group.
• [Q3] Filinvest REIT Q3 profit: ₱160-M (-54% y/y)... Filinvest REIT [FILRT 2.95 ▼0.7%; 272% avgVol] reported a Q3 net income of ₱160 million (-54% y/y) and a 9M net income of ₱721 million (-31% y/y). FILRT explained that it suffered a 10.8% drop in 9M total revenue because of lower rental income, which itself is due to lower occupancy. The drop was partially offset by the inclusion of income from the Boracay property and rent escalations negotiated during lease renewals. FILRT reported that 7 of its 17 office towers had occupancy rates that were significantly below the Colliers industry average (~82%).
  • MB: I think the inclusion of the Boracay property is hiding the degradation of FILRT’s already terrible occupancy rate. The lot is leased to a subsidiary of Filinvest Development [FDC 5.07 ▲0.2%; 200% avgVol], Boracay Seascapes, which is the owner of the Crimson Resort & Spa Boracay facility located on the lot. FDC transferred its interest in the property to FILRT by way of a lease, so now FILRT stands in FDC’s shoes in collecting rent from Boracay Seascapes by way of a singular lease payment. This configuration allows FILRT to consider the property 100% occupied, as it recovers 100% of the lease owed to it for the entire gross leasable area of the lot. Excluding this lot, FILRT’s Q3 occupancy for its office towers was 82.3%. Including the Boracay lot, the Q3 blended occupancy of its office towers and resort lot lease was 83.9%. It’s this second blended figure (rounded up) that FILRT reports now as its overall occupancy. If we only looked at that number, we’d think that things were pretty stable. But I think you can see now how the Boracay property’s inclusion is obscuring the truth about the health of FILRT’s office leasing business. FILRT is losing tenants, earning less income, and distributing far less than it anticipated in terms of dividends to its shareholders. It astounds me how little time the FILRT team devotes to addressing this with its shareholders. FILRT is the worst-performing of the PSE’s Philippine REITs in terms of stock price and total dividend income relative to IPO price, and it’s the only one of the PSE’s eight REITs that has experienced a significant drop in its distributable income. Crickets from FILRT’s management team.
• [DISCUSSION] Reader responses to the MONDE “top-up” post... Last week I covered the commitment made by the controlling shareholders of Monde Nissin [MONDE 8.25 ▼1.6%; 43% avgVol] to “top-up” accumulated impairments, over a 10-year span, suffered by MONDE’s meat alternatives business with a one-time cash payment in 2033. The top-up is subject to a few limitations, including a cap on value (12% the value of MONDE’s outstanding shares), and the complete release from any top-up obligation if a controlling stake in the meat alternative business is sold to a third party. Glossing over a lot of detail, my reaction was one of confusion: who is the audience for this commitment? Considering the size of the impairment that the meat alternative business has already suffered in FY22 (₱20 billion), and the uncertainties that abound both in terms of MONDE’s stock price in 10 years’ time and in the overall vitality of the meat alternative industry in 2033.
  • Reader response: Generally, readers seemed to share my confusion. At least that’s what I could infer from the dismissive tone that most used to discuss the commitment. One reader thought that MONDE was falling victim to the sunk-cost fallacy (throwing good money after bad). Another that the initial high value of the meat alternative industry was due to the fad-like nature of the market, and that the value will continue to drop as the industry comes under greater regulatory and financial scrutiny. Most readers avoided engaging with the terms of the commitment directly, and instead voiced negative opinions of MONDE’s business and its performance on the PSE since joining the exchange.
  • Critical pushback: One reader, in particular, seemed to take offense with my implication that the safeguards (as communicated) are insufficiently robust and detailed for shareholders to rely on. This reader wanted to underline that, based on the media briefing, it appears the controlling shareholders acknowledge the moral hazard of the top-up as written, by way of the safeguards that were actually included in the top-up. Specifically, the reader pointed to the mechanisms that would push approval of any sale transaction through MONDE’s Related Party Transactions Committee (RPTC), which is made up entirely of independent directors, and that the current independent directors are “all known in the local business community for their probity.”
  • MB: We could have a very long debate about independent directors, but I can side-step that debate entirely by pointing out that we have zero guarantees that the roster of current independent directors will be the set of directors on the RPTC in several years’ time if a sale of the meat alternative business is actually transacted. Independent directors are elected by MONDE’s shareholders each year, just like the rest of the directors, and the controlling shareholders generally hold all the cards when it comes to the election of these individuals. What might look like a great set of noble and wise independent directors now could look a lot different next year, three years from now, or eight years from now. The composition of the RPTC, the main safeguard meant to protect minority shareholders in this deal, is not something that the minority shareholders can control and is not something that anyone now could reasonably rely on when talking about business deals that could happen at any time over the next decade. I don’t know that this is the challenge at the heart of the disconnect between the top-up and retail’s largely negative response to it, but it feels like part of the same soup of concerns. I haven’t heard from a single reader, or spoken to a single investor, who has spoken positively about the top-up. Maybe we just don’t know enough about it to be impressed. Maybe MONDE could do a better job of selling the top-up. Or, maybe, it’s just not that great of an idea. I guess time will tell.

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[kuregee]

@ignissus Monde's newest independent director, annabelle chua, will protect minority shareholder interest just as she did pldt's finances

 

[temirlan]

@kuregee She should also moonlight as another director for us!

 

[vinylrecordz]

@ignissus

FILRT reported that 7 of its 17 office towers had occupancy rates that were significantly below the Colliers industry average

16 out of the 17 office buildings under FILRT are located in Alabang. So, are office occupancy rates in Alabang falling in general, or is it just limited to Filinvest's properties? Or are office occupancy rates just falling in general?

 

[ignissus]

@vinylrecordz AREIT, RCR, MREIT don’t appear to have this problem

 

[vinylrecordz]

@ignissus You're right. Although RCR did post slightly lower earnings and revenues for 3Q23 than they did in 3Q22.

 

[astral87]

@ignissus You guys are overthinking this Monde top-up thing.

In typical pinoy fashion, Monde's business owners yhought it would make investors "feel better" to do this top up. Without really planning for it or thinking of the consequences. Typical short-term "band-aid" solution / consolation prize.

But also in typical pinoy fashion, they covered their a** with a whole bunch of lawyer talk and legal gibberish.

The investors like typical pinoys also had an ax to grind w/ Monde's falling share price, irrespective of the top-up -- and have decided to surface unrelated issues.

At the end of the day, like most "plans" in the Philippines nothing will ever come out of it -- and Monde's owners will be secretly hoping you all forget about it.