DITO posts FY22 net loss of P25.6-B (T:Apr18)

[ignissus]

Happy Tuesday, Barkada --​

The PSE gained 24 points to 6506 ▲0.4%​

Thanks to PSE Noob Trader for the observation that a lot of retail volume probably left to crypto and never came back (I think there's some truth to that), to Jing for reminding me of my DDMPR bags, and to G, John, /@deloris, /@faithtees, /@skytheoden83, and /@kprw16 for your passionate commentary on COL Financial's outdated trading platform.

I hope that COL is reading what you are saying, taking notes, and starting the real work of making substantial changes. Your comments are very representative of what I hear every day from new traders asking about which brokerages to use.

Shout-outs to Lance Nazal, avenmicjohn, Kayzee25Maine, cristinaorlina, LanAustria, danmikeel, Dividend Pinoy | PGG, mjbachao, Justn, Cathay Pacific Boarding Music is enchanting, CHARToons, Evolves Capital, Inc., KingArk, arkitrader, Rolex Jodieres, meloi, Palaboy Trader, Chip Sillesa, Reynold, Pao, CookyTitaCookie, Retweeter, and Jing for the retweets, Jayvee Menil, Genesis Umali, Evolves.co, and Mike Ting.

▌In today's MB:​

• ACEN FY22 profit up 90%
• CTS Global had a brutal Q4
• Alternergy's stab fund 75% depleted
• PLDT cleans house
• DITO CME loses ₱25.6-B in FY22
• Chelsea loses ₱2.5-B in FY22

▌Daily meme | Subscribe (it's free) | Today's email​

▌Main stories covered:​

• [FY22] ACEN FY22 net profit up 90% to ₱14.6-B... ACEN [ACEN 6.21 ▲2.5%; 150% avgVol] [link] disclosed a FY22 net income of ₱14.6 billion, up 90% from FY21, on ₱35.2 billion in gross revenues. ACEN said that revenues from the sale of electricity were up 35% to ₱35 billion, driven mostly by the contributions of new facilities and higher spot electricity prices. ACEN also reported that its cost of the sale of electricity was up 59% to ₱34 billion, due to the high spot electricity prices it had to pay during the “major preventative maintenance” of its SLTEC thermal plant in Q1. The company ended 2022 with 3.9 gigawatts (GW) in “attributable capacity”, with 98% of that capacity from renewable sources. ACEN has since increased its capacity to 4.0 GW in March of this year, but that event falls outside of the scope of this annual report. ACEN said that it is on-track to achieve its goal of 20 GW of capacity by 2030. ACEN is a subsidiary of Ayala Corp [AC 655.00 ▲4.0%; 150% avgVol], and is the Zobel Family’s (mostly) renewable energy power generation company.
  • MB: Put plainly, 2023 has sucked for ACEN shareholders so far, as they’ve seen the stock’s price plummet from a high of ₱8.37/share in the first trading days of the year, to Friday’s close of ₱6.06/share. That’s a 27% drop. Sure, higher interest rates hit capex-heavy firms the hardest by making their projects less profitable, but ACEN’s peers don’t demonstrate the same steep price drop. Perhaps it was just ACEN’s stock price coming back to reality, as it carried an elevated price-to-earnings ratio for years heading into 2023. I don’t know for certain. But I do know this: as the market becomes more saturated with renewable energy companies and the industry itself matures into a wide portfolio of operating facilities, one of the key differentiators will be facility uptime. As this report shows, the pain of having to fill generation gaps with elevated spot electricity prices is not something to be ignored. Sure, maybe it’s easier to ignore in the growth phase of the industry when companies like ACEN are growing so fast the numbers can get easily lost in the mix, but as ACEN’s portfolio grows, the impact of each new project will be smaller and smaller on the company’s financial fortunes. The efficient operation of an installed base of facilities will be what wins the day.
• [FY22] CTS Global finishes 2022 with a brutal Q4... CTS Global [CTS 0.89 ▲1.1%; 100% avgVol] [link], the Lee Family’s proprietary trading firm, disclosed a full-year net income of ₱52.2 million, which was up 159% from its FY21 net income of ₱20.1 million. Considering that CTS entered Q4 with ₱70.8 million in accumulated net income for the year, the ₱52.2 million in year-end net profit implies an ₱18.6 million net loss in Q4. On a full-year basis, CTS reported that global trading revenue was down 84%, local trading revenue was down 62%, and total revenues were down 34%. In terms of the investments that CTS made, it said that it “capitalized on the commodities run” by pushing funds into the Indonesian market, but also said that it ended FY22 having put ₱1.275 billion into low-yield fixed-income securities (mostly government bonds). This amount is 94% of the net capital raised by CTS’s IPO. Over 45% of its FY22 revenue came from the interest off of its fixed-income investments and other non-equity positions. CTS turned a larger profit this year because it was able to pay 46% less in commissions. That saved CTS over ₱22 million as compared to FY21.
  • MB: So the main selling point of the CTS IPO was, paraphrased, “give us your money and we’ll grow the international trade business and we’ll split the profits”, but it seems like they left out the part where they’d only do it if the markets were going up. To me, the problem with CTS as an investment is that it is basically a black box; if something goes wrong, as it did in Q4, what analysis can CTS provide about the approach that it used and how it will do better in the future? CTS has no trading thesis. It has self-referential goals, like to expand its international trading desk, but even that move into Indonesia wasn’t part of the original sales pitch. That was a surprise. All we know is that it struggles to make trading gains when the PSE isn’t pumping, when there’s inflation, and when rates are high. The only way FY22 could have been worse for CTS is if interest rates somehow didn’t go up; then its low-risk government bonds wouldn’t have paid out so handsomely.
• [NOTES] Quick takes from around the market...
  • Alternergy [ALTER 2.84 unch; 56% avgVol] [link] stability report reveals that the fresh IPO’s stabilization fund agent “spent” another 26.4 million shares last week to bring its total usage to around 86 million of the 115 million shares in the quota. The stabilization fund is 75% depleted, with one week left to go in the fund’s lifespan.
    • MB Quick Take: ALTER has struggled to punch through the resistance of its IPO price, but the stabilization fund’s spend has been fairly consistent and it has about 25% left to spend during the last 25% of its life.
  • PLDT [TEL 1284.00 ▲1.9%; 2341% avgVol] [link] announced a substantial list of departing executives as a result of the damaging capex overrun fiasco discovered in December of 2022. TEL disclosed that its Chief Procurement Officer voluntarily resigned, while its CFO and Network Head availed of “early retirement”. A vice president availed of TEL’s manpower reduction program, and another vice president voluntarily resigned. TEL did not announce any appointments to fill these vacant positions.
    • MB Quick Take: That capex mess was too big for there to be no consequences. The explanations that TEL has provided (so far) have been so vague and unsatisfying that the only answer seemed to be that it was a personnel issue. These are huge changes. The CFO role in particular, due to its intimacy, is a difficult one to replace quickly. Maybe TEL can make an opportunity out of this crisis and come out the other side with a leaner, meaner executive core.
  • DITO CME [DITO 2.70 ▼3.9%; 1463% avgVol] [link] posted a FY22 net loss of ₱25.6 billion, which was 42% worse than its FY21 net loss of ₱17.9 billion. DITO’s losses actually accelerated into Q4; its 9M net loss was ₱14.2 billion, meaning that it lost ₱11.4 billion in Q4 alone. DITO said that its total subscriber count had increased to 15 million, and that its monthly average revenue per user (ARPU) was ₱83. DITO’s foreign exchange losses grew 17% to ₱7.2 billion. DITO’s interest expense grew 324% to ₱5.3 billion. The company said that it plans to conduct a follow-on offering in 2023, and it reported that Udenna Corp (Dennis Uy’s personal holdco) has “committed to provide additional capital” in addition to having its outstanding advances to DITO converted to equity.
    • MB Quick Take: While it’s hopeful to see DITO’s ARPU jump 7% q/q, it’s alarming to see its subscriber acquisition rate get chopped in half, from 36% q/q in Q3 to 15% q/q in Q4. To DITO’s credit, it exceeded its 12 million subscriber goal by the end of FY22 by a considerable margin, and it did so while improving ARPU, but my god those currency and debt headwinds are strong. DITO’s stock is down 46% over the past year.
  • Chelsea Logistics [C 1.16 ▼0.8%; 7% avgVol] [link] posted a FY22 net loss of ₱2.5 billion, which was actually 35% better than its FY21 net loss of ₱3.9 billion. Chelsea attributed its continuing struggles to the “double blow” of the continued risk of COVID sub variants to disrupt its business, coupled with the high price of fuel as a result of the Russian invasion of Ukraine. Gross revenues were up 44% to ₱6.4 billion on easing restrictions, with gains in all segments. Gross expenses were down 10% as a result of cost control measures.
    • MB Quick Take: The last time Chelsea turned a profit was back in 2017, but its losses really accelerated when Dennis Uy changed the company’s name and focus to include catching some of his falling knives. Losing just ₱2.5 billion is a huge improvement, but it’s still a factor of 10 worse than it was back when Chelsea was just a focused logistics company.

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[taran]

@ignissus Highlights For DITO:

Debt to Equity ratio = -7.92

Interest Coverage = -2.07

plans to conduct a follow-on offering in 2023

They've tapped out their Chinese Bank credit lines, so they have to turn to retail.

If only we had shorting in the market, they could spin a story and sell the FOO on r/wsb.

*Edit: Nevermind r/wsb, seems there are enough fools on Investa.

 

[musicismath]

@taran I wish we could short the stock here cuz im looking forward to short Dito hehe..

 

[ignissus]

Sorry sorry sorry... I thought I clicked "submit"

 

[xbgx]

@ignissus Thoughts on SGP?

 

[pastorjeremiah]

@xbgx I have been accumulating SGP. I don't know why the market doesn't like it. It's a monopoly. P/E = 3. Dividend Yield is 10%.

 

[etxn1960]

@pastorjeremiah Have you heard about the rate reset process going on with NGCP? ERC sets NGCP annual revenue based on a formula which mostly comes down to expenses plus a return on value of transmission assets equal to wacc as determined by the commission every 5 years. The last time wacc was adjusted was 2009 when it was set at 15%. It was supposed to be recalculated in 2015 to go into effect in 2016, then the erc just ... didnt do it. So since 2016 theyve been allowed to collect interim revenue based on wacc of 15%. Now the ERC is finally getting around to resetting the formula and it looks like they think wacc should have been 10.7 since 2016 meaning final revenue for the last 6.5 years will be a substantially less than they already collected. Most likely the excess will be deducted from future revenue. None of this is in any of their disclosures naturally, except a couple vague lines in the IPO prospectus.

Also it has almost no retained earnings since privatization, Sy and Coyiuto cashed it all out and financed capex with debt.

 

[pastorjeremiah]

@etxn1960 I did a quick review of the SGP 2022 annual financial report.

1. I didn't see anything re ERC rate negotiations. So I can't comment on that. We'll just have to see.
2. The 2022 Return on Equity (ROE) = 25%. 2021 ROE = 20%. 2020 ROE = 22%. These are actually fantastic numbers. My benchmark for a good investment is ROE > 15%.
3. High ROE can finance a high dividend yield. Last year, it was 10%. 2023 YTD is 4.4%.
4. Assets = P 417B. Liabilities = P 281B. Equity = P 136B. Retained Earnings = P 72B.
5. So "almost no retained earnings" is not correct. RE was 53% of the Equity.
6. D/E = 207%. So it's true that Capex is heavily financed by debt. That's actually not bad. Debt is cheaper than Equity.
7. Interest on their term loans probably runs at around 6-8%. Their cost of equity is around 22%. So borrowing money for Capex and returning cash to their shareholders is the correct business decision. As a shareholder, I do not object.

The bear case is that they run a business with a government franchise. A corrupt and vindictive president can terminate or cancel their franchise. See how DU30 terminated ABS, handed PhilWeb from Ongpin to the Marcoses and handed MWC from Ayala to Razon. That's the real risk.

For now, I think the reward is worth the risk. But who knows?

 

[pastorjeremiah]

Clarification: DU30 forced Roberto Ongpin to sell PhilWEB to Greggy Araneta, the husband of Irene Marcos.

 

[etxn1960]

@pastorjeremiah We dont know the ROE because all revenue and earnings after 2015 are going to be adjusted. It will be lower because the allowed revenue formula will go from multiplying asset base by a wacc of 15% to 10.7%. Then for the 5 year period after 2020 wacc will decline again because interest rates in the preceding years were lower still.

Theres nothing in the annual reports or other disclosures about this, pse transparency being what it is, but its all on the ERC's website. Resolution from last october then a 500pg document posted in march going over regulatory asset base value and CAPM derived wacc calculations. It does not look good for SGP at all.

 

[pastorjeremiah]

@etxn1960 We do know the ROE for 2020, 2021 and 2022. They are in the Audited Financial Reports which are available in edge.pse.com.

Perhaps you mean the future ROEs.

We’ll just have to see. Assuming you are right (I went over some of the ERC documents but gave up after a while), it’s possible that they will be asked to lower their rate and target a lower RORB. This may result in lower revenues but can still provide a good return.

MER has an RORB = 12%. ROE for 2021 and 2022 = 23% which are higher than my ROE > 15% benchmark. Its P/E = 11 so it’s already fairly priced.

SGP P/E = 4. There’s more upside potential, if you have the stomach for political and regulatory risk.

YMMV

 

[etxn1960]

@pastorjeremiah You keep talking about PE and ROE when the E you are working with is a placeholder number and not final. They will have to restate all revenue after 2015, it is very clear in the documents published by their regulator. 2016 onward is only classified as "interim" revenue subject to revision. The difference will be deducted against future revenue they are allowed to collect. Again, there is literally a formula they use to calculate what total revenue will be every year. Simplified, it is (cost of transmssion assets - acculmulated depreciation+working capital)*WACC + OPEX + current depreciation +/-(performance incentive/penalty). Now what happens when you collect revenue on that formula with WACC set at 15% for 6.5 years, then your regulator says it was supposed to be 10.7% for that whole time?

Almost no one wants to slog through 1000s of pages of boring stuff about transmission infrastructure, i get that.

 

[pastorjeremiah]

@etxn1960 The ERC asking NGCP to restate earnings for 2016 to 2022 will be really messy. That's not up to the ERC. The COA, BIR and SEC will likely disagree. In my experience, that's highly unlikely.

What is less messy and more likely is that *if* ERC does rule that NGCP/SGP collected excess revenues in those years, the ERC will ask them to reduce their rates in subsequent years until the supposed excess is wiped out.

ERC and Meralco went through the same thing almost 15 years ago. You can find a summary here:

https://www.coa.gov.ph/download/216...7-sao-report-no-2009-01-executive-summary.pdf

MER was never asked to restate previous financial reports to correct for their excess revenues.

Like all prudent financial managers, MER set aside provisions in their income statements and balance sheets for this possibility.

While I do not know any SGP financial manager, I suspect they are doing this as well. If they didn't want to, I'm sure their auditor KPMG, whom I have worked with, would have required them to do so.

 

[etxn1960]

@pastorjeremiah

What is less messy and more likely is that if ERC does rule that NGCP/SGP collected excess revenues in those years, the ERC will ask them to reduce their rates in subsequent years until the supposed excess is wiped out.

These two scenarios are economically equivalent. I agree that the latter is more likely, but it just means sgp is set up for a long period of poor future earnings.

Like all prudent financial managers, MER set aside provisions in their income statements and balance sheets for this possibility.

While I do not know any SGP financial manager, I suspect they are doing this as well. If they didn't want to, I'm sure their auditor KPMG, whom I have worked with, would have required them to do so.

SGP has not done this. You can look at the balance sheet, there are no provisions. There is merely a short paragraph in the original ipo prospectus warning of exactly this situation.

 

[pastorjeremiah]

@etxn1960 "Restating past earnings" and "future rate adjustments" are not "economically equivalent".

The first one will result in fines, loss of face for SGP management and KPMG, lawsuits and other bad consequences. Heads will roll.

The second one happens all the time to MER and NGCP. We don't even notice. And MER keeps producing ROEs > 20%.

The provision for rate adjustments is in Concession Fee Payable in the SGP Balance Sheet. If you go into Note 5, you'll see how they provided for adjustments to the Concession Fee.

We may disagree on the future profitability of SGP but as far as rate regulation accounting is concerned, those guys know what they are doing.

 

[pastorjeremiah]

@etxn1960 You can download a copy of the SGP Financial Reports here

https://edge.pse.com.ph/companyDisclosures/form.do?cmpy_id=166

 

[juarezr]

@ignissus I smell sro/foo dilation in the near future