Quick Take: PAL's recovery and 4 more market updates
Ninoy Aquino International Airport (NAIA) [link] repairs will cause the entire Philippine airspace to be shut down for 6 hours on May 17, between midnight and 6 am. The Manila International Airport Authority (MIAA) said that the downtime to facilitate the “scheduled maintenance or replacement of the UPS” of the air traffic management center at NAIA. In this context, UPS refers to an “uninterruptible power supply”, which is a setup that provides emergency power when the normal source of power is unavailable.
MB Quick Take: I struggle to name a more frustratingly iconic duo than “NAIA and stupid power outages”. Cebu Pacific [CEB 39.70 0.8%; 150% avgVol] and Philippine Airlines [PAL 5.50 5.8%; 644% avgVol] really just have to eat these events, as they have been doing now for years. Whether the original outage was caused by sabotage (as the government speculated) or by a faulty design coupled with terrible business continuity planning, anyone who has ever installed a UPS on critical infrastructure like a production server cluster will know that 6 hours is an incredible amount of downtime for something like this to be done. But when it comes to being able to safely guide planes in the air, at night, in the dark, maybe it is better for MIAA to err on the side of caution given its track record.
Union Bank [UBP 83.00 0.1%; 26% avgVol] [link] shareholders approved a substantial increase in UBP’s authorized capital stock (ACS), from P35.3 billion to P60.3 billion, and a subsequent stock dividend equivalent to 27% of UBP’s outstanding stock. This means that existing UBP shareholders will get 1 stock dividend for every 3.7 UBP shares owned as of the record date, which has not yet been announced. UBP is using this stock dividend to satisfy the PSE’s requirement that at least 25% of an ACS increase must be subscribed/paid.
MB Quick Take: This is just another implementation of the CLI Maneuver, which as I discussed here with CLI’s CFO, Grant Cheng, is a low-friction, no-cash way for a company to finance a substantial ACS increase. Nothing about the company or its ownership really changes; every shareholder (technically) will own the same proportion of UBP as it did before the stock dividend. The stock will receive a little liquidity boost by having more shares in circulation. The company will have access to that additional P25 billion in authorized capital that it can sell to raise a substantial amount of fresh equity.
VistaREIT [VREIT 1.61 0.6%; 313% avgVol] [link] FY22 profit plunged 954756% to a net loss of P9.6 billion due to fair value adjustments on REIT’s deposited properties. The Villar Family’s mall REIT was not operational in 2021, so all values in its annual financial report are without historical comparison. The properties that form the basis of the REIT were not even injected into the corporate structure until March of 2022, ahead of its IPO in the middle of the year. VREIT recognized an P11.2 billion loss on the fair value adjustments of its properties in FY22, which VREIT attributes to rising rates making commercial real estate less attractive to potential buyers.
MB Quick Take: The revenue stream of VREIT to shareholders has been confirmed by VREIT’s dividends; the income generated is as-advertised by the prospectus. As we have discussed with the annual reports of other REITs that booked similarly-huge fair value adjustment losses, the income generated by the REIT that forms its distributable income is not touched by these paper value adjustments. Yes, the value adjustments flow to net income as a gain or loss, but VREIT doesn’t get to not pay dividends on its operational income just because it recognized a huge loss on the paper value of its properties. We need to think of the value of the REIT company as being somewhat separate from the value of the REIT company’s income in that regard.
Medilines Distributors [MEDIC 0.61 3.4%; 245% avgVol] [link] FY22 profit grew 13% to P192 million, primarily due to an increase in sales of cancer therapy machines that led to a 24% increase in company-wide revenues. MEDIC’s press release underlined the 53% growth in the company’s core earnings. The consumables business, which was a major focus of MEDIC’s IPO roadshow, increased its sales by 76%. MEDIC said that it “remains bullish” for the medical industry this year and that MEDIC is “in the right position” to “take on more opportunities” in the sector.
MB Quick Take: While MEDIC’s revenues had their biggest jump in the four years of data that the company provided, MEDIC’s associated profit growth has cratered. FY22 profit was up 13% y/y, but the year before, MEDIC’s FY21 profit was up 63% y/y, and the year before that, its profit was up 56% y/y. I know that’s a weird complaint to make for the company after it posted its highest profit ever, but slowing profitability is important. The company’s costs associated with salaries and commissions of salespeople went up dramatically; perhaps they’re just doing the dirty work of building a sales network for the products that will become more efficient over time, but IPO buyers are probably not going to be super patient. The stock is down 73% since its IPO.
Philippine Airlines [PAL 5.50 5.8%; 644% avgVol] [link] said that its recovery will be constrained by a shortage of new planes and intense competition over the spare parts needed to maintain its existing fleet. PAL’s President, Stanley Ng, said that it will take at least two years to acquire new planes and that buying used planes is not an option due to the costs associated with configuring planes to conform to PAL’s business model. PAL said that it remains open to new investors, and has received inquiries from potential strategic investors from Hong Kong and China, but that it was not in any ongoing talks with investors at the moment.
MB Quick Take: The transportation travel industry is cutthroat, and success depends on balancing massive liabilities against future streams of income that can be bent and shaped by factors that are entirely out of PAL’s control, like the spread of a global pandemic or the financial impact of inflation on recreational spending. Lucio Tan’s incredible lifeline to PAL saved it from complete destruction, but the underlying “business model” of the company hasn’t actually changed that much. As an investor, I’d be somewhat relieved that PAL couldn’t just do what it’s always done in path growth periods, which is to just buy more planes. Maybe this is a great challenge for PAL to learn to squeeze every last peso out of every route in its inventory.
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.
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