MM surge in value could not be justified by fundamentals. Before the public offering (IPO), MM’s balance sheet is at 915 Million Pesos. The proceeds of the IPO at 1,500 Million Pesos (1.5 Billion) doubles MM’s balance sheet.
However, the balance sheet growth will not translate into a magnificent net income growth. There is a high barrier to entry in the non-discretionary retail industry. The dominant players are well entrenched and have long established an economy of scale in their operations. SM Investments (SM) is well entrenched not just in SM Malls but also in third party-owned locations with Save More, Watsons, SM Supermarket, Waltermart, and Alfamart. It is not just SM but also Robinson Retail Holdings (RRHI) with Robinson Supermarket, Ministop, The Generics Pharmacy, Rustan’s, etc.; Puregold (PGOLD) with Puregold, S & R, ThreeSixty Pharmacy, etc.; Philippine Seven Corporation (SEVN) with7-11; Metro Retail Stores Group, Inc. (MRSGI) with Metro Gaisano and even the Ayalas, Villars, and Dennis Uy are into it. We are not yet even counting the unlisted giant Mercury Drug and the other Gaisanos and the hundreds of independent grocery stores, drugstores, and convenience stores that have built scale in their own niche market.
Once MM will start spending the IPO proceeds to build scale, the balance sheet will begin to shrink. Possibly MM will bleed red. We think 1.5 Billion Pesos is not enough to create an economy of scale especially in this time of economic slowdown brought about by the covid-19 pandemic. Yes, non-discretionary retail will not be gone but we see a slowdown in consumption with the massive unemployment and reduction in household income. Without the scale, MM will be in the red and if lucky break even. We think it took decades for SM, RRHI, MRSGI and PGOLD to build their operations before they went public. Mercury Drug is up to now private.
We tried to decipher the factors explaining the meteoric rise of MM’s value. The foremost factor in the rise of MM’s value is the “Injap Magic“. As we all know Edgar “Injap” Sia II started Mang Inasal and grew it before it caught the attention of Jollibee Foods Corporation (JFC)’s Tony Tancaktiong who later bought it for billions. The proceeds of the sale of Mang Inasal allowed Injap to start Injap Investments, Inc. which then partnered with Tony Tancaktiong to start the real estate venture DoubleDragon Properties Corp. (DD). DD successfully raised capital in the stock market. (DD is another story.) Those events allowed Injap to multiply his wealth many times over. People see him as a man with a magic touch. This time people bet that Injap can do the magic again. That their one peso investment will multiply several times over. Which actually did happen.
Second factor is that, there is no foreign ownership restriction to own MM. Retail Trade Liberalization Act allows retail trade companies to be 100% foreign-owned if compliant to certain capitalization. Since there is no restriction for foreign investors to own MM, big foreign institutions may have taken large chunks of the Institutional Investors allocation which is 70% of the total shares offered. They may also have taken a sizable chunk of the 20% allocation to the PSE Trading Participants. Top brokers have foreign institutional investors as their biggest clients. This left the LSIs (local small investors) with just 10% of the total shares offered. It was reported that the IPO was overwhelmingly oversubscribed. In the hope of riding the Injap Magic, LSI’s scrambled for available shares which were mostly being held by institutional investors.
ABS can do the same magic also. What ABS has to do is bundle the studio & content with the digital distribution platform and spin it off into a separate company. The studio & content with the digital platform will not have foreign ownership restriction and it is not subject to heavy regulations. No foreign ownership restriction to own shares is one of the biggest factor for the meteoric rise of MM.
Broadcasting is subject to a very strict foreign ownership restriction that raising capital is limited and it is exposed to the vagaries of the political system of the country. This factors are dragging ABS’ value down. It is also does not help that broadcasting is a dying industry, take a look at GMA7 a very good company but not valued as much. (GMA7 is also another story.)
If MM has the “Injap Magic” factor, ABS has also the “Star Magic” factor. ABS boast itself of a world class content creation studio. ABS’ capability to create content is at par with the best in the world. Surely ABS’ studio and content capability will be highly valued in the market especially that it is not heavily regulated and there is no restriction in the ownership. ABS’ studio and content capabilities will be coveted by foreign institutional investors for such capability is rare.
For ABS to create value will just have to split into two: 1) the broadcasting, mass media, and real estate 2.) studio and content capabilities married with its digital distribution platform. The first will not be valued as much but the second will be.
If ABS will not do this, then they are just showing their arrogance. If they will stand by their arrogance they better buy-out the minorities at 30 per share and take ABS for themselves. If ABS will not buy-out the minorities, then the minorities should join President Duterte in his call for a sale of ABS.
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