The latest acronym most listed companies use is ESG which stands for environmental, social and governance. Environmental refers to the ecological impact of the business operations. Social refers to the relational aspect with the stakeholders. Governance refers to the compliance management of the business owners. ESG is a framework that guides stakeholders in determining the best method to minimize risks and maximize returns associated with sustainability initiatives. We commend the regulatory organizations led by the Securities Exchange Commission (SEC) for encouraging listed companies to have sustainability initiatives. To support the listed companies in the evaluation and management of non-financial performance of the business organization across the ESG aspects and to enable them to measure and monitor the related contributions towards reaching the sustainability targets, the SEC issued Memorandum Circular 4 or the Sustainability Reporting Guidelines for Listed Companies on 15 February 2019. Since the issuance of the guidelines, the SEC has seen an improvement in the submission of sustainability reports among the listed companies as it increased to 95.41% as of 31 December 2023 from 90.40% as of 31 December 2019. Although most listed companies have embraced the ESG framework as shown by the notable compliance rate, we should remember that everything that shines is not gold. Greenwashing has been a common practice by some listed companies as they use ESG as a marketing platform to promote themselves rather than to serve stakeholders. It is conveying a false impression or deceptive information about products, services and business practices and making the most of the ESG investing movement. The most common forms of greenwashing include undistinguishable product labels, unsure service commitment and unsound business practices that dupe investors and delude consumers searching for ESG-driven business organizations. Some listed companies have engaged in greenwashing through newspaper articles, online commercials and print advertisements promoting their ESG compliance but are not making a holistic approach to sustainability initiatives. To ensure strong adherence to the ESG framework, the SEC is studying the adoption of the International Financial Reporting Standard (IFRS) Sustainability Disclosure Standards developed by the International Sustainability Standards Board to validate whether the ESG data are transparent or accurate. In the absence of international sustainability standards that would make the ESG data measurable and comparable, we should accept it while maintaining a degree of skepticism about its authenticity. We are not sure which of the listed companies are submitting sustainability reports anchored on strong commitment or simple compliance.
Purpose Driven Investor
30 June 2024
31 March 2024
Free Float
A company that is interested in becoming a listed company by applying for listing by way of an initial public offering is now required to sell to the public between 20% to 33% of total shares depending on market capitalization. For companies with a market capitalization of more than P1 billion, the minimum public ownership must be 20% of total shares or P250 million worth of shares, whichever is higher. For companies with a market capitalization of between P500 million to P1 billion, the minimum public ownership must be 25% of total shares or P100 million worth of shares, whichever is higher. For companies with a market capitalization of less than P500 million, the minimum public ownership must be 33% of total shares or P50 million worth of shares, whichever is higher. For companies applying for listing by way of introduction and listing by way of backdoor, the minimum public ownership must be 20%. It is worth mentioning that upon and after listing a listed company must maintain a minimum public ownership of at least 20%. The rationale for adjusting the minimum public ownership of listed companies would include but is not limited to increasing market liquidity, decreasing market volatility, restraining market speculation and preventing market manipulation. Although the collaboration of the regulatory organizations such as the Securities Exchange Commission and the Philippine Stock Exchange is commendable for implementing a higher minimum public ownership of listed companies, it does beg the question of why not apply these rules to all listed companies. Based on the guidelines on minimum public ownership of listed companies issued by the regulatory organizations, these requirements are mandated to companies applying for listing by way of an initial public offering, listing by way of introduction and listing by way of backdoor but not to the other companies that have been listed before the issuance of the guidelines. If the regulatory organizations want to institutionalize the best possible corporate governance among their stakeholders then they must ensure that the guidelines are applied to all listed companies without prejudice to the timing of listing. Failure to do so would encourage some listed companies that have been listed before the issuance of the guidelines to remain as shell companies without active business operations or significant assets. Shell companies are not unlawful but they sometimes bend the rules without breaking them by disguising business ownership from the regulatory organizations and evading automatic delisting from the local bourse.
31 December 2023
Press Start
30 September 2023
Low Tax
30 June 2023
Wrong Move
Greek philosopher Heraclitus who wrote about the nature of change in his book Fragments once stated that the only constant in this world is change. We adhere to his philosophical thinking and we advocate change if and when the chosen modification is the best possible proposition among the selections. We were elated when the Axelum Resources Corporation (AXLM) announced that its board approved a measure to reallocate P350 million of the Initial Public Offering (IPO) proceeds from the global network expansion to product development, marketing expenses and capital expenditure. The justification for the reallocation of the IPO proceeds is that it makes available supplementary financial resources to the aforementioned business activities that are needed by management in implementing the business objectives. Through its associate company the AMDG Foundation, AXLM acquired the San Isidro Polymedic General Hospital – a leading secondary–level hospital in Gingoog City, Misamis Oriental. The hospital is furnished with a 100-bed capacity and offers comprehensive professional healthcare services which include but not limited to surgery, neonatal, radiology, pharmacy, laboratory, diagnostics, hemodialysis, intensive care, delivery rooms, outpatient clinics and emergency services. Some trading and market participants would argue that a reallocation of the IPO proceeds should be considered as a red flag since AXLM would be breaking its own rules as stated in its prospectus describing the original use of the IPO proceeds and other related information that an investor could use when deciding whether or not to invest. Although we have not come to an agreement with these trading and market participants as long as the purpose of the reallocation of the IPO proceeds is to ensure that the business operations could generate the highest possible return at the lowest possible risk, the corporate action made by AXLM neither created operational nor financial synergies. It is worth mentioning that AXLM is engaged in the manufacturing of coconut products such as coconut oil, coconut milk, coconut water, sweetened coconut and dehydrated coconut among others. No matter how eloquent the press release of AXLM is regarding the acquisition of the San Isidro Polymedic General Hospital, the fact remains that the reallocation of the IPO proceeds is a wrong move. Based on Investopedia.com, business synergy is the concept that the combined value and performance of merged companies would be greater than the sum of the separate companies. If that is the case then where are the operational and financial synergies in this corporate action?
31 March 2023
Broken Vow
Full disclosure principle states that an accurate and complete information that could have a material impact on the financial statements and operating performance of companies should be included in public filings to ensure that information asymmetry between the company insiders such as the directors, managers and shareholders, and company outsiders such as the lenders, creditors and investors would be mitigated if not eliminated. Companies are required to practice corporate governance and transparency that promotes cooperation, collaboration and communication among the concerned parties supported by a sequence of protocols in delivering and increasing value to shareholders. But we should not depend on the strong adherence of the company insiders because the position that they hold in an organization make available to them material non-public information that could have an impact on the share prices of companies in which they could make the most of to have an undue advantage in realizing an above average investment return. Although morality cannot be legislated, behavior can be regulated so the private sector should endorse the best possible solution to the market predicament while the public sector should enact relevant laws to regulate the behavior of company insiders. Whether or not the market structure is competitive or non-competitive, insider trading can happen in an idealized competitive economy. In this regard, the Securities and Exchange Commission warned companies that the electronic submission of reportorial requirements would be considered accurate and complete while errors would be punished with corresponding penalties. The revised Corporation Code of the Philippines noted that companies including their authorized representatives who submitted the erroneous and deficient information would be held liable for the corresponding penalties imposed ranging from P20,000 to P400,000. We do know that the revision of the Corporation Code of the Philippines by the lawmakers and the implementation of the electronic submission of reportorial requirements by the regulators would benefit the shareholders but what we do not know is whether the corresponding penalties are more than enough to discourage violations and encourage compliance. In our opinion, the corresponding penalties could be described as negligible considering that the amount would not make a dent on the financial statements and operating performance of most companies. Perhaps it would be best for the lawmakers and the regulators to increase the corresponding penalties to unreasonable level or else non-compliant companies including their authorized representatives would continue to submit erroneous and deficient information to pump and dump the share prices for personal financial gain at the expense of the unsuspecting market participants.
31 December 2022
Limit Order
Dividend investing is a method of buying stocks of companies that had declared regular cash payouts to shareholders as a reward for holding on to the stock. It can provide a stable income stream to shareholders in addition to the potential capital appreciation. In this regard, Real Estate Investment Trust (REIT) became a popular option for investors considering that it is mandated by law to declare at least 90% of its distributable income as dividends to shareholders in which the dividends should be payable from the unrestricted retained earnings. This is the reason why we commend the lawmakers and the regulators for amending the implementing rules and regulations of the REIT Act of 2009 related to the minimum public ownership requirement from a maximum of 67% to a minimum of 33% of the outstanding capital stock. These amendments persuaded most real estate companies to establish a REIT as a separate subsidiary for the purpose of consolidating its income-generating real estate. But the House Bill 7525 proposes to amend the REIT Act of 2009 that would require the REIT sponsor or promoter to reinvest in the Philippines the proceeds realized from the sale of REIT shares within one year from the date of receipt. Proceeds subject to the reinvestment rule include other securities issued in exchange for income-generating real estate and other proceeds raised from the sale of income-generating real estate that are transferred to the REIT. REIT is required to submit a reinvestment plan to the Philippine Stock Exchange and Securities and Exchange Commission upon registration and should secure an annual certification to demonstrate its compliance with the reinvestment plan. Although the proposed amendments could be beneficial to real estate sector, we should remember that a reinvestment plan should be anchored on a common policy rather than an uncommon strategy. A reinvestment plan provides a platform from which change could be leveraged to minimize the risk and maximize the return so it should be flexible and adaptable enough to manage adjustments to serve the interest of the shareholders. Perhaps the proposed amendments should consider the fact that REIT needs more than one year to reinvest in the Philippines the proceeds realized from the sale of REIT shares from the date of receipt. Any business undertaking goes through the usual process of economic expansion and contraction so we should not propose an order that would limit the flexibility and adaptability of a reinvestment plan.
30 September 2022
Oplan Purge
30 June 2022
Golden Goose
Rather than being considered as an occasional event, the shortage of poultry products brought about by the high feed costs, low feed quality, bird flu outbreak and the changing consumer preference has become a frequent event. This incident turned from bad to worse when major quick-service restaurants which offer meals that require minimal preparation time and delivered through quick services were unable to provide poultry-based menus. Most customers have taken to social media to complain about being unable to buy the popular fried chicken meal that has become synonymous with these quick-service restaurants. We expect the shortage of poultry products to continue considering the decreasing supply and increasing demand situation so we are in agreement with the recent corporate action of San Miguel Food and Beverage Inc (FB), a subsidiary of San Miguel Corporation (SMC), in which it would build a dozen poultry facilities at an estimated total cost of $1.2 billion. Once completed and operational by June 2024, each poultry facility would have an annual production capacity of 80 million chickens so a dozen poultry facilities would have an annual production capacity of 960 million chickens. In addition to the production of processed and ready-to-eat chicken products, the produce from these poultry facilities would be able to serve the growing demand for supersized roast chickens. According to Statista, the poultry products consumption per capita in kilograms in the Philippines increased from 9.32 in 2010 to 13.74 in 2020 or a compound annual growth rate of 3.96%. Based on the aforementioned decade-long compound annual growth rate, FB could be considered as the goose that lays the golden eggs for SMC based on the profit potential of the business undertaking. In addition to the business implication, the business undertaking would be a business diversification for FB considering that its operating segments are concentrated on alcoholic and non-alcoholic beverages. For the comparable years ended 31 December 2021 and 31 December 2020, the contribution by operating income of the alcoholic and non-alcoholic beverages were 74% and 84% while the balance is contributed by the prepared and packaged food. We have a high degree of confidence in the profit potential of this business undertaking because it is anchored on the fact that FB is a master of vertical integration which allows it to streamline its business operations through direct ownership of the stages of the production process rather than relying on external contractors.
31 March 2022
Rule Breaker
As a fundamental principle that expression and communication through media which includes but not limited to the traditional and digital formats, press freedom should be considered a right as stated in the 1987 Philippine Constitution. This is the reason why most investors supported the 25-year franchise renewal application of ABS-CBN Corporation (ABS) when it became a subject of contention among the members of the Philippine House Committee on Legislative Franchises whose majority voted against it. Brought about by the rejection of its franchise application, gross revenue decreased by 16.8% to P17.8 billion from P21.4 billion while net loss decreased by 58.1% to P5.7 billion from P13.5 billion for the comparable years ended 31 December 2021 and 31 December 2020. Although we wanted to sympathize with its partisan politics-induced predicament, the recent business behavior of ABS has dented its corporate reputation. ABS was sanctioned by the Philippine Stock Exchange (PSE) for failure to comply with several provisions of Article VII of the Consolidated Listing and Disclosure Rules. According to the PSE, ABS violated Section 1 mandating public companies to adhere to the updated, complete and accurate disclosure of material public information, Section 4.1 requiring public companies to disclose material public information within 10 minutes from receipt of the details, Section 4.2 prohibiting public companies from disclosing material public information to anyone unless such are about to be disclosed to the PSE, Section 4.3 instructing public companies to report any developments that could have a material impact on financial standing, market position and share prices, and Section 16 directing public companies to update prior statements made erroneous by subsequent events within 10 minutes from receipt of the details. The updated, complete and accurate disclosure of material public information is considered as mandatory reportorial requirements by the PSE and the Securities and Exchange Commission hence its prompt submission is expected by the capital market stakeholders which include but not limited to traders, analysts, investors, managers and regulators. But these basic disclosure requirements are not basic for some public companies that cannot submit them due to a broad range of unacceptable excuses that they blame on systematic risk or risk inherent to the market and unsystematic risk or risk specific to the company. Although we expect them to use unsystematic risk or risk specific to the company as an excuse, we believe that ABS is a rule breaker and has no one to blame but themselves.
31 December 2021
False Start
30 September 2021
Sweat Sugar
30 June 2021
Apple Score
How unfortunate that most capital market stakeholders which include but not limited to the traders, analysts, investors, managers and regulators compared the business operations and financial performance of the public companies for the years ended 2019 and 2020 despite the unprecedented pandemic-driven economic crisis that wreaked havoc on business activities. How could someone with a rational investor mindset compare the pandemic-threatened 2019 with the pandemic-centric 2020? Although these years are poles apart and not comparable by any measurable metric or acceptable standard, most capital market stakeholders tolerated the sequential growth analysis without regard to the comparability of accounting information. Through the digital media platforms such as apps, blogs and websites and the traditional media platforms such as print, banner and broadcast, the financial press compared and reported the business operations and financial performance of the public companies for the years ended 2019 and 2020. Comparability refers to an accounting information quality that makes the financial statement comparable. An accounting information that is prepared using the same measurement procedures and reported using the same reportorial standards is considered comparable. Although the sequential growth analysis for the years ended 2019 and 2020 was prepared using the same measurement procedures and reported using the same reportorial standards, the results cannot be considered comparable. The pandemic-threatened 2019 should be considered as a normal period while the results should be considered as a normal growth but the pandemic-centric 2020 should be considered as an extraordinary period while the results should be considered as an extraordinary loss. The pandemic-centric 2020 was a period in which cost and expense mitigation and elimination were implemented to conserve cash position, manage debt obligations, renegotiate contract terms, reduce business operations, lower manpower headcount and suspend capital expenditures among others. Most public companies went on an unusual survival mode in which business operations were relegated to bare minimum rather than the usual competition mode in which business operations were geared to maximum capacity. Although the infectious disease and public health experts have been warning us for years that a pandemic involving an infectious respiratory disease virus is a plausible scenario, the low‐frequency and high‐impact characteristics of a pandemic makes it an extraordinary period that we should consider as an unpredictable event with adverse consequences. We believe that the pandemic-centric 2020 should not be considered in a sequential growth analysis to ensure an apples to apples rather than apples to oranges comparability of accounting information.