ACCURETTI REAL ESTATE

On January 2020 just before the Covid-19 pandemic kicked-in, Cemex Holdings Philippines, Inc. launched a Stock Rights Offering (SRO) raising 12.8 Billion Philippine Pesos .  The SRO was priced at 1.54 Philippine Pesos a share.

The SRO proceeds didn’t count much to improve the prospect of CHP. Of the total proceeds of 12.8 Billion Pesos, 7.9 Billion Pesos went to Cemex to pay for its advances and fees. Without the SRO proceeds CHP may have ran short of cash during the pandemic.

On July 28, 2020, Cemex Holdings Philippines Inc. ($CHP) in a press release has disclosed that it had reached an agreement to amend its debt covenant with BDO. The debt agreement amendment was meant to defer the compliance of certain financial covenants until June 30, 2021. It could be surmised from that disclosure that had the financial covenants not been amended CHP may have not complied that certain covenant.

The debt covenant amendments to accommodate CHP only confirms that CHP has of little underlying value. Even at the start, CHP’s underlying value seems to be much less than what was projected to be its value.

CHP debuted in the Philippine Stock Exchange through an initial public offering at a price of 10.75 Philippine Pesos per share raising a total of 25.1 Billion Philippine Pesos. The proceeds of such fund raising were all paid to the parent company CEMEX of Mexico. Proceeds of the IPO was not even enough, CHP borrowed around 14 Billion Philippine Pesos from BDO to make additional payment to the parent CEMEX of Mexico. Despite those payments CHP still owe the parent 1 Billion Philippine Pesos.

How did CHP became indebted to CEMEX? CEMEX sold the 40% of the operating companies Solid Cement and APO Cement to CHP. The acquisition of the 40% shares of the two operating companies created a goodwill of 27.9 Billion Philippine Pesos, that means the 40% shares of Solid Cement and APO Cement were acquired at around 40.1 Billion Philippine Pesos and of that purchase price, only around 12.2 Billion Philippine Pesos could be attributed to tangible assets such as cement plants, equipment, machineries, and etc. The 27.9 Billion Pesos overprice was justified as goodwill which was attributed to the existence of an assembled workforce and established dealer network.

After the transaction, CHP struggled in the market as it faces fierce competition especially from the influx of cheap imported cement from neighboring Southeast Asian producers.

With a huge “Goodwill” firmly lodged in its balance sheet and CHP struggling financially, the market slowly has come to realized that how little the underlying value of CHP is. From 10.75 Philippine Pesos IPO price, CHP has declined to a low of even 0.86 Pesos a share.

Now, the SRO price of 1.54 a share months ago looks very expensive. Cemex having accumulated 170,111,000 CHP shares at prices well below SRO price is now telling investors why pay 1.54 a share when I could it get it from you for much less.

The only value of CHP now is the hope that someone may acquire it. But Cemex is smart. No one sells CHP but Cemex. Cemex will probably continue to accumulate CHP at the value of CHP it knows and most probably take it private. As of August 31, 2020 Cemex Asian South East Corporation already captured 77.19% of CHP having accumulated 170,111,000 CHP shares in the month of August. Then most probably afterwards, Cemex will sell it privately at the right price.

The CHP saga is a Cemex masterclass on how to extract value through financial engineering. The best and brightest conglomerates must have taken a lesson from it.

To investors, please consider writing-off your CHP investment. If ever Big Boy will buy CHP, it is most likely that he will not buy it from you, he will buy it from Cemex.

Disclaimer and Disclosure: This is an independent analysis for discussion purposes with the aim of giving stock traders and investors an independent view point.  Accuretti Systems Inc. in the course of day to day trading may have own, or is considering buying or disposing, the shares of the companies mentioned in this commentary.