Material slowdown in cash generation had SMPH unable to service debts using its own cash

In the nine-month period ending September 30, 2020, SM Prime Holdings (SMPH) generated cash from operations of 18.7 Billion Pesos down 57% from last year of the same period.

Despite the material slowdown in cash flow from operations, SMPH proceeded with its expansion spending 36.4 Billion Pesos to add investment properties and other assets.

The expansion eats a significant amount of its cash.

SMPH’s capacity expansion amidst the pandemic caused a shortfall in liquidity forcing SMPH to borrow a sum of 56.5 Billion Pesos.  SMPH used the borrowed money to pay debts, distribute dividends, and fund investments.

SMPH ended the nine-month period with a cash balance of 22.1 Billion Pesos and debts due in the near-term of 49.6 Billion Pesos.  The cash balance is down 12.5 Billion Pesos from the start of the year while the short-term debt is an increase of 29 Billion Pesos from the start of the year.

Real estate sales grew but the increase in real estate sales failed to boost cash flow generations.  This shows that funding for real estate purchases by financial institutions remained tight.  Without funding from financial institutions SMPH forced to carry into its books the receivables from the real estate sales increasing its receivables and contract assets by 20.5 Billion Pesos.

The fast-paced expansion of SMPH beyond the cash flows it generates could lead to growth stagnation later.  Later, debt repayment will confront SMPH forcing it to use cash flow from operations to pay debt and cut investments.  SMPH cannot forever use debt to repay debt.

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

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