Malls contribute 57% to revenues of holding company

There is no need for an expert to state that SM Investments Inc. of the Sy family is  a profitable company because of its controlling interests in the country’s largest mall operator SM Prime Holdings and banking leader BDO Unibank Inc.

SM Investments in a disclosure to the Philippine Stock Exchange that its earnings during the first three quarters of 2023 jumped by 30 percent to P55.9 billion as its core banking, property and retail businesses remained strong.

Total revenues in the first three quarters of 2023 increased by 15 percent to P440.4 billion.

Besides BDO, the other bank under SM Investments is China Banking Corp. The two banks contributed 47 percent to the net earnings of SM Investments in the first three quarters of the year.

Meanwhile, mall operations made up 57 percent of the consolidated revenues of SM Investments, growing by 37 percent to P52.5 billion in the first three quarters of the current year.

“Our ongoing healthy growth reflects buoyant consumer activity in malls and sustained spending in discretionary retail categories,” SM Investments president and chief executive officer Frederic C. DyBuncio said in a statement.

‘Buy’ the shares of SM Investments

And while the prices of the shares of SM Investments listed at the PSE remain low, Maybank Investment Banking Group (IBG) recommends buying the company’s stock for its potential price increase in the next 12 months.

In a research paper, Maybank IBG lists the following as the value proposition of SM Investments:

– It is the holding company of the country’s largest bank, retailer and mall operator;

– Has a highly synergistic portfolio where each subsidiary working as a multiplier;

– SM Retail stores have an exclusive expansion platform through the group’s mall segment;

– BDO and China Bank benefit from the foot traffic of SM malls;

– SM Investments is also consumer-focused, limiting its regulatory/political risk that other industries face.

Growth drivers

When it comes to its mall operations, Maybank IBG said that food consumption drove its increase in revenues, accounting for 58 percent of SM Retail’s total revenues.

“SM Retail’s 8-percent/12-percent YoY (year-on-year) revenue growth in 3Q/9M23 (third quarter/first nine months of 2023) was driven by sustained growth in the food segment (+9 percent YoY), which accounted for 58 percent of SM Retail’s total revenue,” Maybank IBG said.

The investment bank also said that SM Retail is ahead of competitor Robinsons Retail Holdings, Inc.,when it comes to same-store sales growth (SSSG), or 9 percent versus 5 percent.

“This was complemented by continuous improvement in the contributions of the discretionary-driven department stores (+21 percent YoY) and specialty stores (+15 percent YoY). SM Retail’s same-store sales growth (SSSG) remained high at 9 percent vs competitor RRHI, which saw SSSG normalize to 5 percent,” Maybank IBG said.

BDO’s strengths

When it comes to its banking segment, Maybank IBG said in another research paper on BDO said that the bank’s fastest growing segments are credit cards and personal loans.

“On loans, fastest growing segments are credit cards (+26.2 percent) and personal loans (+30.9 percent), while middle market is lagging at only 1-percent growth,” it said.

However, BDO’s largest loan portfolio is in the corporate sector as it capitalizes on big companies seeking loans for their expansion.

“There are positive signs in lending to corporates, who can no longer hold off their expansion plans  and are now tapping BDO to fund capex (capital expense) needs,” Maybank IBG said.

According to Maybank IBG, large corporates make up 51.1 percent of the loan portfolio of BDO.

BDO also has the advantage of having a high cover for bad loans or non-performing loans (NPLs), or at 142 percent. However, the ratio of BDO’s NPL rose slightly to 1.99 percent from 1.95 percent.

“Despite this, we believe that there are no significant asset quality concerns for BDO, and this is further helped by BDO’s high NPL cover at 142 percent,” Maybank IBG said.

BDO also has the largest network of branches nationwide, or more than 1,600.

Overall, Maybank IBG has set a target price for SM Investments shares at P1,310 each. Over a 52-week period, the highest price reached by SM Investments shares is P952.50, which means that SM Investments shares are trading at a discount at the PSE.

Maybank IBG set a higher price target for SM Investments because it sees the company’s earnings growing also in 2024.

“Reiterate BUY on SM, which we expect to post robust FY24E (fiscal year 2024) earnings growth of 14 percent YoY,” it added.