Among the conglomerates in the country listed at the Philippines Stock Exchange (PSE), the SM Group is the top pick while Ayala Corp. (AC) is still a strong contender.

According to a study released by Maybank Investment Banking Group (IBG) on Tuesday, while their forecasts for conglomerates next year (2025) are not rosy, SM is its top pick as improvement in the macroeconomic environment will benefit the segments of the Sy-led conglomerate.

“Our top pick and hero in the conglomerate sector is SM as we expect the group to perform well as the macroeconomic environment improves. We forecast SM’s main subsidiaries, BDO and SMPH (SM Prime), to fare well in FY25 (fiscal year 2025) with a recovery in consumer sentiment and demand also providing a boost to SM Retail’s earnings,” Maybank IBG said.

The investment bank said that for 2025, it sees the net income of conglomerates to increase by 4.2% year-on-year (YoY), with SM and AC putting out good performance compared to the whole sector.

“AC is expected to perform well (+10.6% YoY) given that its major subsidiaries are firing on all cylinders in terms of FY25 earnings growth. Meanwhile, we could see headwinds to earnings at GTCAP (GT Capital) and JGS (JG Summit) given the weak outlook for the PHP (Philippine peso) next year,” Maybank IBG said.

It added that GT Capital will be affected by its subsidiary Toyota Motor Philippines, as the there are vehicles and car parts that it imports from abroad. Meanwhile, JG Summit will be affected through a weak peso as Universal Robina Corp. (URC) still imports raw materials while Cebu Pacific will have to deal with higher aviation fuel costs.

“We find that there is a strong correlation between the PHP/USD (US dollar) forex rate and share price performance of Philippine conglomerates. A risk to the sector is if the PHP continues to weaken and conglos are typically seen as a proxy for the Philippine economy then a sell-off due to a decline in the PHP might mean a sell-off for conglos in general,” Maybank IBG said.

Furthermore, AC’s shares are seen trading at a discount although that is expected to narrow next year as its mobility arm, ACMobility is expected to improve on marking BYD, a global automative brand from China.

“AC’s discount to real time NAV (net asset value) has slowly widened this year likely from investors moving towards the subsidiaries instead of the parent. We think this could narrow as an unlisted subsidiary, ACMobility, improves as we expect BYD to do better. This could be a reason for a narrower discount in the next 12 months,” Maybank IBG said.

PROXY FOR PH ECONOMY

The investment banker added that SM is a “proxy for the PH economy” and is preferred over other conglomerates because it controls the largest bank and mall chain in the country.

“We prefer SM to the other conglos because of its ownership of the largest bank and mall operator in the country. BDO is expected to do well with forecasted steady loan growth of 12%. SMPH, through its malls, and SM Retail could benefit from a recovery in consumer spending as we forecast inflation to remain stable at 3.1%,” it said.

Maybank IBG also sees the residential segment of SMPH performing well with further reductions in the key policy rate by the Bangko Sentral ng Pilipinas (BSP). To recall, the BSP has reduced the key policy rate by a total of 50 basis points (bps) so far this year,

“We may see better performance from SMPH’s residential side with our forecasted 100bps interest rate cut next year. SMPH and BDO are among our top picks in the banking and property sectors and make up 66% of SM’s gross NAV (net asset valuation) and 77% of SM’s net income,” it added.

(MAIN PHOTO FROM SM WEBSITE)