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SM Prime Holdings (SMPH) Summary

Core Content

SM Prime Holdings (SMPH) is a leading real estate company in the Philippines, operating in various segments including malls, residential, commercial, and hotel/convention. It is a subsidiary of the SM Group, which has consolidated all its property assets under SMPH to streamline operations and extract synergies. The company's share price is PHP15.98, with a target price of PHP21.67, implying a 36% upside potential. SMPH has a market capitalization of USD10.2B and an average daily trade volume (ADTV) of USD6M.

Main Points

• Earnings Growth: SMPH is expected to achieve a 19% CAGR in earnings from 2013 to 2016, with net income projected to double to PHP35b by 2018 from PHP17b in 2013.
• Diversification: SMPH has expanded into residential, office, and hotel/convention sectors, making it a more diversified property company.
• Recurring Revenue: 83% of total EBITDA is from recurring businesses (malls, offices, hotels), with the residential segment contributing 17%.
• Residential Segment: SM Development Corp (SMDC), the residential arm, has been overhauled to reduce inventory from 12,000 units to 4,000 by 2015. New projects will only be launched after 80% of inventory is sold.
• Valuation: Using a DCF approach, the net asset value per share (NAV/sh) is estimated at PHP27.09, with a target price of PHP21.67 (20% discount), which is 31x 2014 PER. This is above the current 23x PER and the five-year average of 24x.
• Growth Drivers: The company's growth is driven by new mall developments, especially the SM Tianjin mall in China, which is expected to be one of the largest in the world with 540,000 sqm of GFA.
• Cash Flow: Operating cash flows are expected to reach PHP25b in 2014 and PHP30b in 2015. Free cash flows are projected to turn positive by 2019.
• Land Bank: SMPH has access to a large land bank of 894 hectares, including properties in Tagaytay Highlands and Pico De Loro, which can be used for future developments.
• Debt Profile: The company has a significant portion of peso-denominated debt, reducing exposure to exchange rate fluctuations. It is expected to retire PHP40b of debt within the next three years.
• Ownership: The Sy family, through SM Investments Corp and SM Land, holds a majority stake of 74.12%, with the remaining 25.88% held by institutional investors.

Key Information

• Share Price: PHP15.98
• Target Price: PHP21.67 (+36% upside)
• Market Cap (USD): 10.2B
• ADTV (USD): 6M
• Earnings CAGR (2013-2016): 19%
• Net Income (2013): PHP17b
• Net Income (2018 Forecast): PHP35b
• Core Net Profit (2014E): PHP19.264.8m
• Core EPS (2014E): PHP0.69
• Core EPS Growth (2014E): 9.8%
• Net DPS (2014E): PHP0.19
• Core P/E (2014E): 22.9x
• P/BV (2014E): 2.5x
• Net Dividend Yield (2014E): 1.2%
• ROAE (2014E): 11.3%
• ROAA (2014E): 5.3%
• EV/EBITDA (2014E): 15.6x
• Net Debt/Equity (2014E): 53.3%

Key Catalysts

• Mall Expansion: New malls in the Philippines and China, including the SM Tianjin mall, will drive growth.
• Residential Development: SMDC's inventory reduction and more prudent project launches are expected to improve performance by 2017.
• Synergy from Consolidation: The consolidation of all property assets under SMPH is expected to enhance operational efficiency and create positive synergies.
• Valuation: The company is undervalued relative to its long-term growth prospects, with a target price that reflects a higher multiple justified by its recurring business model and diversification.

Recommendation

• Buy: Maybank recommends a "Buy" rating with a one-year target price of PHP21.67, indicating a 37% upside potential.
• Valuation Justification: The target price is based on a NAV approach, with a 20% discount applied, and reflects the company's strong recurring earnings and diversification.

Company Overview

• Segments: Malls, Residences, Offices, and Hotels/Conventions.
• Malls: SMPH operates 48 malls in the Philippines and 5 in China, with a significant presence in Metro Manila and provincial urban areas.
• Residential: SMDC is the residential arm, with a focus on reducing inventory and launching new projects only after sufficient demand is secured.
• Commercial: Office spaces contribute to the company's recurring income.
• Hotels and Convention: These are also part of the recurring business model.
• Ownership: Majority owned by the Sy family through SM Investments Corp and SM Land.

Conclusion

SM Prime Holdings is well-positioned for growth with its diversified real estate portfolio and strong recurring income streams. The company's restructuring has created a more efficient and synergistic business model, supported by a solid debt profile and a robust land bank. The "Buy" recommendation is based on its attractive valuation and potential for long-term earnings growth.