SM Prime Holdings – Mall operations

THE COMPANY: SM Prime Holdings (SMPH) is the Philippines' largest mall operator. Publicly listed since 1994, SMPH owns and runs world-class malls all over the country, providing millions of square metres of floor area for fully integrated shopping, dining, and entertainment experiences.

In 2013 SMPH was reorganised as the property holding firm of the SM Group, absorbing SM Land, SM Development Corporation, Highlands Prime and SM Hotels and Convention Corporation, among others. The merged entity is better equipped to undertake integrated property developments or “lifestyle cities”, which combine the offerings of malls, residences, offices, hotels, and convention and leisure facilities. SMPH’s total land bank now exceeds 900 ha. Over time the company aims to become one of the largest property players in South-east Asia.

As of the end of March 2014, SMPH was 51.03% directly owned by SM Investments Corporation (SM), with another 25.72% held by the Sy Family. SM, effectively the parent company of SMPH, is a publicly traded Philippine corporation, having listed its common shares in 2005. SM and its subsidiaries are referred to as the SM Group.

PERFORMANCE: SMPH’s net income grew by 11.72% to P9.80bn ($220.5m) in the first half of 2014, mainly driven by a 7% increase in consolidated revenues to P33.42bn ($751.5m). Rental revenues, which accounted for more than half of the total, were up 12% to P17.67bn ($397.6m), thanks to the opening of new malls and the expansion of existing facilities.

SMPH has a robust earnings outlook, as the property sector continues to benefit from the increasing affluence of Filipinos and strong business process outsourcing growth, which fuels demand for housing, retail and leisure establishments. SMPH’s residential segment is in recovery, while its investment properties continue to provide steady growth.

GROWTH DRIVERS: SMPH unveiled a five-year roadmap aimed at doubling its income from P16.2bn ($364.5m) in 2013 to P32bn ($720m) by 2018, and boost its return on equity into the mid-teens, up from the current 11%. Its strategy is to develop more lifestyle cities similar to its Mall of Asia complex.

The company’s capex is expected to total P162bn ($3.65bn) from 2014 to 2016, about 57% of which, or P109bn ($2.45bn), will be spent on building more malls. Around 29%, or P56bn ($1.26bn), will go towards residential condominiums; 10%, or P19bn ($427.5m), will be spent on commercial office spaces; and the remaining 4%, or P8bn ($180m), will be allocated for hotels and convention centres.

SMPH continues to channel most of its capex spending – approximately two-thirds of the total – into investment assets that help produce more stable rental income from its mall and office leasing operations. SMPH is estimated to account for at least 70% of retail mall space in the Philippines. As such, we expect SMPH to be more resilient in case of economic downturns that usually impact the developmental residential and leisure segments.

The addition of new businesses to SMPH could give the company a better earnings profile. Whereas SMPH used to grow by a steady 10-12% every year, the residential development, commercial space and hotel segment could increase the company’s annual growth to about 15-18%.

LOOKING AHEAD: To support its huge capex and help meet debt maturities, SMPH will require nearly P100bn ($2.25bn) in additional capital between 2014 and 2016, which the company will likely raise through a combination of debt and equity. SMPH’s debt level is expected to hit P140bn ($3.15bn) by the end of 2014 and cross the P180bn ($4.05bn) mark by 2017, as the group taps new borrowings in support of its property portfolio expansion. Nevertheless, SMPH’s gearing ratio is expected to remain manageable and its sizeable operating cash flows – P12.68bn (285.3m) as of June 2014 – should provide sufficient interest cover for the company.