Philippine Markets Newsletter

This conglomerate has got it all for you with its continuous growth initiatives, reaching a Uniform ROA of 13%, not 5%

April 5, 2023

While diversification has been this conglomerate’s core strategy, focusing on that isn’t enough to bounce back from the pandemic’s negative effects. That is why as the country continues to reopen, this company also delved deeper into its expansion initiatives.

However, looking at its as-reported data, it doesn’t seem to be showing that it is producing lucrative returns.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Newsletter:
Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus
Powered by Valens Research

What was once a shoe shop evolved into one of the country’s largest companies in terms of market capitalization.

Now, the SM Investments Corporation (SM:PHL), or the SM Group, holds interests in various industries such as shopping mall development and management, real estate development through SM Prime Holdings, Inc. (SMPH:PHL), financial services through BDO Unibank, Inc and China Banking Corporation, and tourism.

However, even large companies like the SM Group are not immune to the negative effects of the pandemic. The SM Group still took a hit as quarantine restrictions constrained consumer spending. This continued into 2021, albeit to a lesser degree.

Fortunately, the company was able to bounce back, posting a 28% revenue growth to PHP 553.8 billion from PHP 432.4 billion in 2022.

Specifically, the SM Group’s banking sector contributed to 45% of its overall net income, while property, retail, and portfolio investments accounted for 23%, 21%, and 11%, respectively.

As the Philippine economy continues to recover, the company continues its plans to innovate and improve efficiencies in its several businesses. Besides that, the SM Group’s other main focus is to expand its hold across the regions.

For one, the company increased its investment stake from 35% to 51% in its logistics business, Airspeed. This comes after the SM Group stated that it wanted to strengthen its expertise in the movement of goods.

Another example would be the company’s recent ownership takeover of the Philippine Geothermal Production Company Inc. (PGPC) as it plans to lower its carbon footprint.

In the retail segment, the SM Group was able to expand its footprint in 2022 through:

  • The SM Store – opening four new stores in Cubao, Makati, Quiapo, and Delgado
  • SM’s Food Group – opening 231 new stores

Overall, the SM Group looks like it is set for continued growth as the country gradually recovers. However, looking at as-reported metrics, it appears that the company continues to only generate profitability near cost of capital levels.

In reality, the company’s expansion strategy actually did better than presented, with Uniform ROAs reaching 13%.

The distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of non-operating long-term investments on SM Group’s balance sheet.

These long-term investments are intangible assets that are purely accounting-based and unrepresentative of the company’s actual operating performance. When as-reported accounting includes this in a company’s balance sheet, it creates an artificially inflated asset base.

As a result, as-reported ROAs are not capturing the strength of SM Group’s earning power. Adjusting for non-operating long-term investments, we can see that the company’s displayed performance is actually misrepresented. In fact, the returns are better than it seems.

SM Group’s earning power is stronger than you think

As-reported metrics distort the market’s perception of the firm’s recent profitability. If you were to just look at as-reported ROA, you would think that SM Group’s profitability has been stronger than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated over the past decade. For example, as-reported ROA was 5% in 2022, but its Uniform ROA was actually higher at 13%.

SM Group’s asset turns are more efficient than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. For more than two decades, as-reported metrics have understated SM Group’s asset efficiency, a key driver of profitability.

Moreover, as-reported asset turnover has reached a peak of 0.5x. In comparison, Uniform turns have reached a peak of 1.2x over the same time period, making SM Group appear to be a less efficient business than real economic metrics highlight.

SUMMARY and SM Investments Corporation Tearsheet

As our Uniform Accounting tearsheet for SM Investments Corporation (SM:PHL) highlights, the company trades at a Uniform P/E of 13.1x, below the global corporate average of 18.4x and its historical P/E of 17.1x.

Low P/Es require low EPS growth to sustain them. In the case of SM Group, the company has recently shown a 139% Uniform EPS growth.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings and convert them to Uniform earnings forecasts. When we do this, SM Group’s sell-side analyst-driven forecast is to see Uniform earnings growth of 19% and 7% in 2023 and 2024, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify SM Group’s PHP 905.00 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow immaterially per year over the next three years. What sell-side analysts expect for SM Group’s earnings growth is well above what the current stock market valuation requires in 2023 and 2024.

Moreover, the company’s earning power is 2x the long-run corporate average. However, cash flows and cash on hand are above total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low credit and dividend risk.

To conclude, SM Group’s Uniform earnings growth is above its peer averages, and in line with its average peer valuations.

About the Philippine Markets Newsletter
“Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under IFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one Philippine-listed company that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earnings Tearsheet on a Philippine company interesting and insightful.

Stay tuned for next week’s Philippine company highlight!


Angelica Lim
Research Director
Philippine Markets Newsletter
Powered by Valens Research

View All

You don’t have access to the Valens Research Premium Application.

To get access to our best content including the highly regarded Conviction Long List and Market Phase Cycle macro newsletter, please contact our Client Relations Team at 630-841-0683 or email

Please fill out the fields below so that our client relations team can contact you

Or contact our Client Relationship Team at 630-841-0683