This conglomerate is fortifying its portfolio amid macroeconomic hurdles.

However, its significant rebound seems to be understated when looking at as-reported returns, not taking into account its TRUE profitability.

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
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In 2022, the Philippine real estate market faced a rocky recovery post-pandemic.

The lifting of pandemic-related retrictions set the industry back on track for growth. However, increased inflation and higher interest rates proved to be major pain points for real estate developers and their bottom line numbers.

Yet, amid these challenges, SM Prime Holdings (SMPH:PHL) was able to pull through.

Over the past year, the company has been focusing on strategic expansion into key locations, as well as its integrated property development and sustainable growth initiatives in a still-recovering industry.

These developments have made SM Prime one of the Philippines’ largest property developers.

One of the company’s most crucial advantages is its extensive land bank. This forms a robust foundation for expansion in the next five to seven years, primarily in emerging progressive cities across the Philippines.

This strategic land portfolio aligns seamlessly with SM Prime’s commitment to integrated property development, focused on the creation of greener and safer spaces.

In 2022, SM Prime allocated PHP 73 billion to its capital expenditures (“capex”) program, funding various property developments and strategic land banking activities.

The company’s expansion strategy yielded substantial results, with a consolidated net income surging to PHP 30.1 billion in 2022, a remarkable 38% increase from the previous year.

Notably, mall operations contributed significantly to these revenues due to the strong recovery of the entertainment industry.

SM Prime expanded its mall portfolio that same year, opening four new malls in the Philippines, bringing its total to 89. These malls account for 52% of the company’s consolidated revenues, with those in the Philippines alone registering PHP 50 billion in revenues in 2022, more than doubling the previous year’s PHP 24 billion. The company plans to open at least three new malls in 2023.

The company’s residential business also showed promise,with reservation sales exceeding PHP 100 billion, while the office and hotel businesses also showed robust growth.

Overall, SM Prime remains poised to capitalize on its extensive landbank, having increased its allocation to capex.

SM Prime’s earning power is stronger than you think

Despite rebounding from the pandemic’s effects, SM Prime seems to generate below cost-of-capital returns, with ROAs only reaching 4%.

In reality, the company achieved higher Uniform returns of 6%, a much higher improvement from lower returns in the previous years.

One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies interest expense.

According to PFRS, interest expense is an operating cash flow. In reality, interest expense represents the cost of debt and is rightfully a financing cash flow. As such, in Uniform Accounting, interest expense is added back to earnings.

For example, in 2022, SM Prime recognized an interest expense of PHP 12.6 billion, 42% of as-reported net income of PHP 30.1 billion. When we add the PHP 12.6 billion back to earnings, because it is not an operating expense, net income increases. This adjustment alone represents a 15% jump in Uniform earning power.

SM Prime has a more efficient business 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 Prime’s asset efficiency, a key driver of profitability.

Moreover, as-reported asset turnover has remained 0.1x levels from 2021 to 2022. In comparison, Uniform turns have improved from 0.1x to 0.2x over the same time period, making SM Prime appear to be a less efficient business than real economic metrics highlight.

SUMMARY and SM Prime Holdings, Inc. Tearsheet

As our Uniform Accounting tearsheet for SM Prime Holdings, Inc. (SMPH:PHL) highlights, the company trades at a Uniform P/E of 27.4x, above the global corporate average of 18.4x, but below its historical P/E of 38.3x.

High P/Es require average EPS growth to sustain them. In the case of SM Prime, the company has recently shown a 59% 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 Prime’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 35% and 14% 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 Prime’s PHP 29.60 stock price. These are often referred to as market-embedded expectations.

The company is currently being valued as if Uniform earnings were to grow by 9% annually over the next three years. What sell-side analysts expect for SM Prime’s earnings growth is below what the current stock market valuation requires through 2024.

Moreover, the company’s earning power is above the long-run corporate averages. However, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends. Intrinsic credit risk is 180bps above the risk-free rate. Together, this signals a high credit and dividend risk.

Lastly, SM Prime’s Uniform earnings growth is above its peer averages and its Uniform forward P/E is also above 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!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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