FREE Stock in Focus: SM (19 Nov 2018) by First Metro Securities
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Summary of Broker’s Recommendation
|BROKER||RECOMMENDATION||TARGET PRICE||ISSUED ON|
|First Metro Securities||HOLD||928.92||19 Nov 2018|
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Our Partner Broker’s Recommendation
Consensus rates SM as a HOLD with median Target Price of PHP 928.92 per share (+5.3% upside from last close). SM is currently trading at 24.75x P/E and 2.87x P/BV. This is at a premium vs peers, given mean forward P/E at 14.67x and mean forward P/BV at 1.86x.
Our Partner Broker’s Analysis
Earnings in line with expectations
SM Investments Corp. (SM) posted 3Q 2018 net income of PHP 9.6 billion (+8.2% y-o-y), bringing its 9-month (9M) 2018 net income to PHP 26.2 billion (+10.4% y-o-y), in line with consensus estimates.
Its 3Q 2018 consolidated revenues grew by 12.3% y-o-y to PHP 109.9 billion, bringing 9M 2018 revenues to PHP 307.4 billion driven by double-digit income growth in its property business. The property segment accounted for 43% of total earnings, while the banks and retail comprised 36% and 21% of the total, respectively. Historically, property, banking, and retail businesses accounted for 39%, 39%, and 22% of SM’s net income, respectively.
Management targets to incrementally lower costs
Management noted that higher leasing expense (distribution expansion), higher fuel costs, and expansion of the Savemore and Alfamart stores led to lower margins in the food retail. Management however expects the slight margin compression is temporary, and plans to recover the costs through better deals with its suppliers. In terms of how higher inflation may affect its department store business, SM do not intend to significantly raise its margins since the company believes that its core competency is in the affordability of its products. Meanwhile, management also said that it does not plan to integrate its unit, 2GO Group, Inc. (2GO) in SM Retail’s distribution since 2GO has a distinct business model and has its own pool of clients.
Mall expansion to focus in North and South Luzon
Management remained positive that it is on track to turn over at least one mall (SM Ormoc) by end-2018. For 2019-2020, SMPH is targeting to open malls mostly in North and South Luzon in the next two years. For next year, malls will be opened in SM Daet, Butuan, Olongapo, Balanga Bataan, Sorsogon, Tagum, Tuguegarao, Mindoro and Caloocan. In 2020, malls will be opened in Roxas, Calamba Turbina, Tanza, San Fernando, La Union, Laoag, Zamboanga and Malolos.
Specialty Store expansion intact
Management remains on track to open 500 Alfamart stores by year–end. As for the whole SM Retail Group, management targeted 3,000 total stores in the next five years as it aims to open more food and specialty stores. To meet the said target, SM Retail is open to introducing more foreign brands.
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