JP Morgan to Ayala: Sell smaller units, take property arm private

MANILA, Philippines — J.P. Morgan has commended Ayala Corp.’s sharper portfolio management under president and CEO Cezar Consing, with the investment banking giant seeing more value being unlocked if the conglomerate sells smaller units upon profit turnaround and takes its listed property arm private.

In its recent Asia-Pacific Equity Research, J.P. Morgan said Ayala, which has long recycled capital across industries, has seen sharper portfolio management under Consing, who has tightened capital allocation and made difficult calls with little attachment to legacy.

It said Consing, Ayala’s first non-family CEO, has laid the groundwork by exiting underperformers, lifting payouts across subsidiaries and reining in capital calls.

“We believe the appointment of Bong Consing as CEO in 2022 has accelerated the pace and reinforced the focus on returns,” J.P. Morgan said.

“Mr. Consing has shown greater willingness to exit underperforming operations, rationalize ownership and push subsidiaries to return capital,” it said.

J.P. Morgan noted that under Consing’s tenure, Ayala right-sized the holding company, exited underperformers, pushed payouts higher across the subsidiaries, reined in capex and capital calls at lower-return subsidiaries and made accretive purchases of undervalued Ayala Land Inc. (ALI).

“That discipline now supports the handover to the eighth generation of the Ayala family, who are taking on more prominent operating roles and bringing fresh blood into the group,” it said.

J.P. Morgan said the eighth generation of Ayala leaders, meanwhile, have transitioned from predominantly board representation to prominent operating roles across the group, with Mariana Zobel de Ayala leading ALI’s leasing business since October 2023, and her brother, Jaime Alfonso Zobel de Ayala, steering ACMobility since September 2023.

It said other family members are also leading ALI’s hospitality and estates, while recent retirements have handed key roles to a new generation of professionals across strategy, finance, data analytics and subsidiary leadership.

Overall, J.P. Morgan said Ayala has built its value by incubating emerging businesses.

“We think its next leg will come from recalibrating the portfolio and delivering shareholder returns,” it said.

While most of Ayala’s components rely on a credible economic growth turnaround, J.P. Morgan said Mitsubishi Corp.’s stepped acquisition to a 20-percent voting stake has drummed up investor anticipation for the conglomerate’s value-up strategy.

J.P. Morgan expects Ayala to adopt Mitsubishi’s value-up template, with clear targets for return on equity, subsidiary returns and portfolio recalibration.

“We believe AC’s differentiated re-rating potential from here will depend on management’s ability to lift cash returns, reduce parent leverage and impose and deliver clear return hurdles on each subsidiary,” J.P. Morgan said.

It said exits from turnaround stories like Integrated Micro-Electronics Inc., health and logistics are the low-hanging fruit, while a hypothetical ALI privatization and a time-bound ACEN reset offer the bigger unlocks.

J.P. Morgan said Ayala has already sold underperforming segments such as last-mile logistics and the UK and Czech operations of IMI.

It said the rest of IMI has been earmarked for sale for quite some time and the recent turn to profitability of the electronics manufacturing services company strengthens the probability of an exit.

Further, J.P. Morgan said there is merit to also consider an exit in health and logistics once profitability improves as doing so would help refocus management bandwidth to Ayala’s core positions and help preserve capital for businesses with stronger returns and a clearer fit with the group and Mitsubishi.

“We estimate a combined P41 billion potential exit liquidity from these assets, which could trim Ayala’s parent net debt by 32 percent or three times as much as Ayala’s annual dividends,” it said.

J.P Morgan also sees structural merit in going further and taking ALI private, which it said would narrow the double discount the market applies to two separately listed entities.

It said AREIT, the listed real estate investment trust of the Ayala Group, offers a better listed property representation than ALI.

“We believe Ayala could theoretically delist ALI and make AREIT the listed entity of its property arm,” it said.

J.P. Morgan said ALI could benefit from a more structural reset as a private company, away from quarterly analyst and investor scrutiny.

It said the real estate company’s valuations are inexpensive and could remain under pressure through the residential downcycle and industry-wide unsold inventory issue.

“From Ayala’s point of view, a theoretically privatized ALI would be a sizeable unlisted asset that investors could not access directly, giving further appeal to Ayala as a listed vehicle,” it said.

J.P. Morgan estimates that a full tender for the 44.84 percent free float at a 20 to 50 percent  premium to the market price would require P113 billion to P141 billion.

The amount, it said, could be funded by conglomerate through a combination of cash, Ayala shares and a distribution in specie of AREIT shares.

J.P. Morgan said AREIT has a potential to become a listed stand-in for the group’s property arm amid higher ascribed valuation for leasing assets and value unlock potential for remaining leasing assets not yet infused.