SMPH is a buy

Even as the local equity market remains sluggish and buyers remain wary of further negative global developments, First Metro Securities Brokerage Corp. of the Metrobank Group is upbeat on the upside prospects of the Sy family’s SM Prime Holdings (SMPH) and its long-term value for equity buyers.

In its latest company update and market analysis, FirstMetroSec recommends a buy on SMPH at a target price of P24. According to analysts Mark Angeles and Shane Tan, their view is that the market is pricing SMPH for weakness in residential and office, while underappreciating its core malls business.

They point out that the key positives that set SMPH apart from other property developers are that  the group remains overwhelmingly driven by its malls business, citing that  malls grew revenues at a 15.3 percent CAGR (which stands for compound annual growth rate and  is the average annual rate of return an investment or business metric needs to grow from its starting value to its ending value, assuming all profits are reinvested at the end of each period).

SMPH’s CAGR in fiscal year (FY) 2022 to 2025 (vs 5.2 percent CAGR for Philippine GDP), and in 2025 accounted for 60 to 72 percent  of total revenues/pre-tax income, they pointed out, noting that  “this strength materially mitigates the softness in the rest of the portfolio. On our estimates, the malls business alone is worth approximately  the P18.07 to P23.45 equity value per share at a six to seven percent  cap rate - a key valuation anchor.”

Second, they further argue, “the balance sheet is stronger than it appears, backed by a large base of recurring-income assets, with >P75 billion of operating cash flow (OCF) in 2025 and >5.0x interest coverage supporting debt service with a meaningful buffer. Current leverage should be viewed in the context of SMPH’s ongoing investment cycle: OCF of P63 billion to P75 billion broadly kept pace with capex of P64 billion to P77 billion, leaving only modest free cash flow deficits of approximately P1.5 billion to P2.5 billion in FY 2023 to 2025.”

They further noted that “balance sheet pressure today reflects heavy investment in malls and Pasay reclamation for long-term value creation, rather than a structurally weak business. At any rate, SMPH also retains funding flexibility: it has yet to pursue a REIT, while the recent bond offering deferment suggests no immediate need to tap markets.”

Lastly, they said, “Pasay 360 is SMPH’s next major growth avenue. While the project has weighed on funding needs, management has kept it on schedule and continues to prioritize completion by 2028. At 360 hectares (with 176-hectares  attributable to SMPH), directly connected to the Mall of Asia complex and planned as a smartcity, it gives SMPH the platform to create another major business district in Metro Manila.”

FirstMetroSec expressed the view that “the market is still treating this as a near-term overhang when it should be seen as a source of long-term value accretion.”

Elaborating further, the analysts stressed “SMPH’s malls segment remains the primary driver of earnings. Following the post-COVID economic reopening in 2022, the segment’s contribution expanded from 52 percent to 61 percent of revenue/pre-tax income to 60 percent to 72 percent, respectively, in 2025. This was supported by a 15.3 percent CAGR over the past three years, significantly outpacing Philippine GDP growth of 5.2 percent CAGR over the same period. In contrast, the residential segment’s contribution declined from 30 percent to 19 percent as of 2025, while offices and warehouses accounted for only four percent to six percent  of revenue/pre-tax income, respectively.”

They noted that “this is underpinned by the best-in-class position of SMPH’s mall portfolio. With over 9.8mn/5.1mn sqm of GFA/GLA (gross floor area and gross lease area), SM Malls account for about 50 percent  of the Philippines’ total mall space, leaving SMPH well positioned to capture the country’s deeply entrenched mall-going culture. Beyond scale, SM Malls also benefit from strong brand equity; its tagline, ‘We’ve got it all for you!’, reflects its status as the go-to destination for Filipino families, and also its appeal as a preferred location for tenants, given its ability to generate critical foot traffic.”

As of the first quarter of this year, FirstMetroSec said, the segment posted an eight percent year-on-year  revenue growth, supported by strong long-/short-term occupancy of 96 to 92 percent and positive rental reversions, partly driven by improved lease economics from a higher variable rent contribution. Meanwhile, EBIT  or earnings before interest and taxes grew 11 percent YOY, with margins expanding to 58.4 percent from 56.7 percent, reflecting strong operating leverage. In the next 12 to 24 months, we forecast SMPH’s mall segment to drive revenue growth at 8.7  to seven percent for FY26F/27F.”

The report continues that “valuing SMPH on malls alone at a six to seven percent cap rate yields an implied value of P37.68 to P32.30 per share. Even after factoring in consolidated net debt, this still points to equity value of around P23.45 to P18.07 per share. In other words, stripping out the weakness in residential and office, the malls business alone underpins a substantial portion of SMPH’s valuation. The weakness in residential and office may weigh on sentiment in the near term, but these businesses do not alter the central investment case: SMPH’s dominant malls platform continues to generate the bulk of earnings, cash flows and value for the group.”

Additionally, they said, “ SMPH’s debt profile is stronger than headline balance sheet metrics would suggest. SMPH ended the first quarter of this year  with net debt of P390.7 billion.” However, they believe that the company’s debt-servicing capacity is better than what the headline metrics suggests because SMPH’s balance sheet is backed by a large base of investment assets (approximately 65 percent  of total assets, with malls accounting for 70 percent).