SM Prime Holdings, Inc. (PSE: SMPH)

SM Prime Holdings, Inc. (SMPH, the Company) operates all the commercial shopping centers of SM Investments Corporation (SM). The Company’s main source of revenue is floor space leases. Lease agreements with tenants are generally granted for a term of one year. Tenants either pay a fixed monthly rent based on a fixed rate per square meter or pay rent on a percentage rental basis which comprises a basic monthly amount and a percentage of gross sales or a minimum set amount whichever is higher. As of 2012, the Company has a total of 5.6 million sq. m. gross floor area and generated revenue of P25 billion or P4,626 per sq. m. For 2013, the Company has three in the pipeline:

SMPH1

SMPH’s other developments are as follows:

SMPH2

The Company’s national footprint and geographic reach enables SMPH to take advantage of the consumer industry growth. The Company’s malls are distributed throughout the country as follows as of 2012:SMPH3

SMPH has 65,269 sq. m. or 1.2% of the Company’s gross floor area occupied by business process outsourcing (BPO) offices. These malls are SM Bacoor, SM City Fairview, SM City Iloilo, SM City Lipa, SM North EDSA, SM Mall of Asia, and SM City Pampanga.

The Company’s China operations are becoming significant. In terms of rental revenues, the five malls of SMPH in China contributed 10% of the total rental revenues of the Company. In term of gross revenue (includes revenue from movies) China operations contributed P2.54 billion or 8% of gross revenues of the Company. SMPH’s five malls, namely SM Xiamen, SM Jinjiang, SM Chendu, SM Suzhou, and SM Chongqing, registered 24% increase in growth largely due to the increase in the occupancy rates which now stands at 92%. Although no new malls will be opened in China in 2013, two new malls will open in 2014 which are SM Zibo with gross floor area of 154,000 sq. m. and SM Tianjin with a gross floor area of 540,000 sq. m. As of the end of 2012, SMPH has 794,252 sq. m. GFA in China.

Valuation

SMPH managed to generate growth in net income even during the recessionary years of 2008-2009 as shown below:

SMPH4

Assuming a growth rate of 10% and no increase in the number of outstanding shares, we can say that 27x PE ratio for the stock at today’s price of P16.60 is a very optimistic valuation. A 27x PE ratio is for the companies that expects more than 30% earnings growth in the next 10 years. To illustrate:

SMPH5

However in a book value perspective, SMPH is properly valued. Assuming that SMPH will maintain a book value growth similar to their ROE of 15%, it will only take 10 years for the book value to equal the current price of P16.60. To illustrate:

SMPH6

It requires 30% growth in earnings for 10 years before a PE ratio of near 1 is reached which is impossible for SMPH but in a book value perspective it will only take 10 years at a BV growth of 15% to reach a price to book value of 1. That said, we can conclude that the market values SMPH at BV with an assumption that BV growth is 15% in 10 years.

SMPH may be properly valued at P16.60 but the market appears to ignore the benefit that the merger can have to the Company. On May 31, 2013, SMPH announced in a press release the consolidation of SM’s real estate assets to SMPH.

The consolidation of SM group real estate assets will result to SMPH owning the following:

SMPH7

After the merger, SMPH will have a simple corporate structure:

SMPH8

In order to determine the value per share of SMPH after considering the merger, outstanding shares and book value of SMPH should be determined.

Estimated Outstanding Shares after Merger

SMPH plans to issue shares for the merger and since the number of shares to be issued are not disclosed especially for the assets to be consolidated in SMPH we can have the following estimation:

SMPH9

Estimated Book Value of SMPH after Merger

The consolidation of all the real estate interest of SM group to SMPH will give SMPH interest on three business segments, namely, shopping mall development, real estate development and tourism, and hotel and conventions.

Using BV multiple in the valuation, we can arrive at the valuation of SMPH (figures from SM SEC 17-A 2012, Note 5, p. 104):

SMPH10

SMPH should be valued at least at P19.09.

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

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