SM Investments Corporation WED 07 OCT 2020

Adjusting estimate on weaker

than expected non-food retail
Food retail continues to grow amid pandemic. The food group of SM Retail, which
is comprised of Savemore, Alfamart, SM Supermarket, SM Hypermarket, and WalterMart,
continued to grow even with the lockdowns. In 2Q20, when most of the country was under
the enhanced community quarantine (ECQ) and modified enhanced community quarantine
HOLD
(MECQ), SM’s food group stores remained open to serve the public. This allowed revenues
to grow by 10.2% during the quarter. We expect the food group to continue posting solid TICKER: SM
growth numbers in the succeeding quarters as the more relaxed GCQ, which started on 827.00
June 1, allowed greater mobility of shoppers. FAIR VALUE:
CURRENT PRICE: 871.50
Non-food retail adapting to changing times. The non-food business had a very
challenging 2Q20 which dragged SM Retail’s performance into a net loss in 2Q20. With UPSIDE: -5.11
much of the stores closed during the greater part of the second quarter (being non-
essential), SM Department Stores reported a net loss of around Php1.2 Bil while Specialty
Stores had a net loss of around Php400 Mil. While this is a huge setback for the group, the SHARE PRICE MOVEMENT
worst is behind them as the move to GCQ allowed SM Department Stores and Specialty
Stores to reopen.
110
However, the reopening of stores only solved one of the challenges faced by the non-
food group. The bigger challenge is the low foot traffic inside malls. According to SM, foot
traffic is still just 30% of pre-COVID level. While foot traffic was already picking up in the
early part of the third quarter, the recovery momentum was derailed by the reimposition
100

of MECQ in the NCR during the first two weeks of August. According to the company, foot
traffic was hitting 50-60% of pre-COVID levels before this happened. Nevertheless, SM
expects gradual improvements going forward with greater improvements to materialize 90

once quarantine restrictions are relaxed. This would improve access to mass transportation
and reduce restrictions on mobility.
80
Nevertheless, SM continues to adapt to the changing times and improve its services 8-Jul-20 8-Aug-20 8-Sep-20 8-Oct-20
offerings. For example, it launched its call-to-deliver (CTD) service last quarter to help
boost sales. By utilizing Viber communities, consumers are given personal shoppers to
SM PSEi

aid them in making purchases and goods are delivered door-to-door through logistics
company partnership. According to management, CTD currently accounts for 10% of pre-
COVID sales volume and is expected to grow to 20% by 2021. SM Retail also revitalized ABSOLUTE PERFORMANCE
online selling by increasing its presence in online shopping portals like Shopee, Lazada,
and online groceries. 1M 3M YTD
SM -3.24 -8.85 -17.07
FORECAST SUMMARY
PSEi -1.15 -6.37 -24.92
Year to Dec. 31 2016 2017 2018 2019 2020E 2021E
Sales 365,255 397,948 449,788 501,652 402,944 483,481
change y/y 9.7% 9.0% 13.0% 11.5% -19.7% 20.0%
EBITDA 80,077 89,872 101,655 124,524 82,314 103,462 MARKET DATA
change y/y 9.1% 12.2% 13.1% 22.5% -33.9% 25.7%
EBIT Margin (%) 21.9 22.6 22.6 24.8 20.4 21.4 Market Cap 1,041.964.18Mil
EBIT 67,216 75,851 86,615 105,153 65,643 85,603 Outstanding Shares 1,204.58Mil
change y/y 9.2% 12.8% 14.2% 21.4% -37.6% 30.4% 52 Wk Range 509.5 - 1100
EBITDA Margin (%) 18.4 19.1 19.3 21.0 16.3 17.7 3Mo Ave Daily T/O 840.62Mil
Net Profits 31,204 32,923 37,078 44,568 22,482 31,150
change y/y 8.1% 5.5% 12.6% 20.2% -49.6% 38.6%
NPM (%) 8.5% 8.3% 8.2% 8.9% 5.6% 6.4%
EPS (Php) 25.90 27.33 30.78 37.00 18.66 25.86
change y/y 7.6% 5.5% 12.6% 20.2% -49.6% 38.6%

RELATIVE VALUE
P/E(X) 33.6 31.9 28.3 23.6 46.7 33.7
P/BV(X) 3.5 3.2 3.0 2.7 2.7 2.5 Richard Lañeda, CFA
ROE(%) 10.8 10.5 10.9 12.1 5.8 7.6
Senior Research Manager
BVPS(P) 249.5 272.4 293.4 317.6 327.0 352.9
Dividend yield(%) 0.8 0.9 1.0 1.2 0.6 0.8
richard.laneda@colfinancial.com
So urce: COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the
COL Financial website as these may be subject to tampering or unauthorized alterations.
 COMPANY UPDATE I SM: ADJUSTING ESTIMATE ON WEAKER THAN EXPECTED NON-FOOD RETAIL

WED 07 OCT 2020

Food retail continues to grow amid pandemic

The food group of SM Retail, which is comprised of Savemore, Alfamart, SM Supermarket,

SM Hypermarket, and WalterMart, continued to grow even with the lockdowns. In 2Q20,
when most of the country was under the enhanced community quarantine (ECQ) and
modified enhanced community quarantine (MECQ), SM’s food group stores remained
open to serve the public. This allowed revenues to grow by 10.2% during the quarter.
We expect the food group to continue posting solid growth numbers in the succeeding
quarters as the more relaxed GCQ, which started on June 1, allowed greater mobility of
shoppers. We also see the potential for further relaxation of quarantine restrictions in the
next few months, in time for the holidays.

Non-food retail adapting to changing times

The non-food business had a very challenging 2Q20 which dragged SM Retail’s
performance into a net loss in 2Q20. With much of the stores closed during the greater
part of the second quarter (being non-essential), SM Department Stores reported a net
loss of around Php1.2 Bil while Specialty Stores had a net loss of around Php400 Mil.
While this is a huge setback for the group, the worst is behind them as the move to GCQ
allowed SM Department Stores and Specialty Stores to reopen.

However, the reopening of stores only solved one of the challenges faced by the non-
food group. The bigger challenge is the low foot traffic inside malls. According to SM, foot
traffic is still just 30% of pre-COVID level. While foot traffic was already picking up in the
early part of the third quarter, the recovery momentum was derailed by the reimposition
of MECQ in the NCR during the first two weeks of August. According to the company,
foot traffic was hitting 50-60% of pre-COVID levels before this happened. Nevertheless,
SM expects gradual improvements going forward with greater improvements to
materialize once quarantine restrictions are relaxed. This would improve access to mass
transportation and reduce restrictions on mobility.

Nevertheless, SM continues to adapt to the changing times and improve its services
offerings. For example, it launched its call-to-deliver (CTD) service last quarter to help
boost sales. By utilizing Viber communities, consumers are given personal shoppers to
aid them in making purchases and goods are delivered door-to-door through logistics
company partnership. According to management, CTD currently accounts for 10% of pre-
COVID sales volume and is expected to grow to 20% by 2021. SM Retail also revitalized
online selling by increasing its presence in online shopping portals like Shopee, Lazada,
and online groceries.

COL Financial Group, Inc. 2

 COMPANY UPDATE I SM: ADJUSTING ESTIMATE ON WEAKER THAN EXPECTED NON-FOOD RETAIL

WED 07 OCT 2020

No change in long term strategy

Despite the current operating environment, SM sees no need to change its long-term
strategy of expanding its geographical reach through its different store formats. Some
expansion sites may have been pushed back to next year, especially of those that are
mall-dependent like SM Supermarkets, Department Stores and Specialty Stores but its
expansion strategy remains intact. SM sees the growth of its online presence and service
offerings like call-to-deliver as complements to its brick-and-mortar stores rather than
replacements. It makes sense for SM to continue its geographical expansion given that
online sales account for just 2% of total retail sales. The Philippines also faces numerous
challenges in promoting e-commerce like access to internet and speed of delivery, just
to name a few.

Adjusting estimates to factor in 2Q20 losses

We adjusted our revenue and net income forecast for SM following the lower-than-
expected revenues and net income of SM Retail. We lowered our revenue forecast by
2.4% and 5.4% for 2020 and 2021 respectively, resulting in a 34.7% and 15.5% reduction
on our net income forecast for 2020 and 2021 respectively. The reduction in revenues
and net income mainly came from Department Stores and Specialty Stores as sales of the
Food Group were actually higher than expected.

Exhibit 1: SM Retail forecast

2020E 2021E
Previous New Change Previous New Change
Revenues 307,426 300,027 -2.4% 379,081 358,787 -5.4%
Net income 9,004 5,880 -34.7% 12,013 10,153 -15.5%
Source: COL estimates

Aside from changes to our SM Retail forecast we also factored in the adjustments in our
net income forecasts for SMPH and BDO. The net impact to SM is a 26.6% and 28.1%
reduction in our 2020 and 2021 income forecasts respectively.

Exhibit 2: SM forecast

2020 Earnings 2021 Earnings

Previous New Change Previous New Change
SMPH 19,840 18,316 -7.7% 26,496 24,812 -6.4%
SM Retail 9,004 5,880 -34.7% 12,013 10,153 -15.5%
BDO 28,993 29,175 0.6% 36,033 37,480 4.0%
SM 30,649 22,482 -26.6% 43,310 31,150 -28.1%
Source: COL estimates

COL Financial Group, Inc. 3

 COMPANY UPDATE I SM: ADJUSTING ESTIMATE ON WEAKER THAN EXPECTED NON-FOOD RETAIL

WED 07 OCT 2020

Cutting FV estimate to Php827, but maintaining HOLD

rating

We adjusted our fair value estimate on SM from Php881 to Php827 after factoring in
lower earnings and valuation estimates for both SMPH and SM Retail. Given the reduction
in our fair value estimate, we believe that SM’s current price already fairly values the
company. Upside risk to earnings and fair value depends on the further relaxation of
quarantine restrictions in NCR and other major areas in the Philippines, and the speed at
which sales and earnings of Department Stores and Specialty Stores recover.

COL Financial Group, Inc. 4

 COMPANY UPDATE I SM: ADJUSTING ESTIMATE ON WEAKER THAN EXPECTED NON-FOOD RETAIL

WED 07 OCT 2020

SM Investments INCOME STATEMENT (PHPMIL)

Corporation (SM) Revenues

2016
365,255
2017
397,948
2018
449,788
2019E
501,652
2020E
402,944
2021E
483,481
% Growth 9.7% 9.0% 13.0% 11.5% -19.7% 20.0%
COMPANY BACKGROUND EBITDA 80,077 89,872 101,655 120,693 82,314 103,462
SM is a leading Philippine company that % Growth 9.1% 12.2% 13.1% 18.7% -31.8% 25.7%
Operating Profit 67,216 75,851 86,615 105,153 65,643 85,603
is invested in market leading businesses
% Growth 9.2% 12.8% 14.2% 21.4% -37.6% 30.4%
in retail, banking, and property. It also Interest Expense (12,029) (15,581) (16,575) (19,194) (18,233) (20,056)
invests in ventures that can capture the Other Income/(Expense) 4,130 5,021 4,091 4,643 4,354 4,654
high growth opportunities in the emerging Pretax Income 59,317 65,291 74,130 86,614 51,764 70,201
Philippine economy. SM has majority Tax Expense (11,558) (13,773) (15,576) (17,170) (10,871) (14,742)
shares in SM Retail (77.3%) which is leader Net Income 31,204 32,923 37,078 44,568 22,482 31,150
% Growth 8.1% 5.5% 12.6% 20.2% -49.6% 38.6%
in the retail sector both in terms of number
Core net Income 30,645.3 32,900.8 37,014.3 44,374.4 22,482.5 31,149.6
of stores and sales, BDO (44%) which is the
% Growth 6.0% 7.4% 12.5% 19.9% -49.3% 38.6%
biggest bank in the Philippines, and SMPH EPS 25.9 27.3 30.7 36.8 18.7 25.9
(50%) which is the biggest mall operator % Growth 7.6% 5.5% 12.5% 19.9% -49.3% 38.6%
in the Philippines. Aside from these major
business, SM ahsl has investments in China BALANCE SHEET (IN PHPMIL)

Bank, Belle Corp., Atlas Mining, and CityMall 2016 2017 2018 2019E 2020E 2021E
Cash & Equivalents 99,421 87,556 105,156 76,244 41,972 53,322
Commercial Centers.
Trade Receivables 31,347 32,353 33,755 53,617 56,298 59,113
OPERATING INCOME BREAKDOWN Inventories 31,067 36,608 39,947 39,184 34,622 42,124
Other Current Assets 57,260 55,997 62,867 79,311 79,311 79,311
PPE and Investment Properties 291,097 310,358 332,466 362,796 382,012 402,040
Other Non-Current Assets 351,272 437,210 486,451 533,011 559,748 607,344
22% Total Assets 861,462 960,081 1,060,642 1,144,165 1,153,963 1,243,254
24% Accounts Payable 89,259 106,561 124,778 141,452 106,561 124,778
38% ST Debts 39,589 64,470 80,366 47,788 49,242 50,769
39% Other Current Liabilities 5,987 4,823 7,548 7,479 7,479 7,479
LT Debts 280,254 292,556 305,555 327,358 340,453 354,071
Other Non-Current Liabilities 31,626 37,858 50,105 83,936 84,403 84,875
Total Liabilities 446,715 506,268 568,352 608,013 588,138 621,971
Total Equity 414,747 453,812 492,290 536,151 565,824 621,283
41%
37% Total Liabilities & Equity 861,462 960,081 1,060,642 1,144,165 1,153,963 1,243,254
BVPS 249 272 293 318 327 353

RetailRetail Banking
Banking and others
and othersProperty
Property KEY RATIOS
2016 2017 2018 2019E 2020E 2021E
EBITDA Margin (%) 21.9% 22.6% 22.6% 24.1% 20.4% 21.4%
OPM (%) 18.4% 19.1% 19.3% 21.0% 16.3% 17.7%
NPM (%) 8.5% 8.3% 8.2% 8.9% 5.6% 6.4%
Times Interest Earned (X) 5.59 4.87 5.23 5.48 3.60 4.27
Current Ratio (X) 1.62 1.21 1.14 1.26 1.30 1.28
Net D/E Ratio (X) 0.82 0.86 0.87 0.78 0.88 0.84
Days Receivable 31.3 29.7 27.4 39.0 51.0 44.6
Days Inventory 38.5 42.0 40.5 35.9 37.1 38.3
Days Payable 151.1 169.3 177.4 182.3 157.6 158.8
Asset T/O (%) 42.4% 41.4% 42.4% 43.8% 34.9% 38.9%
ROAE (%) 10.8% 10.5% 10.9% 12.1% 5.8% 7.6%

COL Financial Group, Inc. 5

 COMPANY UPDATE I SM: ADJUSTING ESTIMATE ON WEAKER THAN EXPECTED NON-FOOD RETAIL

WED 07 OCT 2020

INVESTMENT THESIS: MAJOR CORPORATE DEVELOPMENTS (5-YEARS)

Industry leader in the retailing business Acquisition of Net Group offices 12/03/2013
SM is the leader in retailing industry with
2,303 retail stores across the nation. SM
Acquisition of 34% stake in DoubleDragon's CityMall 12/31/2014
Retail believes that the retail sector is stil
underpenetrated with bulk of trade in rural
SM consolidates related retail businesses into SM Retail in exchange or SM
areas done through informal channels. 07/13/2016
Retail shares
With this in mind SM Retails remains
aggressive in its expansion plans with the
Acquisition of 34.5% of Negros Navigation 03/31/2017
aim of protecting and growing its already-
dominant market share.
Acquisition of 61.21% of Philippine Urban Living Solutions, Inc. 04/25/2017
Benefiting from the highly defensive
nature of consumer spending
SM is a major beneficiary of the highly
resilient nature of consumer spending in
the country. Consumer spending is one of
the major drivers of the Philippine economy
and it has consistently increased despite
periods of economic downturn. Based
on our estimates, SM Retail and leasing
component of SMPH together contribute
50% of SM’s net income and 64% of its
NAV.

Major businesses in expansion mode

Despite the size SM, its core businesses
are stil in expansion mode as they look
ko capitalize on the strong economy and
low interest rates. SMPH continues its mall
expansion in the Philippines and in China.
SM Retail continues aggressive expansion
of its geographical footprint as its seeks
to formalize the retail market. BDO looks
to capitalize on consumer lending and
investment spending.

COL Financial Group, Inc. 6

 COMPANY UPDATE I SM: ADJUSTING ESTIMATE ON WEAKER THAN EXPECTED NON-FOOD RETAIL

WED 07 OCT 2020

Valuation NAV COMPUTATION

Methodology Value (PhpMil) Value (Php/sh) % of GAV % of NAV Valuation Methodology

Retail 304,598 209.8 25.1% 25.4% 30X fowrad P/E
SMPH 444,047 368.6 44.1% 44.6% Sum of the parts
BDO 247,962 205.8 24.6% 24.9% 1.6X P/BV
CHIB 18,127 15.0 1.8% 1.8% 1.0X P/BV
Belle 3,675 3.1 0.4% 0.4% Sum of the parts
Atlas Mining 1,029 0.9 0.1% 0.1% Market value
Hamilo 21,206 17.6 2.1% 2.1% Appraised value
Net Group 17,910 14.9 1.8% 1.8% EBITDA cap rate method
Investment in AC 22,603 18.8 2.2% 2.3% Market value
Net debt -84,800 -70.4 -8.5%
Equity Value 996,357 827.1
Less: Holding Company Discount 0.0 0.0
FV Estimate 996,357 827

RELATIVE VALUATION
P/E EPS Growth
2020E 2021E 2020E 2021E
SM 46.7 33.7 -49.3% 38.6%
AC 19.3 15.0 -30.1% 29.0%
AEV 18.6 11.7 -37.6% 59.4%
DMC 6.1 4.3 -16.5% 43.9%
GTCAP 6.9 4.8 -34.8% 43.4%
JGS 18.0 12.4 -21.5% 45.7%
AGI 8.4 7.2 -39.9% 16.7%
MPI 7.9 5.1 -45.7% 56.9%
Industry Ave 16.5 11.8 -32.8% 39.5%
Industry Median 13.2 9.4 -34.8% 43.4%

COL Financial Group, Inc. 7

 COMPANY UPDATE I SM: ADJUSTING ESTIMATE ON WEAKER THAN EXPECTED NON-FOOD RETAIL

WED 07 OCT 2020

I MP OR TA NT R AT ING DEFINITIONS
BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

I MP OR TA NT DISC L AIM ER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

C O L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

C O L F INANC IAL G R O UP, I NC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 8