August 10, 2014

SM Investments 1H14 net income falls 3.1%

In a press statement, SM Investments Corp (SM) said its consolidated net income fell 3.1% in 1H14 to P12.3b, largely due to the absence of the hefty trading gains that its banking operations registered last year. Otherwise, net income would have risen 11.8% to P12b.

These came on the back of a 7.2% growth in consolidated revenues which were in turn driven by the acceleration in revenue growth for the property group (primarily SM Prime Holdings, see Daily Wealth Take, 5 Aug 2014) and steady growth in core banking operations that was weighed down only by lower trading gains (see BDO Company Alert released 28 Jul 2014).

SM’s retail operations remain challenging. Net income fell 3.4% in 1H14 to P2.8b after this fell 8.4% YoY in 2Q14 and negated the 4% growth in 1Q14. This can be traced to the slowdown in revenue growth to 3.8% YoY in 2Q14 (from +16% YoY in 1Q14) despite holding a 3-Day Sale event in April which, as per company estimates, would usually boost monthly sales by as much as 30%.

The company explained that earnings were saddled by additional operating expenses of about P1.7b related to opening of new stores. This brought net margins down to 3.1% in 1H14 from 3.5% in 1H14. We believe that such additional expenses have been easing in 2Q when net margins increased to 3.3% from 2.9% in 1Q14 (but still lower than the 3.7% posted in 2Q13).

Blended same-store sales growth (SSSG) was at 4.4%, with the food segment posting a 5% SSSG (but implying that the non-food segment SSSG remained below inflation). Both numbers fell short of expectations.

Our take: With our without the impact of lower trading gains, SM’s net income in 1H14 fell short (about 41%) of consensus forecasts. The company is expecting better earnings momentum in 1H14 to be driven by a recovery in residential sales in 2H14 when it resumes launching residential projects (six new towers with 11,000 units); the positive impact of cost management measures and re-engineering of construction processes for the residential development business; positive benefits of store expansion and redesigning/renovating existing stores, and additional revenue contribution from new malls.

On the other hand, earnings may be weighed down by additional costs for the retail segment related to the impact of the truck ban on inventory management not only for SM but its suppliers that could entail higher warehousing costs, and higher interest expenses related to new borrowings. – WealthSec