Ready for the recovery

• SM’s core businesses are proving resilient to the crisis
• Higher retailing GSA, robust banking segment, and CREATE law offset 1H21 lockdown impact
• We forecast SM to post pre-COVID EPS by next year
• Reiterate BUY, TP lifted to P1,254.00

What’s New

Post-adjustments to the second round of ECQ and MECQ imposed in late 1Q to mid-2Q this year, we continue to see SM as among the best positioned to benefit from the Philippines’ economic recovery story. Our estimates expect earnings to grow at a 59.6% FY20-22F CAGR, with next year’s income coming in 33% higher than pre-COVID levels. Our bullish call on the counter is supported by this strong earnings recovery expectations, as the country ramps up its vaccination efforts and further economic reopening continues to gain traction.

Outlook

Reiterate BUY on SM Investments (SM PM), with a marginal lift in the TP to P1,254.0. We adjusted forecasts for the temporary setback of renewed restrictions in 1H21, but the sustained expansion in retail GSA (despite lockdowns), lower banks provisions, and implementation of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law more than offset the impact and we therefore lift our earnings higher by 2%/17% for FY21F/22F.

Post-adjustments, our estimates assume next year’s income 33% higher than pre-COVID levels. Our bullish call on the counter is supported by this strong earnings recovery expectations, as the country ramps up its vaccination efforts and further economic reopening continues to gain traction.

Potential catalysts

Potential catalysts: (i) SM is the best proxy for the Philippine economy – economic reopening will foster strong earnings recovery, (2) stronger-than-expected SSSG and mall foot traffic – as we expect consumers to drive recovery, (3) improvement in lending appetite and asset quality, and (4) a quick ramp-up of the Alfamart business and a faster gain in market share.

Recommendation

Reiterate BUY, with the TP raised to P1,254.00, derived using sum-of-the-parts valuation of its major subsidiaries. This implies valuations 36.9x FY21F forward earnings – justifiable given its strong earnings recovery outlook. Moreover, we expect the counter to be inundated by foreign fund flows given its significant weight in the Philippine benchmark indices.

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