Prime placement from the Philippines' SM Group

Philippines' fourth largest company by market capitalisation brings one of the country's largest placements to fund its ambitious expansion plan.

SM Prime Holdings, the property arm of the Philippines' wealthiest family, raised Ps18.02 billion ($400 million) from a placement of Treasury shares on Tuesday. JP Morgan and Macquarie led the 1.06 billion share offering, which will fund the Sy family's ambitious Ps400 billion five-year capital expenditure plan.

The deal was priced at Ps17 per share, which represents a 4.93% discount to the stock's Ps17.88 close. This was the cheapest end of a range, which began flat to the close. 

Pricing at this level is not very surprising given the deal represented a hefty 80 days trading volume. When it opens on Wednesday, the stock may see some short-term selling pressure given the sheer volume of paper placed out, together with the fact that the original deal size was upsized from $300 million.

However, this may be mitigated by the allocation policy. At launch, the leads had already secured anchor orders to cover half the deal and focused allocations on long-only funds, which took about 80% of the total.

Over 50 institutions participated in the final order book, with a split of about 20% domestic investors and 80% international. The top 10 investors were allocated about 80%.

The deal will boost the group's freefloat by 3.5% from its existing 27.2% level. 

One banker said that while the deal was large it had been expected and may remove an overhang on the stock. Although it has climbed 21.7% year-to-date, SM Prime has underperformed the Philippines Composite Index, which is up 24.9% over the same period.

At current levels, SM Prime is trading at about 21.5 times estimated 2015 earnings, below a five-year average of 24 times. But historical comparisons are complicated by the group's 2013 restructuring. This consolidated all of the SM group property assets under one roof.

Mall man of Asia

Separately-listed SM Development Corp was injected into the group alongside parent company SM Investment's hotel and convention centre assets (four hotels). The move diversified SM Prime away from malls into a more rounded property play, although the former still account for just over 80% of the group's Ebitda. 

Analysts say the group's high level of recurring income are one of its biggest plus points and will help to cushion the impact of its Ps400 billion capital expenditure plan. This aims to raise the total number of malls to 74 in the Philippines and 11 in China by 2018.

At the end of September, the group reported that it now has 50 malls in the Philippines covering 6.3 million square metres (sqm) of floor space and five in China covering 0.8 sqm. By the end of the year, it is targeting 7.5 million sqm.

Its largest mall is the SM City North Edsa shopping complex, the world's fourth largest. Next year it hopes to top this with its 540,000 sqm development in Tianjin, which will be the world's third largest and a key earnings driver for 2015.

Earlier this year, SM group chief financial officer, Jose Sio told FinanceAsia that the group plans to spin off the Chinese mall assets into a separate listed vehicle once they hit critical mass. This new entity would then be listed in either Hong Kong or Singapore.

The Chinese mall assets currently account for 9.5% of total mall revenue. In its recent third quarter results, SM Prime reported a 9% year-on-year increase in revenues, with mall revenues rising 14% and Chinese mall revenues by 23%. 

Net income was up 12% year-on-year to Ps13.5 billion. 

Analysts also add that the restructuring of the group's residential property arm should bode well for future earnings growth. It has now said that it will only commence new projects when existing ones are at least 80% sold. 

Long-term investors may also regard the group's disputed $1.2 billion Bonifacio Global City development as a free option. Analysts do not include it in their valuations as the 33 acre project is the subject of a legal battle between the government's Bases Conversion & Development Authority (BCDA), which wants to open it for competitive bidding and SM Prime, whose unsolicited bid was approved by a former BCDA board.

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