Financial Adviser: 5 Things to Know About Tessie Coson’s SM Investments After Its 1Q 2026 Financial Results and How to Profit from It

Large conglomerates often provide a macro view of the economy because their businesses operate across several major industries. When economic growth is strong, they benefit from higher consumer spending and business expansion. During periods of uncertainty, however, weakness in one sector can offset strength in another.

SM Investments Corporation (PSE: SM) has one of the most diversified business portfolios in the Philippines. Through its major investments in banking, property, and retail, the company has exposure to some of the largest drivers of domestic economic activity.

Its principal listed holdings include SM Prime Holdings, BDO Unibank, and Chinabank. It also controls SM Retail and holds investments in businesses such as 2GO, Goldilocks, Philippine Geothermal Production Company, NEO, Belle Corporation, Atlas Mining, and Airspeed.

This diversification has allowed SM to generate steady earnings from several sources. Its banking businesses benefit from loan growth and higher financial activity, while SM Prime provides exposure to malls, residential development, offices, hotels, and other property assets. SM Retail, meanwhile, gives the group direct exposure to household consumption through supermarkets, department stores, and specialty retail formats.

Despite the strength and scale of these businesses, SM shares have remained under pressure amid weak sentiment. At P592 per share, the stock trades well below its previous highs, while SM Prime, BDO, and Chinabank also remain at relatively depressed market valuations.

This has led to questions over whether the current share price already reflects the challenges facing the group or whether the market has undervalued the combined worth of its businesses. Since much of SM’s value comes from its listed subsidiaries, weak prices for SM Prime, BDO, and Chinabank can also reduce the market’s estimate of SM’s underlying net asset value.

Is SM trading at a meaningful discount to the value of its investments? Can continued earnings growth from banking, retail, property, and portfolio businesses support a recovery in the share price? Or does the current valuation already offer only limited upside?

To answer these questions, it is important to look beyond the share price and examine the value of each major business, the strength of its earnings, and the discount that the market applies to the group. Here are five things to know about SM and how to profit from it:

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Last year, SM delivered steady earnings growth despite slower consumer demand and weakness in residential property sector.  Consolidated revenues rose by 4.1 percent to P681.7 billion, while operating income increased by 5.6 percent to P160.4 billion. Consolidated net income grew by 8 percent to P123.8 billion, while net income attributable to SMIC shareholders rose by 9.5 percent to P90.5 billion, supported by operating growth and lower interest expense.

Banking was the largest earnings contributor at 49 percent, followed by property at 27 percent and retail at 18 percent. Strong results from BDO, Chinabank, malls and food retail offset weaker residential property and specialty-store earnings.

Portfolio investments contributed another P5.5 billion, led by NEO and Philippine Geothermal Production Company, while 2GO and Goldilocks each accounted for about 10 percent of the segment’s income.

This year, SM’s earnings growth continued in the first quarter of 2026. SM’s consolidated revenues increased by 4.9 percent to ₱P59.4 billion, while operating income rose by 6.5 percent to P38.4 billion. Consolidated net income increased by 5.7 percent to P29.2 billion, while net income attributable to SMIC shareholders grew by 7.3 percent to P21.5 billion.

The composition of earnings growth was encouraging because retail and portfolio investments compensated for slower growth in the group’s larger property and banking businesses.

Retail net income attributable to SM increased by about 16 percent to P3.23 billion. Portfolio investment earnings rose by nearly 59 percent to P1.78 billion. Banking again was the largest contributor at P10.61 billion, although growth was more modest at about 2 percent while property contributed ₱5.89 billion, almost unchanged from the previous year.

SM’s 2025 and first-quarter 2026 results show that the group can continue to grow even when not all its businesses perform strongly at the same time. In 2025, mall earnings and banking growth offset weakness in residential property and specialty retail.

In the first quarter of 2026, stronger contributions from retail and portfolio investments compensated for flat property earnings and slower banking growth.

This diversification reduces SM’s dependence on any single business. It also gives the company several possible sources of future growth. A recovery in residential property could strengthen SM Prime’s earnings, while continued loan growth could support BDO and Chinabank. Retail could also benefit from lower inflation and stronger household spending.

However, the results do not yet point to rapid earnings recovery. Revenue growth remained below 5 percent in both 2025 and the first quarter of 2026, while almost half of SM’s earnings still came from banking. Property earnings were flat during the first quarter, and the residential business remained a weak part of the group.

The stronger investment case therefore rests on consistent earnings growth rather than an immediate earnings surge. SM has shown that it can protect profitability through its diversified portfolio, but a more meaningful rerating of the share price may require faster growth from SM Prime, stronger consumer spending and continued expansion in the portfolio businesses.

SM’s diversified structure gives it better protection during an economic slowdown than companies that depend on only one industry. Banking, property, retail and portfolio investments do not always peak or weaken at the same time. Food retail continues to benefit from essential household spending, while mall rental income provides a more recurring source of revenue than residential property sales.

The key strength of SM is not that its earnings cannot decline. It is that the group has several profitable businesses, recurring income sources and strong cash flow that can absorb weakness in individual segments.

A severe recession could temporarily reduce profits, but the current financial position suggests that SM has sufficient scale and liquidity to withstand a normal economic slowdown without threatening the long-term stability of the group.

SM’s profits are supported by solid cash generation. Net cash from operating activities has been increasing from P90.9 billion in 2023 to P107.6 billion in 2024 and P117.0 billion in 2025. Operating cash flow was equivalent to 94.5 percent of consolidated net income in 2025, compared with 93.9 percent in 2024. This indicates that most of the group’s reported earnings were converted into cash rather than remaining in receivables or accounting adjustments.

SM also generated positive free cash flow despite its large investment programme. After deducting P76.9 billion in additions to investment properties and P10.6 billion in property and equipment from operating cash flow, estimated free cash flow reached P29.5 billion in 2025. This was higher than approximately P27.3 billion in 2024 and P10.3 billion in 2023. The improvement shows that cash generation has strengthened even as SM continued to invest heavily in malls, residential projects and other assets.

However, the conventional free cash flow calculation does not capture all the cash that SM receives from BDO, Chinabank and its other associates. SM removed P54 billion in equity earnings from operating cash flow because these were not direct operating cash receipts, while P18.3 billion in dividends received was classified under investing activities. If these dividends are added before capital expenditure is deducted, adjusted cash generation reached about P47.7 billion in 2025.

This cash reached the parent company and supported shareholder returns and debt reduction. SM’s parent company received P38.6 billion in dividends from its investments in 2025. It used its available cash to pay nearly P16 billion in dividends, repurchase P5.1 billion of its own shares and reduce long-term debt on a net basis.

The first quarter of 2026 was weaker from a cash flow perspective. Operating cash flow reached only P10.6 billion against consolidated net income of P29.2 billion. After P15.8 billion in property and equipment and investment property additions, estimated free cash flow was negative by about P5.3 billion. However, free cash flow was also negative by about P9 billion in the first quarter of 2025, so this represented an improvement from last year.

The quarterly weakness was largely caused by working capital movements. Inventories increased by P7.8 billion, while accounts payable and other current liabilities declined by P15.5 billion. These cash outflows can reverse later in the year as inventories are sold and payment timing normalises. The first-quarter result should not be treated as a warning sign unless weak cash conversion continues over several quarters.

SM’s ability to generate cash has also allowed it to repurchase shares while continuing to invest in its businesses and pay dividends. In February 2025, the company approved a buyback programme of up to P60 billion. As of July 22, 2026, it had repurchased 13.8 million shares for P9.42 billion, which leaves about P50.58 billion of unused authorisation.

The unused amount does not mean that SM has already set aside ₱50.58 billion in cash for immediate buybacks. The actual pace of repurchases will depend on dividends received by the parent company. Based on SM’s parent-level cash inflows, another P5 billion to P10 billion of buybacks appears more realistic in the near term than the full remaining authorisation.

At a share price of about P586, an additional P5 billion could retire roughly 8.5 million shares, while P10 billion could retire about 17.1 million shares. This would reduce the outstanding share count by approximately 0.7 percent to 1.4 percent and increase earnings per share even without additional earnings growth.

Using the P592 share price and about 1.215 billion shares, SM’s 2025 conventional free cash flow implies a yield of about 4.1 percent. The yield increases to about 6.6 percent when dividends received from associates are included.

This is not exceptionally cheap, but it shows that SM generates enough cash to fund expansion, pay dividends and buy back its shares. Its positive and improving annual free cash flow also gives the group room to reduce discretionary capital expenditure and preserve liquidity if the economy slows.

SM enjoys an increasingly well-capitalised balance sheet. By end of 2025, its total equity increased by 10.3 percent to P955.6 billion, while liabilities rose by only 2.8 percent to P856.2 billion. This year, as of March 2026, SM’s equity had risen further to P973.3 billion and total liabilities had declined slightly to P853.5 billion.

A substantial portion of SM’s balance sheet is backed by income-producing assets. As of March 2026, investment properties of P670.1 billion accounted for about 36.7 percent of total assets, while investments in associates and joint ventures of P439.3 billion represented another 24.0 percent.

Combined, these assets made up approximately 60.7 percent of SM’s P1.83 trillion asset base. Cash and cash equivalents added P98.2 billion, or another 5.4 percent of total assets. This asset composition provides SM with recurring rental income and earnings from major investments such as BDO and Chinabank.

SM’s liquidity position is adequate but not exceptionally conservative. Current assets of ₱360.3 billion exceeded current liabilities of P320.6 billion as of March 2026, which produced a current ratio of 1.1 times.

Cash alone covered about 31 percent of current liabilities. This means SM still depends on continuing retail sales, rental collections and the conversion of inventories into cash to meet short-term obligations. The ratio is not necessarily alarming for a group with recurring rental income and fast-moving grocery inventories.

Debt also remained manageable relative to the size of the balance sheet. Interest-bearing debt increased only slightly from P511.5 billion at the end of 2025 to P515 billion by March 2026. Gross debt represented 35 percent of total debt and equity capital, while net debt accounted for 30 percent. On a more conventional basis, interest-bearing debt was equal to about 53 percent of equity, while net debt was approximately 43 percent of equity.

SM’s capacity to service this debt remains strong. EBITDA reached P45.5 billion during the first quarter, while interest coverage improved to 8.6 times from 7.5 times a year earlier. Its solvency ratio also increased to 18 percent. These ratios suggest that a moderate decline in earnings would not immediately threaten the group’s ability to meet interest obligations.

Return on equity remained at 13.5 percent in March 2026, unchanged from 2025, despite the continued increase in shareholders’ equity. This is important because rapid balance-sheet expansion can reduce returns when new assets fail to generate sufficient income. SM’s stable ROE indicates that earnings have so far kept pace with the additional capital invested in the group. Return on assets remained steady at about 7 percent.

SM’s estimated return on invested capital (ROIC) reached about 10.7 percent in 2025. This means the group generated approximately P10.70 in after-tax operating profit for every P100 of capital funded by shareholders and lenders.

The return is respectable for a capital-intensive conglomerate where SM reported operating income of P160.4 billion in 2025 against average invested capital of approximately P1.30 trillion.

However, SM’s estimated return on incremental invested capital, or RROIC, was lower at about 7.5 percent. RROIC measures the additional operating profit generated by the additional capital invested during the year. The lower result indicates that SM’s newer investments have not yet produced returns as high as those generated by its mature assets. This is understandable because new malls, stores and mixed-use developments require significant spending before occupancy, sales and profitability reach normal levels.

The gap between ROIC and RROIC is therefore an important point to monitor. A company can maintain a healthy overall ROIC because of established assets while its recent investments generate weaker returns.

If RROIC remains below ROIC for an extended period, continued expansion could gradually reduce the group’s overall profitability. However, if newer projects mature and generate higher rental income, RROIC could improve without another large increase in invested capital.

The first-quarter 2026 figures suggest that this pressure continued, with annualised ROIC estimated at about 9.8 percent, below the 2025 level. Investment properties increased to P670.1 billion, while total invested capital continued to expand, but operating earnings did not grow at the same pace.

One quarter may not represent the full-year trend because property and retail earnings are seasonal, but the figures reinforce the need for SM to improve the productivity of its growing asset base.

Overall, SM appears to be earning a reasonable return on its existing capital, but its recent investments still need time to prove their value. The investment case will become stronger if RROIC rises closer to or above the current ROIC, since this would show that expansion is creating additional value rather than merely increasing the size of the balance sheet.

At a share price of P592 and approximately 1.215 billion outstanding shares, SM has an estimated market capitalisation of P719.4 billion. Based on its 2025 attributable net income of P90.5 billion, the stock trades at about 8.0 times earnings, equivalent to an earnings yield of roughly 12.5 percent. This is a relatively low valuation for a company that continued to grow earnings and maintained a return on equity of 13.5 percent.

SM also trades at approximately 1.0 times book value, based on March 2026 equity attributable to owners of the parent of P708.9 billion. This means the market is valuing the company at almost the same amount as its accounting equity, despite its ownership of established businesses in banking, property and retail.

On an enterprise-value basis, SM trades at approximately 6.0 times EBITDA. These multiples indicate that SM is priced more like a mature, slow-growth conglomerate than a high-quality collection of dominant franchises.

However, the low valuation partly reflects concerns over slower growth and the holding-company discount. A low P/E alone does not prove that the shares are undervalued if earnings growth remains modest.

Now, conventional valuation multiples show that SM trades cheaply, but they do not explain whether the discount is justified. We need to know whether the returns generated by SM’s businesses are sufficient to compensate shareholders for the risks they assume. This requires comparing the company’s return on equity, earnings power and cash generation with its estimated cost of equity.

No single valuation method can fully capture SM because the group combines different industries under one holding company. We can analyze this by using several approaches, including residual income, justified price-to-book value, no-growth earnings power and reverse free-cash-flow valuation. These methods provide different ways to determine whether the current price of P592 reflects fair value or excessive pessimism.

To estimate SM’s required return, the analysis uses the Philippine 10-year government bond yield of 7.467 percent as the risk-free rate, a beta of 0.42 and an equity risk premium of 5 percent. Under the capital asset pricing model, this produces an estimated cost of equity of 9.567 percent.

The residual income model is particularly useful for SM because a large share of its earnings comes from BDO and Chinabank, where book value and return on equity are important valuation measures. The model measures the value created when a company earns an ROE above its cost of equity.

SM reported equity attributable to owners of the parent of P708.9 billion as of March 2026. Using the latest outstanding share count of approximately 1.215 billion, this is equivalent to book value of about ₱583 per share. Its annualised ROE stood at 13.5 percent.

Since SM’s 13.5 percent ROE exceeds its estimated 9.567 percent cost of equity, the group generates an excess return of approximately 3.93 percentage points. This translates to estimated annual residual income of about P27.9 billion.

Assuming this residual income can be maintained without growth, the model produces an estimated equity value of approximately P1 trillion, which is equivalent to about P823 per share.

Compared with the market price of ₱592, SM trades at an estimated 28 percent discount to this residual income value. Reaching P823 would represent potential upside of approximately 39 percent.

The same conclusion can be expressed through a justified price-to-book ratio. With no assumed long-term growth, the justified multiple is calculated by dividing ROE by the cost of equity. The computation shall be Justified P/B = 13.5% ÷ 9.567% = 1.41 times

SM currently trades at only about 1.02 times book value. Applying the justified multiple of 1.41 times to book value of P583 per share also produces a value close to P823.

This suggests that the market is pricing SM as though its return on equity will eventually fall close to its cost of equity. The valuation potential depends on whether the group can preserve its present ROE despite slower economic growth and additional capital spending.

Another way to test the valuation is to capitalise SM’s current earnings without assigning any value to future growth. SM generated P90.5 billion in net income attributable to shareholders in 2025.

Dividing this amount by the 9.567 percent cost of equity produces an estimated no-growth equity value of about P945.8 billion, or about P778 per share.

Under this approach, SM trades at a discount of about 24 percent, with potential upside of approximately 32 percent. This method is more conservative than the residual income valuation because it assumes earnings remain flat indefinitely and gives no additional credit for future expansion.

A reverse valuation estimates the long-term growth rate already reflected in the current share price. Using SM’s adjusted free cash flow of approximately P47.7 billion, market capitalisation of around P719 billion and estimated cost of equity of 9.567 percent, the present valuation implies perpetual adjusted free-cash-flow growth of only about 2.8 percent.

The adjusted free-cash-flow calculation includes dividends received from associates because SM recognises earnings from BDO, Chinabank and other associate companies without recording the related dividends as consolidated operating cash flow. Adding these dividends provides a better measure of the cash that ultimately becomes available to the group.

The implied growth rate appears conservative compared with SM’s recent performance. Adjusted free cash flow increased by approximately 10.9 percent in 2025, from about P43.1 billion to P47.7 billion.

SM does not need to maintain double-digit free-cash-flow growth indefinitely to justify a higher valuation. It only needs to sustain long-term growth above the 2.8 percent rate currently priced into the shares.

From a wave analysis perspective, SM appears to be in the latter stage of a major five-wave decline from its previous peak near P1,000. The latest drop toward P575 may represent the fifth and final wave of this bearish sequence.

The recent consolidation between approximately P575 and P610 therefore suggests that selling pressure may be starting to weaken and that the stock could be attempting to form a medium-term bottom.

Although the Wave reversal is not yet confirmed, SM continues to trade below its previous lower highs. A sustained move above P610 would provide the first sign that the five-wave decline has ended. A stronger breakout above P645 would improve the probability of a larger corrective recovery.

If the bottom near P575 holds, SM could initially rebound toward P610, followed by P660. A stronger recovery could eventually extend toward to P700. These levels would still represent a corrective rebound within the broader downtrend unless the stock subsequently recovers above the P720 area.

The bearish alternative is that the final wave has not yet been completed. A decisive break below P575 would indicate that the fifth wave is still extending and could expose the stock to the next support near P550. Further weakness could bring the price toward P525. The P575 level is therefore important because it separates a possible bottoming process from another continuation of the decline.

Latest readings suggest that SM may be approaching the end of its long decline, but the chart has not yet confirmed a durable reversal. At P592, the stock is trading close to the potential support zone of P575 and appears technically stretched after the sharp fall.

This makes the current area suitable for gradual accumulation by long-term investors who are prepared to tolerate further volatility. A move above P610 would strengthen the short-term outlook. A sustained break below P575, however, would invalidate the immediate bottoming case and raise the possibility of a decline toward P550.

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on X (Twitter) @henryong888.