On Monday, JPMorgan (NYSE:JPM) issued a downgrade for SM Prime Holdings, Inc (SMPH:PM) (OTC: SPHXF), moving the stock's rating from Overweight to Neutral. Alongside the rating change, the firm also adjusted the stock price target to PHP31.00, a decrease from the previous PHP41.00 target.
The downgrade was prompted by the anticipation of a slower net income growth for SM Prime Holdings, projected at 7% per annum through 2026, which is lower than the market consensus of 11%.
The analyst cited several factors for the tempered growth outlook, including a high base effect from the company's return to pre-pandemic profit levels in 2023, a plateau in residential revenues due to softening demand in the mid-market segment, and rising interest expenses, which are expected to account for 18% of estimated EBIT for 2024 and a net debt-to-equity ratio of 0.9 times.
Market sentiment towards SM Prime Holdings is expected to remain subdued as investors adjust to the forecasted 20% year-over-year decline in pre-sales for the current year, with a sharper 40% drop anticipated in the first half of 2024. This downturn in pre-sales is likely to lead to stagnant year-over-year residential revenues from 2025 to 2027.
The analyst also expressed skepticism regarding the immediate benefit of potential interest rate cuts, suggesting that it could take between two to four years for the mortgage burden to decrease to a more manageable level of 60-70% from the current 82%, even assuming stable property prices.
Despite the downgrade, JPMorgan does not recommend an Underweight position on SM Prime Holdings, pointing to the company's malls as a continued source of cash flow. Moreover, the firm notes that stricter buyer requirements may help reduce the likelihood of future residential revenue back-outs.
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