Ascendant Conglomerates: Potential winners emerge as economic outlook improves

The Philippine conglomerates have faced significant challenges this year. However, as economic indicators begin to show signs of improvement, some of these corporate giants are positioning themselves for a strong recovery.

The conglomerates sector, which includes diversified companies with interests across multiple industries, has underperformed the broader market by a considerable margin. As of August 2024, the sector lagged behind the Philippine Stock Exchange index (PSEi) by over 1,400 basis points, or 14 percentage points. This underperformance can be attributed to modest growth in core earnings, which are profits from a company’s main business operations.

Despite this overall trend, a closer examination reveals that certain conglomerates are demonstrating resilience and adaptability in the face of market challenges. Two companies, in particular, stand out as potential winners in this evolving landscape.

Attractive valuation, strengthening peso

GT Capital Holdings (GTCAP), a major player in the automotive, banking, and property sectors, has recently seen its stock price approaching its 52-week high. This performance is driven by attractive valuations and improving profit outlook in its Toyota automotive business, which is benefiting from the strengthening Philippine peso.

While GTCAP’s profit growth for the first half of 2024 was a modest 5%, the street anticipates stronger performance in the latter part of the year, which could further boost its stock price.

Another noteworthy contender is SM Investments Corporation (SM), a company with significant interests in retail, property, and banking. SM serves as a bellwether for consumer sentiment in the Philippines.

As inflation rates decrease and the central bank eases its monetary policy, SM is well-positioned to benefit from the expected increase in consumer spending power. The company has already shown its resilience by posting a 13% year-on-year increase in earnings for the second quarter of 2024.

Broader economic trends

The improving outlook for these conglomerates is closely tied to broader economic trends. For instance, the value of GTCAP’s stock has shown an inverse relationship with the strength of the US dollar, highlighting how currency movements can impact a company’s earnings, especially in its import-dependent automotive segment.

Similarly, SM’s performance is expected to improve as inflationary pressures subside, leaving consumers with more disposable income.

While the conglomerates sector as a whole may continue to face headwinds in the short term, astute investors are likely to distinguish between companies that are struggling and those that are adapting successfully.

Firms with diverse business portfolios, strong financial positions, and exposure to recovering sectors of the economy are well-placed to capitalize on the improving economic environment.

As the Philippine economy continues its path to recovery, keeping a close eye on these resilient conglomerates could prove beneficial for investors looking to participate in the country’s economic resurgence.

For more details, you may download our report here.

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GERMAN DE LA PAZ III, CFA serves as an Equity Research Lead in the Investment Services Division of Metrobank Trust Banking Group. His coverage includes gaming, telcos, conglomerates, and utilities, as well as select offshore markets. Prior to joining the bank, he spent 9 years at Abacus Securities, starting as a Junior Investment Analyst and working his way up to Senior Investment Analyst. German holds a Bachelor’s degree in Humanities and a master’s degree in Industrial Economics from the University of Asia and the Pacific. Recently, he obtained his CFA charter and is currently pursuing additional industry certifications. In his free time, German enjoys playing sports, particularly basketball, and has a penchant for reading fiction books, watching suspenseful movies, and listening to music.

ARIZ MARCELINO is an Equity Research Analyst in the Investment Services Division of Metrobank Trust Banking Group. His local market coverage includes banks, consumer, and properties. Additionally, he monitors various sectors and investment themes in the offshore space. Previously, he was with the Markets Research Department, focusing on macroeconomic research and sector analysis. Ariz graduated from New Era University with a degree in Banking and Finance and has cleared the CFA Level 1 exam. He is a certified Financial Modelling and Valuation Analyst and a UITF Sales Person. Outside of work, he unwinds by watching popular sitcoms and anime series while enjoying a cup of hot matcha latte.