Philippines billionaire Sy's group counts on logistics as next growth engine

MANILA (BLOOMBERG) - Almost 60 years after turning a shoe shop in Manila into a banking-to-property conglomerate that's made him the richest man in the Philippines, billionaire Henry Sy has found the next growth engine for his group: logistics.

Mr Sy's SM Investments Corp. is counting on logistics affiliate 2GO Group to fuel earnings growth as e-commerce and economic growth boosts demand for deliveries, chief executive officer Ricky DyBuncio, 57, said in an interview. Logistics may even become the company's fourth business pillar after banking, real estate and retail, he said. The logistics company's shares surged to a record Tuesday in Manila trading.

"As economic growth spreads nationwide, you will see a more and more increasing need for logistics operations," Mr DyBuncio, the first person from outside the Sy family to lead SM Investments, said in Manila May 25. "It definitely could grow by double digits for many, many years to come."

SM Investments, the country's most valuable company after Sy-controlled residential and malls builder SM Prime Holdings, has said it needs to expand in high-growth sectors to complement its main businesses. Investments in logistics will help boost earnings as the core businesses reach a scale that makes double-digit percentage growth no longer the norm, Mr DyBuncio said. SM stands for Shoemart, the name of the original store Mr Sy opened in 1958.

Mr DyBuncio, who took over from the founder's son Harley Sy last month, has said he'll look to the company's share price as a measure of his performance. He will need fast-growing businesses to continue driving the stock higher as his predecessor oversaw a more than a six-fold increase since the shares began trading in 2005.

Logistics can grow at least two times faster than the economy, according to Mr DyBuncio, who has been looking at investment opportunities in logistics over the past two years. Economic growth is boosting demand for shipping, warehouses and port facilities nationwide.

Shares of 2GO climbed as much as 21 per cent to 25 pesos, the highest since the company's 1995 listing, before paring gains to trade at 23.40 pesos as of the midday trading break in Manila on Tuesday. The stock has tripled so far this year. SM Investments fell 0.2 percent to 775.50 pesos.

The Philippines plans to spend as much as 9 trillion pesos (S$249.1 billion) on infrastructure from this year to 2022 to boost Southeast Asia's fastest growing economy. The economy grew 6.4 per cent in the first quarter, its weakest expansion in six quarters and is forecast to grow 6.6 per cent this year, according to economist estimates compiled by Bloomberg.

"You can't have faster economic growth without logistics," said Gonzalo Bongolan, vice president at Philippine Commercial Capital Inc., a Manila-based investment bank. "Logistics and the last mile of distribution will become more critical as commercial activities multiply."

2GO is the largest provider of so-called end-to-end logistics services in the Philippines, a nation of more than 7,000 islands. The company, which has a fleet of 24 ships, had a 90 percent passenger market share and cornered 38 percent of cargo that passed through the ports where it operated. Customers include SM Investments' department stores and grocers, Procter & Gamble, and Lazada Group, a Southeast Asian e-commerce operator whose Philippine clients include an SM's online store.

Net income will jump about 14 per cent this year to 35.4 billion pesos, based on the average of seven analyst estimates compiled by Bloomberg. That would be the fastest growth since the 16 percent advance in 2012.

SM Investments indirectly owns about 30 per cent of 2GO. It's part of portfolio investments amassed to diversify beyond core businesses that include BDO Unibank Inc., the biggest Philippine lender by assets, and China Banking Corp. SM Investments' two other major units are SM Prime, the nation's largest shopping mall operator, and SM Retail Inc., the biggest Philippine retailer with 2,303 outlets.

Return on equity, which fell to about 11 percent last year from the 14.3 percent peak in 2012, will rebound in the next couple of years as returns from its investments, including property assets, improve, DyBuncio said.

As for the logistics business, DyBuncio said he's still not certain it will become a core business on the scale of the banking, property and retail mainstays.

"Is it going to be big enough that we can say it's a fourth leg? We need to see what happens in the next few years," DyBuncio said. "We might be able to find the fourth leg but it will probably be a short leg given the size of the group's three core businesses."