PERFORMANCE TASK- BUSINESS FINANCE

Read the news article below and answer the questions that follow.
SM to raise P42.5B from equity, bonds to finance P85-billion capex this year
Thursday, Apr 30, 2015 Manila Bulletin By James Loyola

SM Investments Corporation (SM), the  flagship of the Sy family, plans to raise about P42.5 billion
from the issuance of various financial instruments to fund part of the group’s P85-billion capital
expenditures  (capex) this year.
In a press briefing after the firm’s annual stockholders’ meeting, SMIC executive vice president and
chief finance officer Jose T. Sio said half of the capex will come from outside sources which may
include equity and debt while the other half will be funded internally.
Sio noted that the firm can actually generate enough cash internally to fund the entire P85-billion
capex but SMIC is keeping its options open in case of good opportunities to raise cheap funds.
“We are open to financing from banks. It is not our intention to go abroad because we need the funds.
But we go out when the time is right and the opportunity is there,” Sio explained.
Sio said that the debt could either be sourced locally or from overseas, although the company has a
preference for tapping domestic sources, including raising cash through equity.
SMIC is allocating the bulk or P70 billion of its P85-billion capex for integrated property development
unit SM Prime Holdings Inc. while its retail and banking units, would get the remaining P15-billion of
the budget.
The firm is facing stiff competition for its retail business. “The retail is still quite challenging (despite
low oil prices). While we’re dealing with the competition, we’re still trying to improve our margins.
Hopefully we can see better results,” SMIC president Harley Sy said.
The company said that it made a record P28.4 billion in earnings last year, some 3 percent higher
than the previous year’s attributable income of P27.4 billion.
Excluding extraordinary items such as trading gains from the banks, SMIC’s recurring net income
grew 14 percent, the company said.
SMI’s underlying earnings growth was mainly driven by BDO Unibank Inc., the country’s largest
lender, which posted a core income growth of 18 percent.
Together with China Banking Corporation, banks accounted for 41 percent of SM’s consolidated net
income in 2014. Property, meanwhile, contributed 38 percent and retail 21 percent.
Consolidated revenues grew 9 percent to P275.7 billion in 2014 from P253.3 billion in 2013, mainly as
a result of a good retail sales environment which also boosted rental revenues in SM’s property
business.
Questions:
1. What are the main activities of the company on the news clip?
Based on the news clip the main activities of the company would be property
development of their company which is the SM Prime Holdings Inc. to boost more
their rental revenues since it contributed about 38% of their net income in 2014, 3%
lower to banks contribution. They believe that it could contribute more once it’s
developed. The second activity, would be facing the threat they have for stiff
competitions in their retail and banking units. They are planning to research and
focus on that so they will overcome this threat of them.

2. What do they need financing for?

The SM Invesments Corporation need a fund for the innovation of the other companies
that they have. The first one is, the property development of SM Prime Holdings Inc. for
innovations and expansion of their real estate business to have a much larger share in
the market. Although I believe that they are still the biggest real estate in our country
and Ayala Corporation is far from them based on their incomes they are still making
new improvements that will help the company to gain more profit. The next one is, the
P15 billion will be funded for their retail and banking unit company because they are
facing a tight competition in the market and they’re getting challenged by it. Despite the
expenses will be lesser for the oil prices are low, the company’s income is not growing
enough that’s why they need funds to improve it and earn a higher profit than the past
year.

3. How much are they planning to raise through financing? In what manner are they
planning to raise funds? Do you think it is an effective method to raise the funds that
they need? Why or why not?
The Corporation is planning to raise 85 billion pesos for financing the innovations
that they’ll have. They will raise it through internal and external sources. Half of it will
come into the equity and debt financing from other financial instruments while the other
half will be funded by the corporation’s income. Although, they could really fund the
funds by themselves, the corporation chose not to, because there may be a
spontaneous opportunities that will benefit them and through it they can grab the
opportunity quickly. I think it’s an effective method of raising funds because they do not
let the corporations fund suffer alone from the expansions that they’ll have. They are
open for help and they’re not closing their doors for these opportunities that’ll help them
in raising funds. They are using the hard-earned trust they have from other companies
to raise the fund that they need and doesn’t solely dependent on the firm itself. After all,
it took them time to earn this that’s why it’s just acceptable to use these institutions. It’s
an effective method because their financial department will not be having a hard time to
find available assets for the fund and it would be a less burden since it will not cause a
sudden loss because a huge amount of money will be use and they are given a time of
the banks to fully paid their obligations.

4. What are the company’s plans after achieving the proposed funding?
After achieving the propose funds, the company wants to develop their
corporation which is the SM Prime Holdings, Inc. that is more on real estates such
as Malls, residential and commercial shopping centers, hotels, etc. They are
planning to innovate their company and a big corporation like this need to have a big
funds since real estates are costly. I think they are developing this corporation since
 they saw a potential when they’re net income grew for about 3% as stated in the
article and they think that they could earn more especially if they’ll build and develop
more. Meanwhile, the remaining 15 billion of the raised fund will be allocated to their
retail and banking units since it’s having a tight competition in the market and they
need to do something in order to keep up with the competition. They can’t be
careless and be too confident, that’s why they are trying to improve their margins
and are very meticulous on possible opportunities that may come to them.

5. Do you think these activities and investments will be worth the method of funding? Why
or why not?
In my opinion, I think that these activities are worthy of the funds they are raising
because it will give them a great benefit once it matured. Developing properties with
the use of these funds is a good strategy because time will come, the expense used
for this innovation would maximize the shareholder’s wealth. We know that these are
non-current assets where price could get higher and higher as years goes by.
Solving the threats your company is facing is also great because we are able to
improve our company even more so that we could get into the stages where our
competitors are. Using the funds for your research and development team is an
adequate move for it can help the company be better. All these activities and
investments are worthy of the funding method used because I am certain that if
these things succeed, the company will receive the target profit they have especially
that these are great projects. Though, they will have a plenty of obligations in
different banks and probably a big decreasement in their net profit or to the
shareholder’s capital, these sacrificial lambs will create value in the future slowly.

6. Write a short reaction paper regarding the news article given and relate it to what
you have learned in this module.

To be honest, I was really in awe when I read this article. It’s because the
CFO has a really great skills and very suitable for his position. While reading the
article, it makes sense that he’s the assigned person for this crucial position. First,
he knows what is the best financial instrument to be used in raising the fund. As I
mentioned, they’re really capable of funding it alone but the CFO decided to fund it
in two different methods. From what I’ve learned, there are numerous sources of
funds we could use. It could be in short-term or long-term sources. As this is a huge
amount of money, they should use a long-term source also and that is banks. The
CFO plans to use their good connections in borrowing banks both local and foreign.
Since they have all the 5c’s in credit that creditors needed in evaluating such as they
have a good reputation in the business industry, they’re also capable of paying their
obligations since they can fund the money internally. They have a lot of other
corporations and companies that may serve as their collateral, the capital of the
shareholder’s are on a good state and the condition of the company is great
because they are planning an expansion. The CFO knows that they got these
certain things that’s why they are confident in borrowing this bulk of money to this
financial institutions. Thus, for me that is an excellent way of raising the funds. Next,
I was really shocked that this established company loans a massive amount of
money like that. Though I know that corporations really acquire loans, I was not
expecting that it would be this big. I thought that it would be millions only however I
was wrong. In our discussion, I learned that it’s normal for corporations to borrow
money from financial institutions upon reading the article I realized that it’s really
happening in the real world and they’re confident that they could also meet their
obligations. Lastly, because of this article I saw the applications of this module. I
 learned that it’s not really that bad to use loans for funding money and we shouldn’t
be afraid to borrow money from these sources especially when we are certain that it
will mature when the time comes.

7. Write a short reflection paper about the important things that you learned in
Business Finance in the 1st quarter period.

Starting from the very first things I’ve learned which is the financial institutions, I
learned that these institutions are very helpful to our company in funding our
expansions, innovations or development. Just like what’s stated on the article, they
will use Commercial banks both foreign and local to loan money for the projects that
they have. We can really use these institutions in borrowing money when we met the
certain conditions. Secondly, the financial manager and its role. I’ve learned that
financial manager have duties to fulfill and one of those is to raise the funds of a
company into different ways. Relating this to the article, when the occurred where
they need to raise funds the financial manager chose two different ways for raising
it. The Chief Financial Manager also have primary roles to do just like financing and
investing decisions. In the article, the CFO did two of his duty which are Financing
and Investing decision. In financing decision, when he saw the potential of the
propose project and decided to fund this long-term acquisitions of the company, he
evaluate how he will fund those things. The remaining money of the company
corresponds to CFO investing decision. Since I believe, it was reported to him that
they’re having a tight competition. He decided to invest in this company so that it will
help to gain a higher profit. Third, the sources and uses of short-term and long-term
funds. I learned that there are several sources you can use to fund the short/long
term activities that you have. Banks are not only the institutions where you can loan
money. There are plenty of choices and you should just chose wisely. These funds
could also use in different ways that will help your company to earn profit. In relation
to that, the corporation have long-term plans that needs a long-term sources that is
why they need to split in order to raise it well. Lastly, I’ve learned that these lessons
are really applicable in life especially if you’ll be an entrepreneur someday. I now
saw the essence of it and I can now answer myself whenever I say “ Will I use it in
the future?” because definitely yes. This analysis have been an eye-opener for me
that the things discussed to us really happened in corporate world and in no time, I’ll
be able to use these especially when I’ll build my own business.