Philippine conglomerates are struggling to compete with pure-play companies due to their declining annual total shareholder return (TSR), according to global management consulting firm Bain & Co.
Reshaping portfolios, redefining roles, and investing in technological innovation are keys to succeeding in the volatile landscape, Bain said in a report e-mailed to journalists on Thursday.
Data from Capital IQ and Bain’s analysis showed that conglomerates from the Philippines, during the last decade, had an average annualized TSR of 2.6%, compared to the 3.2% of pure plays.
The fifth edition of Bain’s Southeast Asia Conglomerates report stated that the average annualized TSR of conglomerates in the region from 2013 to 2022 was found to be only 4%, declining by 24% from 2003 to 2012.
Meanwhile, SEA pure plays had 11%, outperforming conglomerates in revenue growth, margins, and multiples.
“When the region was less developed, it was easier for conglomerates to prosper, thanks to their size and privileged access to opportunities, capital, and talent,” Jean Pierre Felenbok, Singapore-based advisory partner at Bain, said in a press statement.
“However, we observed that this privilege started diminishing in the middle of the last decade, and the performance gap between pure plays and conglomerates has widened ever since,” he added.
A correlation between market maturity and conglomerate performance was found in developed markets such as Singapore, Malaysia, and Thailand, where conglomerates lost their upper hand first and most rapidly, according to Bain.
Conglomerates need to expand their margins more quickly and establish strong leadership positions in attractive sectors, mirroring what young pure plays have done, it added.
“Accounting for 17% of the region’s market cap and 30% of capital expenditure, Southeast Asia needs its conglomerates to grow and create value,” Mr. Felenbok said.
Till Vestring, another Bain advisory partner, noted that ‘all-weather stars,’ referring to a subset of conglomerates, have outperformed their peers through increased revenue, defended margins, and expanded multiples.
These included the Enrique Razon Group in the Philippines, which encompasses the port-handler International Container Terminal Services Inc., Bloomberry Resorts Corp., Manila Water Co., and Prime Infrastructure.
Holding company PHINMA Corp. was included in the report’s list of seven new all-weather stars in the region.
“Companies should continue to reinvest in their core businesses to manage their strategic positions and offset erosion of the conglomerate advantage,” Bain said, mentioning that 44% of top-quartile companies are leaders in their primary business.
“Top-quartile conglomerates actively reshaped their portfolio toward high-growth industries and growth engines of the future,” it added.
Bain recommends that companies redefine their corporate center’s roles to add value. It also mentioned that many companies in the region handle group functions for procurement, information technology, and commercial excellence.
It highlighted the need to invest heavily in innovation and technology through data analytics and automation for product development and new revenue streams.
“Ownership and capital structures impact a conglomerate’s value in the public market,” Bain said on optimizing to reduce conglomerate discount. — Miguel Hanz L. Antivola