Tuesday, October 28, 2014

Recent Action - SPH

Every year during this time, I would take the time to review SPH full year results to see how they were doing. Last year in Oct (See Here), I was disappointed with their results and was contemplating whether to hold or let go of this darling grandfather stock. Anyway, I managed to hold to them eventually and have well "eaten" their normal, final and special dividend despite the not so satisfied results.

Today, I made the decision again to review SPH recently announced full year results and decided to let go my 5 lots at a price of $4.23, not too bad I think given the range they have been in the past 5 years or so (will talk it more detail in conclusion).

My decision to divest the company has been based on figures which have been disappointing and not too satisfactory for me.

If we take a look at the top line and operating profit figure, specifically for Newspaper and magazine, the drop on revenue year on year has been pretty bad at around 6%. Operating profit has dropped at around 16%. Taking a closer look, the fall in circulation can somewhat be offset by the increase in the property and other segments. However, the drop is advertising revenue is massive and hits hard for them.

Revenues and Operating Profits
Looking back over the past 2 years at least now, the decline in print and advertising on offline have been a secular trend given the high internet penetration of the young people these days. Sources of advertising revenue such as Classifieds have been on free fall and is evident in their latest results.

Some people have mentioned whether the property segments will come and rescue the core business, especially given the hype that Seletar mall will begin operations in Nov 2014. Using my calculated estimated capitalization rate of 4.85% (See Link Here) over its latest valuation of $493 million, we get an NPI of around $24 million/year. Having an ownership of 70%, this will translate to around $16.7 million/year for additional income. Being a conglomerate, $16.7 million will not impact their earnings by much, given that their loss in advertising revenue alone is over $50 million. We have not even taken into account some other expenses and considerations and the revaluation gain/loss.


The company has declared a final dividend of 14 cents/share, making the total to 21 cents, a 1 cent drop from previous year. You can see that the company is floating right now with their cash flow, given that their latest payout has now exceeded to 107.8%. I seriously doubt they will be able to increase their payout anytime soon.


The key here is that the company is trying to transform their business into the digital platform, having more online than offline, tapping on the digital space, integrated content and online advertising. I think it will take some time for the strategy to play out but will good for the business over time.

Conclusion

This is a counter that somehow people loves most despite their results. If we take a look at the price range over the past couple of years, it has always range somewhere between $3.80 (after xd) to $4.30 (before xd). Last year they went to as high as $4.60 because of the hype regarding the listing of the SPH Reit and the special one-off dividend. Over the next year, they should be at least maintaining their total of 21 cents/share dividends. If you are satisfied with the 6% yield, this counter should be fine. But given the current market volatility, maybe there are more opportunities to cash in on the proceeds from selling this counter, at least for me.

16 comments:

  1. Thanks for sharing your analysis of SPH. Sometimes selling is much harder than buying especially if you have been holding a winner for so many years. But you always must look forward and if the recent results aren't to you liking it may be time to let the stock go. Look forward to your next update.

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    1. Hi Div Hut

      Good to hear from you again.

      Indeed, selling is harder than buying sometimes. If fundamentals or business doesn't improve over time, it could be time to let go and look elsewhere. The best part is you can always come back to it again ;)

      Cheers

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  3. Hi B,

    I am contemplating selling too. Given the poor advertising performance and the not so impressive yield. I might still sell it but 2 things are holding me back.

    What is the base for advertisement revenue?

    1) yes, advertisement from print is doing badly YOY due to online advertisement. I however think there is a limit of how much online advertisement can take away business from print advertising. It is going to be a 6% fall annually for the next few years or a decade is everyone guess.

    SeletAr mall will not be injected to Reit for the next 2 years at least, so we should take 100% and not 70% for the calculation

    The biggest thing on my mind, regarding Circulation revenue is the possibility of raise in ASP.

    It has been more than a decade since ST went from 80 cents to 90 cents. Of course, unlike MRT, we could say that people will boycott the papers at 10 cents more, but those that will boycott the papers are mostly those will have already migrated digital anyway.

    In conclusion,
    I do not see it as ever- darkness, but neither do I see lights at the tunnel. I simply see it limping along for years and get some knee- jerk reaction when results are not up to expectations

    The biggest reason to sell, for me will be opportunity cost instead.

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    1. Hi Sillyinvestor

      SPH only owns 70% of Seletar mall while the other 30% is owned by United Engineers, hence I have taken only 70% of the income.

      I think the company is undergoing some transition period at the moment, so you are right. It could be sitting in the middle trying to see whether it will fall or rise up once again. As business owner, I like to see businesses improving over time, not trying to float in the middle. At the worst case, I can use my selling price at $4.23 to probably buy back the shares. I am pretty sure I could get them at around the price should the situation remains this way.

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  4. this stock was low at 4.4 before your 5 years. the only reason it was surviving now is due to its hidden non-cores. they must regret divesting their belgian telecom operators.

    if you look at those that bought in 2005 or so, the dividend gains have to make up for it. but this is still the best div stock around.

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    1. Hi Kyith

      Thanks for adding.

      What is their hidden non-cores? Property? But I thought they just bought them not too long ago at a price not too low. The 6% dividend is probably all investors are looking forward to. But with over 100% payout, not sure if that's the best situation I want to be in right now.

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    2. they own much local and belgian telecom shares.

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  5. B : as always, very detailed and well thought through review.. So now got more fund in the war chest to "attack" other better opportunities then lol

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    1. Hi Richard

      Thanks for your words :)

      I have one eye on a counter that I am going to utilise my warchest soon, but maybe after it announces its results next week.

      Delete
  6. Hi B,

    I remember asking you why are you holding to sph a month back?

    I let go 8 lots in Apr after holding for 3 years.

    http://www.rolfsuey.com/2014/04/singapore-press-holdings-good-bye.html?m=1

    I read one writer says before "many monkeys will start to leave this tree, fruits getting smaller"

    We are monkeys???

    Rolf

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    Replies
    1. Hi Rolf

      Ahh yes I remember that.

      Probably when the coast is much clearer I could go back to pick up its shares again but at this value its a bit overrated. The price is holding up much due to the dividends in dec.

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  7. Thanks for your analysis of SPH. Its certainly going to be a bumpy ride for them, but I will still hold on to them for some side dividend income. :)

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    1. Hi PIB

      The dividend should be maintained at 21 cents but looks like the business is in the midst of transition so I would come back in once it stabilizes.

      Delete
  8. I had not like SPH as the core business had been in the sunset industrial. Thanks for your sharing....

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    1. Hi David

      Sph is a matured business and in the sunset industrial but thats what we expect these days with technology. They've got to quickly shift their core to digital and hope this will be tied their down in offline copy.

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