Sunday, October 13, 2013

SPH FY2013 - Hold on or Let go

When SPH announces its FY13 results on Friday after market close, investors would be most pleased to hear that they will pay a final and special dividend of 15 cents/share, which is down 2 cents from the previous year of 17 cents/share. Combined with the 18 cents special dividends given earlier, it brings the total dividends to 40 cents/share, which is a record high for SPH. So should investors hold on to this stock or should they let go and move on to other stocks with clearer earnings direction?

Overhead Costs

Investors need to take note that the lower YoY% drop in profits for FY13 were mitigated by the special provision of their variable bonus, which otherwise will look much worse than what is in their books. There were also a couple of impairment losses recorded on their books under the operating expenses which has increased quite a bit this year.

Core Business

The management seems to be satisfied with the performance of their newspaper ad revenue, which has declined lower than the previous couple of quarters and that the figures might stabilized in the near future. Having said that, newspaper print prices are expected to remain flat in the near term, hence a lower volume drop in the next quarter would give them a direct impact on their PnL.

Future Direction

The management seems to finally be able to account to the shareholders in terms of its strategy moving forward. 

First, the $19 Million savings initiative that they had planned is a great start, but it would probably not be material as it accounts for less than 0.5% of the full year profits.

Second, they had a project team working on initiatives to improve their gross profit margins. Based on the direction they are going, it seems like they are trying to lower the material costs by saving on some unnecessary workflow steps. Again, this is a short-term measure which is unlikely to bring the company to the next heights.

Third, the company had engaged an external consultant to review new growth opportunities in their core media business. From my experience, when a company engages a consultant like Mckinsey, it is going to always be a long drawn process. It means that we are unlikely to see any growth and expansion from SPH anytime soon.

For now, SPH looks to be able to maintain their future dividends payout of 22 cents to shareholders, which translates to about 80% payout on earnings. Seletar mall - which will open by the end of 2014 will bring temporary boost to its earnings while the management think of how they are going to shape the future of the company. My take is they will only package Seletar Mall into their Reits only when they had a clearer direction of their core business. Until then, it is hard to imagine anything more than the 22 cents/share dividends next year with a limited capital appreciation to its price. Long term shareholders might just hold this darling grandfather stock, but I'm not so sure about whether the new kid on the block who has just invested in SPH will hold on to this or not.

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