Every once and then, there would be companies in focus that would be the major target for the short seller. These are mostly sick companies because their outlook are bleak. If you recall in the early of 2016, we had similar cases with oil and gas companies. Keppel and Sembcorp took the most hit and they were depressed to levels that everyone just want to shun on it.
SPH has been a grandfather stock for a very long time. Long time shareholders would know that they used to get to as high as $18 to $20 before doing a split back to $5. The GFC event in 2008 brought them down all the way to $2.40 before rebounding sharply when the market recovers. This was despite the start of the decline in the media print and ads as people start to read less hardcopy and go more digital. It didn’t deter shareholders though as the company continued to pay decent dividends that goes from 24 cents for a few years after the gfc and only the past few years that they began reducing it to levels they can sustain.
With the current share price hovering at around $2.58, perhaps it’s worth to take a look at what the company is worth. Let’s break them down by parts.
1.) SPH Reit
This is the most straightforward play.
The Group owns 69% of SPH Reit which is currently valued at 1.05x P/BV at 99 cents. This is rather fair value considering that they use a rather aggressive cap rates to value their properties at 4.3% cap rates as compared to other retails CMT and FCT who are using a 4.9% cap rates.
$0.99 x (2,559,633,342 / 1,614,973,980) x 69% = $1.08
2.) Seletar Mall
The company held 70% stake in Seletar Mall in the highly anticipated divestment to the Reit in due time.
The latest appraisal for the mall is at $495m using a cap rate of 4.9%, again rather fair comparatively.
$495,000,000 / 1,614,973,980 x 70% = $0.21
3.) Bidadari Site
SPH and KDDL managed to outbid its competitor by winning the tender bid at the Bidadari site a couple of months ago at an agreed price of $1,132m. The book value of the land will be $1,132m x 50% = $566m based on its 50% stake.
The Group will be redeveloping the land site for mixed commercial and residential use in due time so we can expect them to earn a margin on it by slapping a conservative tag margin of 15%. We can also see this 15% as a potential upside to the rnav.
$1,132m x 50% x 1.15 / 1,614,973,980 = $0.40
The Group announces its maiden entry into the healthcare sector when it bought Orange Valley healthcare for $164m. The net asset value for OVH is at $71m, so the company is paying around 2.5x. Still, I think the right way to value this is using earnings multiple on the sector.
Orange Valley runs five nursing homes in Singapore with more than 900 beds and charges about $2,700 per month for each bed. Assuming 100% full utilization, it works out to be 900 x $2,700 x 12 months x = $29m. This is just the topline margin. Based on the last earnings result from OVH, the company earns an EBIT of about $6.5m. Slapping an earnings multiple of 25x (based on competitors) and translating this into EPS, we get about:
$6.5m x 25 / 1,614,973,980 = $0.10
5.) Stake in M1 & Other Investment
The group has a 13% stake in M1, which is a small part of their market cap.
With M1 share price hovering at $1.80 and the other investment worth around $250m on the book, this works out to be at around:
[($1.80 x 13% x 930,151,000) + ($250,000,000)] / 1,614,973,980 = $0.29
6.) Net cash less borrowing
The company has cash of $233m and a borrowings of $1,484m and they are being consolidated from the group against their Reit.
($233m – $1,484m) x 69% / 1,614,973,980 = – $0.53
Adding point 1 to 6, we get a value of $1.55.
7.) Print, Ads and Media
If the current share price is $2.58, what this assumes from here is that the core media and print business is valued by the market at about $1.
Readership of SPH newspapers have declined since 2009 for about almost 25 over quarters to date and you can see there has been a switch to the growing trend of digital subscription. This is cannibalization in the sense while digital is up, hardcopy is down. This is despite the rather steady print price the group has set for their newspaper.
When consumers switch from print to digital subscription, advertising also drops since advertisers spend less in digital space. You can see how drastically the drop in the ads print revenue from this year to the last and to the previous year. The company continues to face margin pressures over the years as margin drops from a high of 37% in 2010 to 24% in 2016. The company also faces more impairments as the new CEO tries to kitchen sink this year while starting afresh next year, so we should see further impairment towards the year end.
With 9m FY17 media earnings coming in at $57m, we should expect full year earnings to come at around $76m. This translates to about $76m / 1,614,973, 980 = $0.05 or 20x earnings based on $1 price. Multiples for media are never cheap to begin with, even when they were doing decently fine all these years.
This is a big key here as the new CEO tries to redevelop a switch into digital over the longer term which should involve restructuring in the interim.
The drop in the share price has accounted for a lot of the drop in the media earnings as well as the bleak outlook.
I think it is safer to look at SPH as a special situation play than hoping for the media industry to recover, which is a way long shot and a big question mark.
Dividend sustainability would be key. I just suspect the company would be able to retain around 17 cents dividend payout for the next 2 years as the company divested some of their non-core investment. Do note that this is a return of capital not a return on capital though. They divest these investment assets and will not be able to generate further roic on the investment so you get it back as a capital repayment form.
Short sellers are having a field day these days, owning 30% of the overall volume in day trades over past couple of days.
There are always silver at the end of the lining if we managed to look at it closer.