Wednesday, August 28, 2019

Is There Light At The End of The Tunnel For SPH (SGX: T39) ?

Following my recent article on Starhub, I've received a few inquiries from readers regarding what I think about SPH and if their current valuations are fair.

SPH has been a very good dividend payers for many years in the past and is a past time favorite for dividend investors so I can understand if there are a lot of them out there who are holding on to the shares and not knowing if they should cut loss or continue holding on to it (perhaps due to sentiments).

Long time shareholders of SPH would have experienced that the shares of the company used to get 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 at 24 cents despite the beginning of a structural decline.

It wasn't until sometime in 2013 when they split part of their property portion out to SPH Reit that they started to reduce their dividends every year due to decline in earnings, and the share price has since languished to a new low today of $1.95.




But at today's languished price of $1.95, is there light at the end of the tunnel for SPH? Where is the bottom for SPH?

Let us take a look parts by parts of how much they're worth now.

1.) SPH Reit

Whether you like it or not, the SPH of today is pretty much a property play, which is why SPH Reit is probably the most valuable worthy of the lots.

The Group owns 69% of SPH Reit which is currently valued at $1.10 (thanks to the resilient nature of Reits these days!).

$1.10 x (2,586,531,833 / 1,617,010,890) x 69% = $1.21

2.) Seletar Mall

Seletar Mall spin off into SPH Reit is a matter of time and not if.

SPH Reit has recently established a $1billion multicurrency debt issuance, which is likely to fund a potential acquisition which is likely to be Seletar Mall. Under this issuance, SPH Reit is able to tap into both debt and perpetual securities so it is likely they will acquire something big to tap on both.

In any case, the last appraisal for Seletar mall is likely to be in the region of $488m using the latest appraised valuation last year in SPH's book, so the worth of Seletar mall on SPH's books (70% stake) is likely to be:

$488,000,000 / 1,617,010,890 x 70% = $0.21

3.) Bidadari Site

SPH and KDDL managed to outbid their competitors by winning the tender bid at the Bidadari site sometime back in 2017 at an agreed price of $1,132m.

The intention is to build the site into a mixed commercial and residential use in due time, so it's not currently contributing anything to earnings yet.

$1,132m x 50% / 1,617,010,890 = $0.35


Adding point 1 to point 3 for the property site, we would get a worth value of $1.21 + $0.21 + $0.35 = $1.77

If you are not comfortable with taking the full current asset value and want it to be further conservative, you can slap a discount to the property by 20% and you should get a lower amount to $1.77 x 80% = $1.42.

4.) Orange Valley Healthcare

The Group announces its maiden entry into the healthcare sector when it bought Orange Valley healthcare for $164m back in 2017. The net asset value for OVH is at $71m, so the company is paying around 2.5x, which proves to be too expensive on hindsight given that they recognized an impairment in Q3 FY19 by $22.8m.

Given that OVH's earnings are only at around $5.8m, and if we slap an earnings multiple of 20x for healthcare premium, we would get:

$5.8m x 20 / 1,617,010,890 = $0.07

This is also similar if we take it via the book value method:

($168m - $22.8 impairment) / 1,617,010,890 = $0.08

5.) Other Investments

SPH also has a stake in other investments such as M1 and Mindchamps, which we can value it out based on the last traded price. The company also recently added their stake in the UK student accommodation portfolio, increasing the beds to a total of 5,059 beds across 10 cities.

Mindchamps:

$0.54 x (241,600,000 / 1,617,010,890) x 20% = $0.016

M1:

$2.06 x (930,151,000 / 1,617,010,890) x 16% = $0.19

Student Accommodation:

5,059 x $1,000 / month x 12 x 70% occupancy / 1,617,010,890 = $0.026

6.) Media, Newspaper & Ads Print

SPH's share price decline is probably most contributed by the decline in the structural nature of the media and print business.

Media and advertising profits were down 11.6% year on year and it doesn't seem to abate going into the new financial year in the next two quarters.

Alone, Quarterly newspaper and publication profit declined from $63m in Q1FY16 to $13m in Q3FY19. Margins were down structurally.

With full year media and newspapers earnings expected to come in at $50.8m, and we place a conservative 8x PER multiples on the earnings, we are expected to value the media portion at:

$50.8m x 8x PER / 1,617,010,890 = $0.25

7.) Net cash less borrowings

As at 31st May 2019, the company has cash of $206m and borrowings of $2,177m.

Since the Reits portion are being consolidated into the book, we will have to separate it out.

($206m - $2,177m) x 69% / 1,617,010,890 = -$0.84

Final Thoughts

If we sum point 1 to 7 all up, we will get a sum of the parts of $1.56 worth in value.

There are some very conservative earnings multiple that I have used on the valuation above but there are some parts like the property side which we have also used the book value to justify the nav.

In this regard, I think SPH will still have further room to go down, especially if their media and print earnings continue to decline.

If you are interested in buying SPH just because of their properties, then it is a much straightforward play to buy their SPH Reits instead of going through the indirect way through SPH.

The SPH of today is no longer the SPH of the past.

They ventured a lot into unknown territory which we do not know if things might work out to be good in the end. The Orange Valley purchase gives us a good indication of how they overpaid for a project they are pretty unfamiliar about and have to pay the price.

Sentimental buy? Maybe can reduce them to a smaller position in your portfolio instead.

Short the company? Do it at your own risk. I have a relatively large position shorting Starhub already so I would want to keep my other bullets for other uses.

Having said that, the high likelihood of divestment of Seletar Mall to SPH Reit might buy them some time to breathe in for a moment.

Thanks for reading.

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8 comments:

  1. Always worthwhile to read your posts. Thanks B.

    ReplyDelete
  2. Hi B
    Appreciate your effort to share your analysis on stock picks. Was wondering if you could share how u price your TP or identify triggers to exit the counter. Thanks.

    ReplyDelete
  3. This is a good informative article, thanks for the effort

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  4. uncle168,

    metro retail is lose money one, i think it will also close down paragon and causeway pt outlet

    that is why it brought the office in tampines

    it is easier to be landlord anyway the things it sell is much cheaper online

    i wonder what paragon going to do with so much empty space if metro exits

    keekeekee

    ReplyDelete
  5. Interesting Article. Hoping that you will continue posting an article having a useful information. Kids Savings Account

    ReplyDelete
  6. Hi, I think the M1 valuation should be adjusted as the proportion is higher now that only Keppel and SPH owns it.

    ReplyDelete
  7. Hi Brian,

    my personal thought on SPH is that it is going down and down. it is venturing too fast and too quickly into many random businesses. i wonder how is it possible they can find "so many talents" to manage all the different businesses.

    it is definitely a no buy for me.

    ReplyDelete
    Replies
    1. Hi Boonhow

      I have the same thoughts as you. They are in a difficult situation as the industry is sun setting.

      Whichever way they go it's going to be a tough journey.

      Delete

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