Tuesday, 30 May 2017

NEW CEO FOR SPH

The media industry is undergoing structural changes, with a shift away from traditional printed media sources towards digital media. Another company here undergoing structural changes would be SingPost, which appointed Mr Paul Coutts as their new CEO. Mr Coutts has more than 20 years of experience in C-suite positions at major global logistics and postal companies.

Therefore, when SPH announced that Mr Ng Yat Chung would take over the role of CEO from Mr Alan Chan, an industry veteran, many investors wondered if Mr Ng was the right person to have the responsibility of turning around SPH's business. Most cited his poor record at Neptune Orient Lines, and lack of industry experience, given that he was previously from the military. 

I have summarised the various business segments of SPH. 




Falling Earnings and Dividends


SPH Annual Report 2016


SPH Annual Report 2016

SPH's recurring earnings and dividends have been on a consistent downtrend since 2012, and their dividend payout ratio has been more than 100% of recurring earnings for the past three years. This is unsustainable and I expect dividends to be reduced further in the coming years. SPH's earnings per share for 2016 was 16 cents, and paid out 15 cents of dividends, with an additional 3 cents as special dividends. At its current price of $3.22, this gives us a dividend yield of 4.6%.



Declining Media Business




SPH Annual Report 2016

SPH used to be a media monopoly in Singapore, but the proliferation of online news sources has been detrimental to SPH's dominant market position. Newspaper readership numbers have been declining since its peak of around 3 million in 2009 to 2.4 million in 2015. With the combined revenue from media advertisements and circulation contributing around 70% of total revenue, the downtrend in readership for printed media would continue to be a drag on earnings. As consumers move away from printed media, SPH's advertising revenue from its newspapers would have to be offset by advertising revenue from its online editions.


MediaPropertyInvestmentsOthersTotal
2016175,204161,40948,833-24,405361,041
2015241,480185,94141,377-38,553430,245
2014246,381239,39730,41912,194528,391
2013293,340222,41711,385-38,043489,099


I complied SPH's past four years of profit before tax and minority interest, from its various business segments. Profits from the media segment has been falling by a larger percentage as compared to their property segment, which I would elaborate more below. For the 'Others' segment, they have been making losses, except for 2014 when they recognized a one-off partial divestment gain of 52 million. The other's segment consist of events and exhibitions business and SPH's 22% stake in MindChamps.



Property


SPH owns investment properties worth more around 4 billion. Though its 70% deemed interest in SPH REIT, SPH owns and manages properties including Paragon, Clementi Mall and The Seletar Mall. SPH's property development subsidiary also developed an upmarket residential condominium, Sky@eleven, at Thomson Road.

This year, SPH acquired Orange Valley Healthcare, a nursing home service provider for $164 million. This latest investment is a positive development to diversify its sources of recurring income. From SPH's announcement, the proportion of population aged above 65 in Singapore is expected to double by 2030 to 900,000 from the current 450,000. Singapore's ageing population would require additional nursing homes. Demand for healthcare services would increase along with Singapore's ageing population. $164 million is relatively small compared to SPH's $4 billion property portfolio, and SPH should continue to expand its business in this sector. 



Conclusion


SPH Annual Report 2016

From a valuation perspective, SPH's earnings per share has been falling since 2012, but its P/E ratio has been increasing. This means that the fall in share price has not been proportionate to the fall in earnings.

With most of its assets being investment properties, I think SPH should be considered as a property company with a media business segment. SPH has 4 billion worth of investment properties and 1.1 billion worth of investment holdings which makes up the bulk of its assets. I believe that a reasonable price to pay for these would be at their net asset value. The premium that we would be willing to pay above this net asset value would depend on the valuation we assign to SPH's media segment.

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