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Notes: We provided some insights on our initiation short for Singapore Press Holdings (SPH) earlier on DrWealth.com(link below) and nailed a couple of expectations including the business under performance, under performing investments, reduced dividends and even the restructuring exercise being carried out in the media segment.
This article serves as a supplement to the first article and flags out a couple of critical downside risks and also potential upsides to take note of.
Click here to link to our article on the Dr Wealth website.
Downside risks
(i) Continued business under performance
(1) Media segment
SPH recorded another quarter of under performance with the media segment continuing to under perform. Print advertisement revenue has continued to declined further. It is unlikely that this is the bottom. With another restructuring, merely 2 years after the previous one, one can only hope this is the last one.
It is also a common view to attach a zero valuation to this segment as a prudent way of valuation modelling. We note that this segment is still profitable of now, however we would like to point out that if revenue falls below a line in the sand, fixed costs and corporate overhead costs may pull the segment into a loss position.
Unlike other businesses who are able to dispose business segments to other competitors for economies of scale, SPH is neither able to dispose this segment nor acquire a competitor.
(2) Property segment
The property investment segment continues to perform well, with a growing base of recurring income, fuelled by acquisitions funded by debt. The property segment even recorded a higher ROA this FY, mainly due to the higher yield of the PBSA assets and valuation gain.
The risk in the property segment arises from Woodleigh residences, the property development project continues to undersell, with the Woodleigh residence only 17% sold as at June 2019 and 20% sold as at Aug 2019. Woodleigh residences is a 667 unit development, which means an average of only 10 units were sold in each of the last 2 months. We did the math based on SPH’s 50% stake in the project, due to the lack of sales, the amount of cash they need to put up for the construction is about $250m. This sum is about 3.5% of total assets and $11m in financing costs which is not small but also not too big in the grand scheme of things.
(ii) Underperforming investments
The investment segment recorded $8m in PBT on a $350m asset base. While we appreciate that there may be some understatement in the profits as some investments may be held at cost and therefore not subject to valuation uplift, a 2.3% return based on headlines is meagre to say the least. As SPH is looking to reduce this segment, we think some long tail risks may surface.
(iii) Long tail risks
We think there is a portion of investments that are subjected to long tail risks. These are the early stage startups that SPH invested in a couple of years ago, and have now reach a point where it is unlikely to generate any returns or sell the investment to extract capital as they have underperformed since SPH invested.
(iv) Implicit dividend payout guidance
We did the math and obtained a dividend payout ratio of about 103%. We believe that management is trying to signal that they intend to keep to a sustainable payout ratio of circa 100%. It is obvious that the intention is to avoid funding the cash requirement for dividends via external sources. The mere 1 cent reduction is also an attempt to prevent the share price from falling below book value.
We think SPH is not able to reduce dividend payout ratio to a more sustainable range of 60-80% without giving up its share price in the near term.
Potential positives
i) Valuable minority stakes
While some of these investments have a longer term gestation period, we see upside from the minority stakes in M1, Mindchamps & Prime Reit. From our review of Keppel’s presentations, we believe M1 investment is a long gestation period and as such may not support SPH in the near term. We remain positive on the immediate and longer term returns from the other minority stakes.
ii) Panache for healthy leverage
From FY18 to FY19, including the perpetual securities into our calculations, SPH has increased its debt levels by $900m (approximately 56%) to $2.5b. Debt to asset ratio has increased from 0.26 to 0.35. We have seen the current management focus on investments in the property segment, these investments have been immediately accretive. We like the healthy leverage, however we have previously flagged out the lack of synergies or efficiencies across the property investments.
Conclusion
We are pretty much keeping our conclusion from our previous report on SPH, however we think that there could be short term upside to SPH due to the dividend yield and would be constructive on a short when the share price is above $2.40.
