Singapore Press Holdings Stock Crash in May 2020- Buy More Or Worst Yet To Come?

Singapore Press Holdings (“SPH”) seemed to be plagued with bad luck recently and its stock performance had dropped to an all-time low level towards the end of May 2020. As at the beginning of FY2020, SPH price was still at S$2.20 per share. On 29 May 2020, its price declined sharply again (yes, another sharp drop since the March 2020 price collapse) to a price of S$1.25 per share and a 52 week low from the day before price of S$1.46 per share. This represented a spectacular loss in value of 43.2% relative to the beginning year’s price. The million dollar question on every investor’s mind is whether the price will decrease or crash any further to less than S$1 per share.

1. So what had happened to cause a 12.3% decline within a day? 

On 28 May 2020, SPH price was still hovering at approximately S$1.46 per share before the sharp decline one day later to a miserable S$1.28 closing price on the fateful day of 29 May 2020. This represented a 12.3% price decline in a single day. Apparently, SPH was one of the 4 counters that was officially deleted from the Singapore MSCI index on 29 May 2020. This triggered off a wave of mass selling by mutual funds that are pegged to the MSCI Singapore index and thus switching out of SPH in order to reorganize their investment basket portfolio. 

The main reasons for the removal by MSCI were that (i) SPH Media business has been gradually declining over the last 5 years and that the (ii) COVID-19 measures implemented by the governments of UK, Australia and Singapore were hurting the Purpose Built Student Accommodation (“PBSA”) and retail mall operations of the real estate segment.

2. SPH- Is it worthwhile to invest now or prices will drop even further?

While I agree that the Media business is in doldrums and will never recover to its previous splendid days, the same cannot be applied to the real estate business segment whereby the current downturn due to COVID-19 is only temporary and not permanent. Yet strangely, the market is now pricing in COVID-19 frequent economic lockdowns on a perpetual basis without consideration of eventual vaccine or antibodies drug development.

Exhibit A: Quarterly Trending of SPH Different Business Segments (Profit B4 Tax)

Exhibit B- Chart of Quarterly Trending of Business Segment (Profit B4 Tax)

The Media business segment of SPH is on a steep decline since 1st Quarter FY2019 (please refer to Exhibit B) and approaching almost zero. Most importantly, take a look at the most recent 1^st half financial year results ending 29 Feb 2020 of the net profit by business segment. The contribution by Media is only 5.1% to 13% (please refer to Exhibit A) in the 2 quarters of FY2020 out of total net profit before taxation, whereas the bulk of the remaining profit numbers are now derived from the real estate and other business segments. The new growth engine is in the purpose built student accommodation ("PBSA") and retail mall businesses.

3. Concern over declining Media Segment is over-rated- It is already at the trough bottom in FY2020.

This is a remarkable progress from 1st Quarter of FY2019 whereby the advertisement and subscription contribution to profit were substantial of almost half of net profit (before tax) at 47.7%. Right now, SPH had completed its transformation to a real estate group. The Media portion to me is nothing more than a national service to Singapore as I do not think that the Singapore government will allow SPH to divest this sunset business that is losing out to Google, Facebook and online influencers in advertising dollars. The world of marketing has changed. Nevertheless, as long as SPH keep this segment at break-even and slightly profitable will do. This is as bad as it should get with such terrible performance of only S$2.8Mil contribution to group net profit in Quarter 2 of FY2020.

There is actually an interesting upside in the Media segment as I see that the Australia government has legislate such that Google and Facebook need to share their advertising revenue with local media companies. Of course, Google and Facebook are now fighting it out with the Australian government. If this is the trend and stand adopted by all governments, then SPH will be able to make additional income out of this. Alternatively, the Singapore government should channel back some of the corporate tax on Singapore Google and Facebook businesses to SPH for them to sustain the Media business such that it will never get into a loss making situation.

4. Growth Areas- Purpose Built Student Accommodation Business (PBSA) and Woodleigh Shopping Mall.

(i) Major investment into PBSA  
SPH has invested S$1.5 billion into the PBSA business in UK and Germany. Current portfolio consists of 7,726 beds in 18 cities in the 2 countries. The student population is projected to grow by 25% in 10 years time. A boost in market share will help to improve yields and optimise the overall portfolio.

(ii) Woodleigh shopping mall- construction in progress + other M&A in retail malls

SPH has already commenced looking out for tenants for Woodleigh shopping mall. The new Singapore shopping mall is expected to come online in another 2 years time. This will further boost recurring rental income. 

Also, the maiden foray by SPH into Figtree Grove shopping mall had given its management team further exposure in the Australian market. In  Nov 2019, SPH REIT invested A$670Mil into its second Australian shopping mall of Westfield Marion. This will certainly build up further capabilities and competencies for other Australian mall acquisition in future.

The only major concern I have with SPH is its property development project in Bidadari. The Woodleigh Residences seems overpriced at over S$1,800psf even with the re-launched from S$2,000psf. The current pandemic and the severe recession may mean a fire-sales in the near future if SPH still cannot sell enough units in time to avoid the ABSD. For the valuation exercise in the next section, we will need to include in a discount to derive at the fair valuation.

 5. Valuation- Is it worthwhile to invest now or prices will drop even further

As mentioned earlier therein, the price of SPH at the beginning of January this year is at around S$2.20 per share. To get an estimate of the current valuation, let's do a quick and dirty way to shorten the various mental acrobatics and assume the following:

• As at 2 January 2020, investors already knew that the Media business is declining rapidly and have factored this in based on the full year results for FY2019 ending 31 Aug 2019 which was publicly released on 17th October 2019. 1st Quarter FY2020 was not out yet at that juncture. Hence we will start off with S$2.20 per share and adjust this for the next few factors. 

• Adjust out for Media profit decline as per section 3. Media currently only made up 5% to 13% of net profit contribution. Assume 10% needs to be shaved off and thereafter zero contribution from Media business segment.

• Adjust for Woodleigh Residences Bidadari impairment due to economic recession.  Assuming 50% discount of S$400Mil in investment property for Woodleigh by SPH, this will be S$200Mil discount off the net asset value which has already been fair valued. Based on the total shares outstanding (excluding Treasury shares), the 50% discount to be adjusted out will be a mere S$0.092 per share. 

• Adjust out for effect of COVID-19 and economic lockdown in Singapore and Australia. Assume 1 year in total for frequent lockdown out of 10 years cashflow discounting. Assume from a high level this will shave off another 10% off its valuation. (Note: In actual fact, we are only locked down for 2 months. I have exaggerated this to get a sense of the worst case scenario of further lockdowns till mass vaccination against COVID-19). 

Based on the assumptions and adjustment factors, one will arrive at a fair valuation of S$ 1.45 per share. Also, this is excluding the upsides from the PBSA and further M&A growth. My own stress test placed the value at between S$1.45 per share to S$2.00 per share for the real estate business and zero profit from Media. SPH has been on my watchlist since last year as I would very much like to gain exposure to the PBSA business but the ever declining Media segment put a stop to my plan. So when the price dropped to around S$1.30 per share, I decided to acquire 26,000 units at between S$1.27 per share to S$1.32 per share. 

(Note: For sanity check purpose, the net asset value per share of SPH as per the results announcement for SPH's 2nd half FY2020 ending 29 Feb 2020 is S$2.14 per share.)

Parting thoughts

Hopefully, the vaccine development can be a success this year and there would not be any further devastating economic lock-downs in Singapore, UK and Australia.