It is ironic that many investors have been dumping Singapore Press Holdings ("SPH") and proclaiming that media is dead and the way forward is to invest in high tech business with data centres such as in Mapletree Industrial Trust. Then on 29 June 2020, SPH announced a joint venture with Keppel Data Centres Holding Pte Ltd to develop and operate data centre facilities at 82 Genting Lane.
I have actually been to SPH's Genting Lane premise before to perform an external audit on SPH Magazine subgroup many years back. It was crazy then as SPH had many subsidiaries and there were many different group of auditors being dispatched to its various premises (main one at Toa Payoh) to rush out the year end reporting.
1. Investments into development and maintenance of data centres- One off investment or building up in house expertise?
The reasons cited by the SPH management are to maximise the existing yield of its industrial property at 82 Genting Lane.
But SPH could be harbouring a hidden ambition to develop a larger segment of its business into data centres development and management due to the trend towards digitization and cloud computing. This is not surprising as both SPH and Keppel Corp are indirectly owned by the Singapore Government. Diversifying into data centre business is actually a good move as it draws on the positive attributes of Singapore which is renowned for its political stability, free from natural disaster such as earthquakes, excellent infrastructure and a well-trained labour force.
The only current problem for SPH is that it does not have the in-house expertise. The SPH management did a smart move by spinning off its 82 Genting Lane industrial property into a joint venture with Keppel Data Centres Holding Pte Ltd. It took a 40% stake in the business while learning the roles from Keppel. The Genting Lane JV will also be a good showcase to prospective tenants as proven experience if SPH chose to expand into the data-centre business.
2. Improvement to SPH financial impact from this deal but strangely share price drop on 30 June 2020 immediately
Net tangible assets is expected to improve to S$2.09 per share after the proposed deal from S$2.08 per share before the transaction.
Earnings per share is expected to improve to S$0.15 per share after the proposed deal from S$0.13 per share before the transaction. This is an improvement of 15.4% to its future earnings.
But surprisingly, price of SPH dropped to S$1.27 per share the following day of 30 June 2020 after the announcement. Apparently, the fear of a 2nd wave of COVID-19 and another Circuit Breaker had a devastating impact on its share price.
3. SPH is severely undervalued- due to fear of declining media segment going into losses
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Exhibit A: Quarterly Trending of SPH Different Business Segments (Profit B4 Tax)
Exhibit B- Chart of Quarterly Trending of Business Segment (Profit B4 Tax)
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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 1st 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"), retail
mall businesses and the possibility of expansion into development and
management of data centres.
If
the Media revenue decline further such that it became loss making, it will not
make any sense to carry on this business. If the Singapore Government thinks
that it is a strategic asset, then either it provides the funding through
taxing Facebook and Google (just like what Australia is doing) or it establish
a government agency to buy over this business segment. It will not be fair for
the shareholders of SPH to be doing charity service perpetually and there will
be many queries raised during AGM.
Summary
I
think that SPH is severely undervalued given that its latest announced net
asset is currently at S$2.09 per share. Trading at S$1.29 a share, this is a
whopping 61% discount to its net asset value per share. In addition, the EPS
projection of S$0.15 per share in the latest announcement means that the Price
Earnings ratio is at an amazing low 8.6.
(P.S:
I am vested in this as I just repurchased new SPH stocks at S$1.28 per share
today. A week or two back, have sold off all of them off to take profit at
S$1.36 since buying some on 4 June 2020 after its price plunged from the fall
out of MSCI index)
PE 8.6 for this stock is high, i will wait till it is 5.
ReplyDeleteYou will need to compare against stocks such as City Development, Retail REITs, Centurion Corporation and Keppel datacentre REIT for SPH property development, Retail Mall mgt, Student Accomodation and new data centre businesses respectively by taking an appropriate weightage to see whether PE is high or low.
ReplyDeleteMedia business is already insignificant currently in terms of profit contribution.
PE may turn out to be 5 if there is fraud like Wirecard where a large chunk of cash on balance sheet turns out to be none-existent. Nevertheless and if ceteris paribus, I will accumulate at least another 10,000 shares in SPH if the PE turns sinks to 5.
Many has severely underestimated the influence and inherent power of sph media. It has all the solution to be a powerful relevant forces as it revolutionise its digital contents.
ReplyDeleteIts enormous reliable and credible contents developed over many decades in both English and Chinese medium can be tapped and converted to digital contents incorporated with audio and video to capture wider global audience to boost its subscription.
Look at the rest of the influencial newspaper with thier effort scattering from fierce competition in free market and now devastated by dwindling advertisement. They long for a solution which the sph already blessed for many decades and that is to have a group of billionaire or government backing the media to survive as it is one of the most essential service . They need to consolidate into one big company which sph media has been doing buying up almost all competitors for many decades. Thier predicament is far from over just for survival but sph survivor is never in doubt but is about to dominate the global arena with its digital revolution.
Sph with its highest quality and reliable credibility in its news reporting will be a beacon of light amid the avalanche of fake news dominate the social media and will gobble up all eyeballs around the world. Sph media will be an influential voice that will shape the history of the world.
Hi Darren, thanks for sharing the above thoughts and comment. I hope what you mentioned will be enough for SPH to maintain its Media Segment business at breakeven point via more subscriptions. As long as Media portion is not loss making, then all is good.
DeleteThe challenge is that subscription base in Singapore will be small given our small population unless we are really gunning for 10 Million people in SG. The good money lies in advertising dollars whereby the trend are that companies are now focusing on targeted advertising via Google, Facebook and even influencers, instead of the traditional media or online news portal.
The only way out I foresee is to follow Australia by planning laws to force Google and Facebook to share their advertising dollars with SPH- the basis is that digital content these digital platforms used came from the companies such as SPH which has invested lots of money to provide journalism.