Friday, 16 October 2020

The SPH Share Price Disaster- Media Segment Needs Emergency Rescue

The terrible results announced by SPH of a first time loss led to its share price dropping to less than S$1 per share. Current price has recovered to around S$1.01 per share. If one has been holding on to SPH when it was S$4 per share, 75% of one's invested capital would have gone up in smoke. But then again, I think that SPH is oversold albeit its Media segment needing an emergency rescue.

1. Fair value accounting can be nonsensical and illogical
The main reason for the net loss of SPH is due to S$232Mil fair valuation loss of its investment properties. Accounting rule have been changed from a historical focus basis to the current fair value model. Unfortunately, this leads to weird "see saw" effect on the yearly profit and loss. This <S$232Mil> is an unrealized losses due to market valuation in the midst of COVID-19. Last year 2019 was a valuation gain of +S$82Mil. The fair valuation thus becomes a yoyo. 
Taking into account the difference in fair valuation variance, this amounted to S$310Mil differences. so if next year COVID-19 improves, one will see another S$100 Mil valuation gain. This is absurd for any analysis as we know that the going concern issue for SPH group should not be an issue currently due to the huge amount of cash maintained on its balance sheet.

The "Operating profit" line item will be a better indicator of the financial health of SPH. Current Operating profit is S$100.2Mil relative to prior year of S$186.9Mil which is a 41% decline in earnings due to the COVID-19 pandemic (before one-off items).
However, we will still need to normalise the Operating profit for one off gains and losses for (i)Jobs Support Scheme (-S$33.4Mil), (ii) other COVID government grants (-S$35.1Mil), (iii) retrenchment costs (+17.4Mil), COVID related grants expenses (+28.3Mil) and (iv) goodwill impairment and intangibles (+17.5Mil).  Hence normalised Operating profit is S$104.9Mil relative to prior year's normalised profit of S$210.5Mil which is a substantial decline of -S$105.6Mil and a drop of 50.2%.

2. Media Segment Woes and Solutions
The main problem currently is with the disruption in advertising revenue that keeps declining over the years and for this year, the COVID-19 pandemic further exacerbate the financial performance of SPH. Advertisements on Facebook for example are cheaper and more targeted thus leading to the declining trend.
2(i) Can SPH close the Media Business and just focus on the very profitable property business?
This is the ideal case. If SPH no longer has the competitive edge in media, it should probably closed down the Media Business and change the Group's name from Singapore Press Holdings to Singapore Property Holdings. Unfortunately, the Singapore government will need a local communication media. Hence the government should get a Temasek linked company to buy and takeover it since apparently, SPH is expected to do National Service.

2(ii) SPH should consider hiring a new CEO with overseas Media commercial experience.
SPH may have to consider getting a new CEO who is well versed with Media commercial working background to try to steer SPH back into profitability for Media segment. If the CEO cannot address the decline and the losses, then have to consider changing  a new one which is the norm in many other global MNCs.

2(iii) Government to provide funding to sustain Media segment if it not practical to terminate the Media business.
As alluded to 2(i), if the Singapore government wanted a loss making business segment of SPH to continue in business, it probably should look into providing additional grant to sustain it. A cost plus model can be worked out similar to the current public bus service routes being awarded. 

Once the economy turns around, and advertising dollars increases, any extra profit made can go back to the government. SPH will be allowed to only just retain the cost plus mark up portion agreed. This will be a fairer approach to both the Singapore Government and shareholders of SPH.

Summary
Shareholders of SPH should consider raising the above points at AGM or writing in to the SPH senior management. It cannot be letting the current management strategy continue for the Media segment and allow it to keep deteriorating and bleeding. 

4 comments:

  1. Very sad, from $4 to $1. It’s pretty much a lost cause, I think.

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    1. No worries. The property side will do well. Just that the Media segment SPH needs to reinvent itself and at least keep it break-even. Does not make sense for property business to subsidize for a loss making segment. If the current CEO is unable to do it after so many years, then best to start looking out for new talent with related extensive commercial experiences to help.

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