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Thebearprowl is a trading and research outfit with focus on Global Equities, FX, Fixed Income and Commodities. We take a view with ideas generated from macroeconomic and fundamental analysis by utilising a comprehensive range of products and solutions across multiple asset classes. We also provide research reports and conduct courses based on the trading strategies we have developed.
Credentials
- #1 Winner of SGX/Investing Note Stock Trading Challenge 2018
- #3 UOB-SOCGEN-SGX DLC Competition 2018
- Quoted by The Business Times on 9th August 2019 due to a successful YZJ short call issued from Mar19
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Notes: Thebearprowl shared on their Facebook page in July that they took on a short position in Singapore Press Holdings Limited(SPH: SP) at $2.41 with a view of an intrinsic value of $1.20. Since then, the share price has fallen to $2.11 with a low of $1.91. We have been able to secure exclusive insights into their rationale for the view.
Investment Thesis
SPH has underperformed in the past 5 years, with the share price falling from around $4.30 to $1.91 today, despite that, we believe that the worst is yet to come. We expect the next 12 months to be potentially more challenging for the business than what they have been through so far. In this financial year, the business has continued to underperformed in most segments, taken on further accounting charges and raised debt at increasingly higher cost.
The current market capitalisation is $3.2 billion, for the first time falling below book value of $3.4 billion, exerting additional pressure on Management to stem the decline in value to shareholders.
With the FY19 results set to be announced in early October, we wanted to prepare our readers for a potentially adverse reaction to the share price that may start to present itself in the build-up to the date of announcement or materialise after the announcement.
(i) Business performance
SPH recorded another quarter of underperformance in 3Q19 with the media segment continuing to underperform. Print advertisement revenue has continued to decline further. The property investment segment is continuing to perform well, with a growing base of recurring income, fuelled by acquisitions, mainly funded by debt. However, the property development project continues to undersell, with the Woodleigh residence only 17% sold as at June 2019. As SPH has a 50% stake in the development, we are concerned about the cashflow management for the project.
(ii) Underperforming investments, and investments with minimal synergy
The business provided for an impairment charge on Orange Valley in 3Q19, barely 2 years post-acquisition. The reason was due to a potential oversupply in the industry, we view this as indicating that Management will not expand the business as previously planned. This is also starting to look like a case of poor capital allocation.
We view the PBSA acquisitions as lacking synergy due to the nature of industry and geographical location. Whilst the ROI on this investment has been ok so far in spite of the weakening GBP, we thought that there could have been acquisitions that are more closely related to its existing suite of properties. We however reserve judgment while we watch the growth of this segment.
Further, we are wary of the timing of impairment of Orange Valley. We believe the business is preparing for further negative news in its FY19 results, likely from further business underperformance and accounting charges.
(iii) Weakening balance sheet, leading to hurdle rate for investments
This table indicates declining liquidity and gearing ratio for SPH, and the first time the business moved to a net debt position after excluding SPH Reit’s debt.
The two main reasons are as follows:
- a $198 million reclassification of the initial stake in M1 from Investments to Associate and a subsequent $308 million outlay as part of the take-private process.
- Acquisition of PBSA portfolio of $602 million which is partly funded by cash
We excluded the SPH Reit’s debt from the computation as it is ringfenced.
We can see an increase in SPH’s funding cost in its funding round, raising $150 million perpetual securities at 4.5%. We appreciate the ability of SPH to continue to secure funding to match the duration of its investment but are wary of the cost and the higher hurdle rate that Management has to overcome.
(iv) Others
(a) We observed an adjustment in the structure of the year-end dividend back in FY2017, from a larger final dividend to a larger special dividend. This caters for the business to adjust payout in the future. With the weakening business performance, we fully expect a reduction in the special dividend for FY19 and possible guidance on a sustainable payout ratio for future years.
| Dividend history (cents) | Interim | Final | Special | Total | Dividend payout ratio* |
| FY2015 | 7 | 8 | 5 | 20 | 102% |
| FY2016 | 7 | 8 | 3 | 18 | 109% |
| FY2017 | 6 | 3 | 6 | 15 | 146% |
| FY2018 | 6 | 3 | 4 | 13 | 128% |
| FY2019 | 5.5 | Pending |
*: Dividend payout ratio is calculated based on recurring earnings of all segments, excluding earnings attributable to NCI in the property segment. This refers to earnings attributable to the minority shareholders of SPH Reit
(b) SPH last carried out a restructuring exercise in Dec 2017. Since then, the media segment has continued to underperform, we are wary of further restructuring, reminding our readers that in the unfortunate event of such an exercise, the costs occur first and any benefits will be recognised later.
(c) 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 are positive on the immediate and longer-term returns from the other minority stakes.
(d) SPH has bought back nearly 4.3 million shares in the last 12 months so as to shore up the share price and investors confidence. We will not go into the details of the pros/cons of a share buyback but will like to point out that this is beginning to look like an essential cash utilisation for the business.
Conclusion
Overall we have seen continued business underperformance, questionable capital allocations, acquisitions made with no immediate synergistic elements being identified, a higher cost of funds providing for a higher hurdle rate. We are concerned for any potential reduction in dividends which may lead to a negative reaction to share prices, and are consequently short on SPH.
