Previously on Dr Wealth…
I shared my views about SPH could be a potential undervalued play if it trades at $0.90 after it got kicked out of the Straits Times Index.
But it didn’t go that low. It only went down to around $0.99 as investors weren’t that bearish about the stock.
Undervalued stocks need catalysts or simply put, events to have their value unlocked.
Coupang – a comforting sign
In SPH’s case, the recent excitement about South Korean Amazon-like ecommerce company, Coupang, going for IPO in the US, may just be the catalyst the SPH needs.
On 25 Feb 2021, Business Times reported that SPH has a stake in Coupang and could financially benefit from the listing. The news sent SPH share price up from $1.28 to $1.40, a 9% increase.
However, over the weekend investors were disappointed subsequently having learnt that SPH only had a tiny 0.1% stake in Coupang. The following Monday saw investors selling down the share price by about 8% in early trading.
Coupang could potentially receive a $50 billion valuation at IPO and a 0.1% stake would translate to $50 million. That’s not a transformative amount for SPH but still meaningful considering that it is almost half of SPH’s $110m operating profit in FY2020.
SPH’s bets in startups
SPH would need a lot more Coupang-like investments to make save an ailing media business.
Which is difficult by itself due to the Pareto Principle – a few investments will deliver majority of the returns.
SPH has invested in numerous fast-growing startups but we have yet to see any bearing juicy fruits (yet). Coupang offered a glimpse of hope although SPH’s stake was an anti-climax development.
I think the management understands the low probability of such long shot bets and the focus has been on real estate which can be witnessed from its financial statements – real estate business segment is the main profit driver and the most valuable assets in its balance sheet.
So what can SPH do to unlock its value?
Here’s my unsolicited, naïve piece of corporate strategy.
I think SPH is getting something right with Aged Care. It is a growing trend in the world and SPH is competent in property investing. They just need to learn how to deal with a specialised real estate – nursing homes.
No matter how ‘unfilial’ the concept of nursing homes sound, it is going to be inevitable that Singapore and many other developed countries would need more supply due to longer lifespans.
Here’re some statistics from this EdgeProp,
In Singapore, 581,680 of the resident population are aged 65 and above, according to the Department of Statistics. They accounted for 14.4% of Singapore’s resident population in 2019. The number is a 76% jump from 330,132 a decade ago, and more than double the 235,296 in 2000.
By 2030, the number of those aged 65 and over is projected to increase to 900,000, which means one in four Singaporeans would be in that age group, up from one in seven today.
And on the supply side,
According to C&W, the extent of private-sector involvement in Singapore’s nursing home market has been relatively low compared to VWOs and government-supported organisations. Of the 77 nursing homes today, 23 are public and another 23 are not-for-profit nursing homes, which have a total of 12,201 beds or 76% of the total beds. The 31 private nursing homes account for the remaining 3,858 beds (24%).
Currently, it seems like the model is for the government to shape, build and own the properties while outsourcing the operation of the nursing homes to private companies.
This is one of the ways the government pursues to keep the cost of nursing home under control.
SPH’s play in the Aged Care sector
Hence, there may be limited room or market share for SPH to capture in Singapore at the moment – SPH has not acquire nursing homes in Singapore ever since shelling out $167m for Orange Valley. But I believe more land would be sold to private nursing home operators as the aged population grows and SPH can participate in the growth.
SPH didn’t rest on its laurel given the limited opportunities in Singapore – it has been looking overseas, investing in nursing homes amounting to $66m in Japan.
In total, SPH has spent $233m in nursing homes and I think more would come.
After collecting enough nursing homes, SPH could spin off into a SPH Aged Care REIT and free up capital for further acquisitions.
A good example is Parkway Life REIT which has $747m worth of properties (48 out of 49 are nursing homes) in Japan. It is currently trading at a PB ratio of 2.1, which is much higher than SPH’s PB ratio of 0.6.
Of course they are not exactly the same because Parkway Life REIT has a huge hospital segment while SPH is holding on to the troubled media component. But my point is that Parkway Life REIT has a proven model for nursing homes that SPH can copy. If the SPH Aged Care REIT build up the book value to $500m and it can trade at the same multiple of 2.1, it could be worth $1b market capitalisation and a good size for a spinoff.
That would be one sizeable value unlocking event.
I believe SPH management is working towards this direction but I felt they didn’t promote it enough nor let investors get excited about it.
This is what they can do:
- Openly commit to play the aging population theme and commit a capital to this segment (markets love future trends now. Ask Cathie Wood.)
- Separate the operating segment for nursing homes instead of combining with other forms of real estate. This way, investors can see the performance and its progress clearly.
- Communicate and publicise any development in the Aged Care segment regularly to keep investors interested.
So yes. That’s my unsolicited advice to unlock SPH’s value.
I think their best chance is to double down on their property play especially in the aged care segment. It has a nice story and a good trend to ride on.
Most investors would get it as long as SPH can be more explicit about it.
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