For many years from 2005 to 2016, SPH had been regarded as a blue-chip darling company providing consistent profits and dividends to investors. However, over the recent years, SPH’s performance hasn’t been stellar. The final nail in the coffin occurred on 6 May 2021 when SPH announced to restructure their media business into a not-for-profit entity.
Could investors have avoided the huge loss in capital?
Instead of blaming the current CEO, I took an objective view to examine what went wrong in the business and when should investors exit.
I share 5 early warning signs of the deteriorating business fundamentals. You can use this as a case study to evaluate stocks in your portfolio, if you are looking to trim off any potentially ‘bad’ stocks.
1 – Revenue decline in core media advertising business segment in 2012
Ignoring the global financial crisis in 2008-2009 when almost all businesses took a revenue hit, the decline in media advertising revenues started in 2012.
The negative growth in advertising revenues from media started to accelerate rapidly.
SPH’s management had also warned of the increased advertising competition from new digital media like Facebook (IPO-ed in 2012, coincidence?) and other online websites in 2012 and 2013 in their investor presentation.
Although the management tried to calm investors by showing that Q4 2013’s decline in revenues seems to have slowed down, media revenues deteriorated even further in 2014.
2 – Operating profit and margin decline started in 2013
2008-2010 saw a one-off revenue from Sky@eleven property development that boosted operating profit and margins.
However, the property development revenues were not sustainable as government stepped up property cooling measures in 2011.
After adjusting for 2008-2010, operating profit and margins declined in 2013. Operating margins also went below 30% in 2013 due to decrease total revenues.
3 – Dividends decline from 2013 excluding special dividends
We saw dividend per share payout increased to 27 cents from 2008-2010 because of one-off revenue from Sky@eleven property development.
Notice how dividend payout correlates to revenues and profits. 2013 also had a special dividend payout of 18 cents due to the listing of SPH REIT in addition to the 22 cents dividends declared.
4 – Restructuring announced in Oct 2016
Unable to achieve increased profits from the advertising market, restructuring was announced in 2016 to reduce costs and manpower.
The new CEO Ng Yat Chung was appointed on 1st Sep 2017 to manage cost cutting as the decline in media advertising revenue continue to compress margins.
5 – Diversification into other business segment in 2017
SPH bought nursing home provider Orange Valley for $164m in Apr 2017 to diversify their operations into the healthcare sector.
What should SPH shareholders do?
Cut Loss
The main reason investors stuck to SPH (SGX:T39) is because the dividends payout is good.
But in 2013, it became obvious that their dividend payout will not be sustainable due to the decline in their media advertising revenue and a profit margin squeeze.
They could not reduce their operating costs fast enough to offset the revenue decline to maintain operating profits. In the end, SPH had to resort to selling assets to slow down the decline in dividend payout. In view of the strong headwinds in traditional advertising, decreasing revenue/profit trend, SPH could not pivot fast enough and was being disrupted by new media.
In comparison, Facebook’s Asia-Pacific revenues had been growing at above 40% CAGR.
Looking back, you might also have noticed how total revenues hit a ceiling in their early years from 2008-2010.
That leaves very limited upside for the share price to go up because growth is almost non-existent. It also means that the company is more susceptible to being disrupted.
For SPH to turnaround, the company had to accelerate their revenue growth or maintain revenue, if not the only road is a spiral downwards.
When a business is going down, I would sell it, take the remaining money and put it to work somewhere else.
Vote!
If you plan to continue HODL-ing, then make use of your shareholder’s right to vote.
I would vote against this restructure because essentially this move means that SPH will be giving out money (S$80M) and assets (S$20M worth of SPH REIT and S$10M worth of SPH shares) for free.
I’m not a shareholder, but I think this is sufficient reason for SPH’s shareholders to take umbrage at the management’s restructuring proposal.
More Case Studies coming
Stay tuned, I’ll be sharing about a hot, disruptive technology platform company that I have invested previously and the reason why I sold it early and avoided a huge price crash.
