The mighty has fallen.
Will SPH fall out of the Straits Times Index? I’d say it’s possible.
Is it really possible for SPH to fall off the STI?
SPH is currently ranked number 20 in the 30-member STI.
As the index is weighted by traded market-cap, a declining share price would reduce the market cap further. Dropping out of the Index is a possibility and with its recent fluctuations, that seems more likely now than ever before.
Currently at 30th place is Starhub. It has $4.5 billion market capitalisation.
After the recent price decline, SPH’s market cap is about $4.3 billion. It would be interesting to see what happens in the next STI review in end Sep 2017.
| Rank | Company Name | Index Weight (%) |
| 20 | Singapore Press Holdings Limited | 1.46 |
| 21 | Comfortdelgro Corporation Limited | 1.41 |
| 22 | Jardine Cycle & Carriage Limited | 1.35 |
| 23 | UOL Group Limited | 1.33 |
| 24 | CapitaLand Commercial Trust | 1.18 |
| 25 | Hutchison Port Holdings Trust | 1.07 |
| 26 | SATS Ltd | 1.03 |
| 27 | Yangzijiang Shipbuilding (Holdings) Ltd. | 1.02 |
| 28 | Sembcorp Industries Ltd. | 0.94 |
| 29 | Golden Agri-Resources Ltd | 0.85 |
| 30 | StarHub Ltd | 0.52 |
Table 1: Last 10 Companies in STI. Will SPH be relegated?
Why Investors Should Stop Focusing On Blue Chip Stocks
Since 10 years ago, STI has replaced 8 out of the 30 components.
That’s 25% change in 10 years. And why I always cringed when someone tells me to ‘just buy and hold blue chip stocks, and you’d make money’.
It isn’t true because there is a high enough chance for a blue chip to lose its lustre. All stocks need to be monitored and a blue chip shall not be treated differently.
There are enough sob stories from NOL, Noble, Olam and now SPH. Let’s not relearn the mistake.
| STI Components in 2007 which dropped out by 2017 | STI Components added after 2007 |
|---|---|
| Cosco Corp | Ascendas REIT |
| F&N | GLP |
| NOL | Golden Agri |
| Olam | HPH Trust |
| Sembcorp Marine | Jardine Matheson |
| SIA Engineering | SATS |
| Yanlord | UOL |
Table 2: Changes in STI components in 2007
The implications of SPH falling off the STI would be that the institutions and funds may start selling it, especially if the stock no longer fit the funds’ investment mandates.
Such selling which depress the share price further.
SPH: How It Got Affected By The Evolving News Media Industry
SPH owns and publishes major newspapers in several languages in Singapore. It is a monopoly.
#1 – Major shift to digital platforms
But SPH doesn’t make money from the few cents we pay for each newspaper. The company earns from advertisements. Their advertising pricing power depends on the circulation number of the papers.
The newspaper used to be a very powerful medium as it is where people get their updates on current affairs.
But the medium has changed with the onslaught of social media. People are spending more time on social media platforms such as Facebook than buying and reading newspapers.
Straits Times has also started posting more news online and across social media platforms to attract readers. Personally I read these news on social media too and I’ve stopped buying the papers. It is okay that I don’t get to read the entire paper because not every piece of news is of interest to me. In fact social media does a good job highlighting worthy news to me.
Hence I can say I spend less time on Straits Times now compared to many years ago. There would be less opportunities to put advertisements in my face and there are limited advertising space on a phone screen when I read an article.
The advertisers may have also realised that the effectiveness has dropped and have shifted their dollars to Google and Facebook where the eyeballs are.
#2 – Increase ease for consumers to get information
I believe journalism is still important and credible news sources are necessary in a world of fake news nowadays. However, news has been commoditised and readers expect it to be free. I guess this is what major news agencies such as SPH are busy thinking about today. I don’t have an answer but I know the business model has to change.
I was just exploring a rather new feature from Twitter – List. I built a list of news agencies from around the world and I can add a news source as obscure as one in Tatarstan. The reason I created this list was because I wanted to have a more global perspective, and some information could only be accessed by the local or niche news media. Maybe someone can come out with a Spotify model like Toutiao in China. News agencies can contribute to the platform and allow users to just pay a monthly fee to access news around the globe.
Another source of revenue for the newspaper was its classified ads but it has been rendered redundant in recent years.
#3 – Challenges from startups
A big part of the property ads market share have been taken away by PropertyGuru. Second hand car ads have been challenged by sgCarMart. SPH had to spend $60m to acquire sgCarMart, just to regain the market share.
Potential Next Steps For SPH To Ensure Its Survival
The culture in Singapore seems to gravitate towards property investments whenever we have substantial excess cash.
SPH seems to have adopted this culture. It has built up a respectable property portfolio over past decades.
It also spun off the SPH REIT in 2013 which holds major commercial properties like:
- Paragon (290 Orchard Road)
- The Clementi Mall (3155 Commonwealth Ave West)
- The Seletar Mall (33 Sengkang West Ave)
These are some of the properties still retained under SPH:
- Print Centre (2 Jurong Port Road)
- News Centre (1000 Toa Payoh North)
- Media Centre (82 Genting Lane)
SPH as a REIT or Property Stock?
I would say property seems to be a logical extension to the portfolio they already have. They have proven to have some expertise in this area and this segment has the potential to contribute more revenue.
Early this year SPH acquired a nursing home operator, Orange Valley. This could be a new business segment for SPH to ride on the aging trend in Singapore. However, the company lacks expertise and hence a complete buyout of the operator is necessary, so that they can run the business on behalf of SPH.
SPH can go one step further to own the properties of these nursing homes and spin off a nursing home REITs. This is common in the United States and Japan. SPH could put their REIT and newly acquired nursing home expertise into good use.
SPH as a Digital News Media?
I have also observed that SPH has been acquiring online media over the years to grow their digital presence. These acquisitions could be a potential form of extension to their business. However, acquisition is an expensive way to grow market share or capabilities and there are a lot of risks involved, should the acquisitions fail to perform or integrate properly into SPH.
In short, I believe SPH is better off building their property portfolio and establish a nursing home REIT. Second, focus on quality journalism in Singapore but rethink of the business model to deliver the service.
Our (CNAV) Evaluation of SPH
I would label SPH as a property company given that 68 percent of the total assets are properties.
I would value their assets more and pay less attention on their earnings since the latter has been the spectacle lately. I would rather pay below the value of the properties they have and get the news media business for free.
As such, the Conservative Net Asset Value (CNAV) strategy would be apt for this purpose.
The final year report for 2017 has not been published and I would be using the 2016 annual figures in this article.
Quantitative analysis of SPH using CNAV:
| Asset considered | Amount | |
|---|---|---|
| Properties for own use | $91 m | |
| + | Investment properties | $3,963 m |
| + | Cash | $313 m |
| + | Investment in associates | $78 m x 50% discount |
| + | Joint ventures | $12 m x 50% discount |
| + | Investments | ($629 m + $407 m) x 50% discount |
| + | Trade and other receivables | ($6 m + $137 m) x 50% discount |
| + | Inventories | $21 m x 50% discount |
| + | Asset for sale | $9 m x 50% discount |
| - | Total liabilities | $1,702 m |
| - | Non-controlling Interest | $724 m |
| CNAV | $2,591 m |
CNAV per share:
Divide the CNAV value with the total number of shares (1,614,802,000) = $1.60
To learn more about the thought processes, read about the CNAV strategy in our Factor-Based Investing Guide.
SPH: Can Buy or Cannot Buy?
I would only buy SPH if the share price is below $1.60.
Some of you must be thinking that it won’t happen. I rather have a margin of safety when I invest and be extra pessimistic than to buy it with a lot of hope.
If it doesn’t go down to my buy price and the share price rebounded much higher, so be it. I am okay to miss it because there are many other more undervalued stocks to invest in. SPH is not a must-have. It is important not to fall in love with any stocks.
SPH at $1.60 is a possible price if it falls off the STI as many funds may start to sell it. Anything is possible in the stock market.
Disclaimer: This is obviously not a stock recommendation. Please do your own analysis and due diligence before investing your own money!
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