Commentary

Separation from media will let SPH seize new opportunities

Paragon mall in Orchard Road is one of SPH's properties. ST PHOTO: DESMOND WEE

SINGAPORE - A lot of ink has been spilt and many opinions have been shared on social media about the proposed restructuring of Singapore Press Holdings.

Under the plan, SPH would be giving up 6.6 per cent of its assets to a new entity, a company limited by guarantee (CLG). This means SPH will give the entity $80 million in cash, $20 million in SPH Reit stock and $10 million of SPH treasury shares.

What this essentially does is ring-fence SPH and its property assets from being weighed down by its very challenged media business, whose print product has been in secular decline over the past decade.

Operating revenue in the past five years has halved, and in financial year 2020, the SPH media business posted its first ever loss. The first half of FY2021 has seen the run-rate worsen further, with a pre-tax loss of $9.7 million. SPH media ad revenue fell 39 per cent from FY2018 to FY2020.

At this rate, it is quite likely that SPH's media business will post cumulative losses of well over $100 million over the next two years. This is something SPH shareholders need to take into account when evaluating whether the $110 million to be given to the CLG is good for shareholders.

The restructuring will enable the listed company to carry on as a largely property-based entity, with some other assets.

Its portfolio includes a 66 per cent stake in SPH Reit which comprises Paragon, The Clementi Mall and The Rail Mall. It also holds an 85 per cent stake in Figtree Grove, a freehold sub-regional shopping centre in Wollongong, New South Wales, and 50 per cent in Westfield Marion Shopping Centre in Adelaide.

SPH also owns and operates The Seletar Mall and is developing a new commercial-cum-residential site consisting of The Woodleigh Residences and The Woodleigh Mall.

It is also an owner, manager and developer of a portfolio of purpose-built student accommodation in Britain and Germany. It currently operates two distinctive brands, Student Castle and Capitol Students. SPH's aged-care business in Singapore is one of the largest private nursing homes, and it has also bought into a similar business in Japan.

The irony is that a bulk of these assets were purchased with the profits from the media business during better days.

The total value of all these assets would be in the region of some $4.33 billion, post-demerger. This gives the company a net asset value or NAV per share of $2.08, post-restructuring.

At last Friday's close, the stock was trading at a discount of 24 per cent to this valuation.

More importantly, post-restructuring, SPH property's financial position remains healthy.

On a pro forma basis, H1 2021 operating profit would have been almost 10 per cent higher, and full-year FY2020 operating profit would have been 48 per cent higher (excluding government wage grants).

Despite being widely anticipated, news of the restructuring has drawn some strong reactions, not least among netizens who question the way the company has managed its media business.

Critics reckon SPH could have hired the requisite experts, acquired the necessary assets and moved more aggressively in the digital domain.

They may have a point.

But, to be fair, SPH has spent some $250 million on digital transformation initiatives over the last five years. In fact, 53 per cent of total media sales is via digital platforms.

Yet, revenue fell 12 per cent between 2018 and 2019. The decline accelerated to 31 per cent between 2019 and 2020. Much of this is due to the fact that the digitalisation effort has not been enough to stave off the global "big boys" such as Google, Facebook and others who have muscled into the news business, not just in Singapore, but also globally.

Then there is falling newspaper consumption, mirroring a global trend, as news consumption habits change.

But here's the thing.

The market is forward looking. It does not spend time ruminating over the past but looks to where the opportunities are in the future. And this is the lens through which one should view the restructured SPH.

The restructuring essentially paves the way for private and public funding of SPH media. It can now focus on the news business with fewer revenue constraints.

Of course, there are concerns about how these new sources of funds could influence the reporting. But the media has learnt to report accurately on commercial entities, even when it seeks ad funding from them.

It will simply have to smartly navigate the challenges when the sources of funding diversify.

If one were to look at media organisations such as the BBC and The Guardian in Britain, Le Monde in France, ABC in Australia or PBS in the United States, they all work on a similar public-private partnership model. But they have maintained their credibility with bold, balanced and believable news reporting. And all have had regular run-ins with their respective governments, but emerged with their credibility intact.

The same will happen here. This is something SPH Media will also have to navigate.

Also, given that residents of other countries rely on the Singapore media for an accurate picture - especially when major events at home go under-reported - there is strong potential for SPH Media to capture the regional market digitally and become a pan-Asian player.

Meanwhile, the listed SPH entity, having obtained shareholder approval, will go forward as largely a property play, freed of the media albatross around its neck.

What the market will be particularly interested in is the fact that the listed entity will now be unshackled from the Newspaper & Printing Presses Act which limits any single shareholding in SPH, as a media company, to 5 per cent.

Also, given its stable of properties spread across various geographies and businesses, SPH's earnings will likely be more stable than they are now.

There is also the possibility that with SPH shares now trading at about 0.75 times NAV, it could become a target of acquisitions.

Alternatively, over time, the company could also attract strong cornerstone investors who can now hold more than a 5 per cent stake.

On a sum-of-parts basis, some analysts value the listed company as high as $2.43 per share. That is a whopping 53 per cent premium to its current price.

Price targets for the stock vary from $1.92 to $2.41 at the moment - significantly above the current trading price.

But the listed property entity has to address the market and share its strategic vision and mission for the future. Shareholders will want to know how the value of its broad portfolio of assets differs from existing property plays in the market.

The "new kid on the block" will also have to explain its strategies to enhance shareholder value. It might have to rebrand, re-engineer and even rename itself.

The past is over. The present is still in play. It is the future that really matters.

If executed well, SPH can move forward boldly as two separate and successful entities, each with its own space and playing at its own pace.

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