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SPH–Financial Engineering at its best with this REIT move

SPH provided the circular today about its upcoming move to IPO their REIT. For me it is a good lesson of how well they executed this financial engineering.

Presentation slide can be viewed here.

Paragon spin-off as a 99 year leasehold

While Paragon is a free hold property, SPH have effectively did what Keppel Land did when they sold off Ocean Financial Centre as a 99 year lease hold.

SPH gets to hold on to that land while again the REIT investors may think they have the full worth of a lucrative free hold.

The latest valuation is at 2.6 billion. They spin it off at 2.5 billion. Winner.

Realized $900 million in value

Compared to book value of 2.1 billion, SPH will list the assets by selling it off at nearly 3 billion.

They will pay out $0.18 out of $0.558, letting them keep  $0.378 or 609 million.

If the current share price have factored in this 55 cents (after the recent run up) The price will jump to $4.70.

I suspect the price have already been factored in.

Cash flow for SPH maintained

The cash flow in contention here are the cash flow derived from Paragon and Clementi that they stand to lose.

Proforma FY2012 income comes up to $115 mil.

Since SPH will retain 70% share of it, 80.5 mil. Add a 0.5% management fee for the 3100, you will get another 15.5 mil per year.

So net income adds back to 96 mil.

This will ensure that future years dividends are somewhat maintain. Since publishing cash flow have tapered off, this is a good move.

Free up $900 million of debt headroom

SPH effectively shifted $900 million debt into the REIT, likely non-recourse.

Together with the cash, they will be able to make a leveraged $1.5 billion investment.

At 4% yield, that will generate 60 mil in income. If they can find higher  value investment, even more.

This together with Seng Kang mall’s income may add 25% of current div. This will buffer declining publishing.


Overall, this is a good example of how value can be realized at the right time in a good spin off.

Still wondering if the REIT is actually worth it.

At this moment the parent looks better value.

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Friday 31st of May 2013

Actually, this company should have greater potential as it controls most of the online content right at the source here in SG. I guess the mgmt has to find a way to unlock its value within such as using Big Data analytics, Social Media marketing etc. Execution is the key!!

It will be like why Warren B keeps buying all those newspaper companies. But yet still got to compete with Google for our attention. =)

Only future will tell...


Sunday 2nd of June 2013

hi Ed,

I think Buffett bought those newspapers because they are localised news that will not be cannabilized by removal of borders.

Speaking of that, we see a very defensive approach form SPH on that front. You have to note that they not just have to compete with google and the overseas ad players but also local players like Singtel.

At the end of the day, a person only have this amount of attention per day.


Tuesday 28th of May 2013

Hi Drizzt, how do you think this stock will do in the short term e.g. 1 week? prices seem to have fallen from 4.55. much appreciated!


Wednesday 29th of May 2013

honestly no idea. in a hardwarezone thread i already estimate that the price should be 4.30 haha. so this is actually overpriced.

ah i see.maybe i can do a fast ball park estimate. sph is made up of roughly 2 portions, a part generating newpaper income + a little side business. and the rental properties.

an optimistic projection of the listed value of the potential reit is given as 3.2 bil by standard chartered bank. this comes up to $2 per share. remember there are debts within it, so i should be deducting it.

net of property the other 75% of income generates from news papers.

assuming newspaper publishing is around for the next 20 years. they go though an initial 10% decline, 8% decline until year 7 in which they reach stagnated growth. this is not far fetch since this half year they already got down 10% on that portion.

if we demand a low 4% earnings yield instead of the usually 6% equity cost, we give it a low benchmark to beat.

the ball park estimate is $2.

The value is $4 and perhaps we have not netted the debt.

for it to be 5 bucks which is $1, you need an addition of 1.6 billion future from its online and newspaper endeavors. i could be wrong. newspaper and publishing could grow instead of stagnating.


Tuesday 28th of May 2013

Hi Dritzz, Just reading a few articles commented by bloggers, including yours, (i have sold all my SPH much earlier), i agree Mother is very smart to give birth to son now. Not so sure about son's future. But mother still has 70% interest in the son. So i think son should be O. K. too.


Tuesday 28th of May 2013

i think so. paragon is good but they really overpaid for clementi. but i somehow felt a deep infatuation for these children of bluechips.

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