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Valuing Singapore Press Holdings: Sum of the Parts Valuation Case Study

Singapore Press Holding is changing.

Whether it is actions lead by new CEO Ng Yat Chung or previous management, the approach now seem to be morphing it into more of a property based business.

I thought why not take this opportunity to take stock whether there is some value in SPH.

So I will try to value SPH, and if you wish to learn, I hope this article helps.

SPH just announced their 2nd Quarter Results so lets take a look.

Before we start, its good to pick out the following figures, as we will need to reference them often. Majority of the figures can be obtained through the annual report, quarterly financial statements, or main stock websites.

SPH Current Share Price: $2.69

Ticker: T39 on SGX

52 Week Low to High Price: $2.41 to $3.35

Last Annual Dividend Distribution: $0.15 (Dividend per share maintained for the interim)

Historical Dividend Yield: 6% (Check out other comparable on my Singapore Dividend Stock Tracker)

Dividend Trend: Declining > $0.18 > $0.18 > $0.15

Number of Outstanding Shares: 1600 mil shares

Total Cash: $228 mil

Total Debt: $1600 mil

Market Capitalization: $4,304 mil

Enterprise Value: $5,676 mil

Relative Valuation

SPH is a business that we relatively know what it is about.

Thus the first step to know if we can do more homework about it is to understand roughly where is SPH price, relative to its valuation.

The first thing to explore is what kind of valuation metric should we consider using.

SPH is made up of 2-3 segments of business, some that contribute cash flow, others based on asset value and some not performing consistently yet.

The sum of parts valuation (SOTP) makes the most sense.  With the sum of parts, we break down the valuation to each segments. Some of the parts, we can assign an appropriate price earnings, free cash flow yield, then find the asset value. For another part we can use the cap rate or plainly use the market asset valuation.

We can then decide what are the current intangibles that are non contributing yet and decide if SPH is attractive enough.

If we go to the annual report’s segmental information in the notes section, you can see how SPH breaks down their segment.

For SPH it is:

  1. Media
  2. Property
  3. Treasury and Investment
  4. Others

From the description above, the breakdown to each segments can be a bit ambiguous.

Where would their 22% stake in MindChamps and their Stake in Perennials be?

Where would their $164 mil purchase of healthcare group Orange Valley be?

Where would their stake in M1 be?

This is the complexity of doing a sum of the parts valuation and what we sought to find out.

To do a SOTP, you need to

  1. read the annual report to gain an understanding of the various business segments
  2. read through some of the company announcement to identify recently recreated business segments. This can be from the SGX announcements page
  3. some portions might not be reflected in the annual report. For example, the management fees earned as a REIT manager cannot be easily separated out unless you read SPH REIT’s annual report

Essentially, I have broken down the parts into this way:

  1. The declining cash flowing Media Business
  2. The Treasury and Investment
  3. The Investment Property of Seletar Mall and SPH REIT
  4. Property Management function
  5. The Debts on Balance Sheet Attributable to SPH and the Cash on Balance Sheet
  6. The Others – Associates, Healthcare, Joint Venture (Property Development) and Intangible (Goodwill and IP)

The following are the full year 2017 and 2016 segmental results (not the latest half year results)”

The following is the 1H 2018 segmental results announced:

1. Valuing the Media Segment

The media business is in a declining mode. The idea is that this is a segment that the government would want to have around. However this could start bleeding pretty badly. When that happens, the likely scenario is that the government will privatize a loss making business that is hard to sustain as a private business.

Given this, it is important to model a few scenario. Would this business reach a terminal profitable state? If it is what is the state it will be like?

The 2016 to 2017 results show nearly a $100 mil decline in revenue for the Media segment.

The Media and Advertising business have so much operating leverage. A $1 in revenue after the fixed cost goes straight into the operating profit.

However, in this case, the operating leverage actually worked against SPH. Because the cost does not go down equivalently when revenue decline, all the revenue fall hits the operating profit.

They also took a $35 mil impairment in 2017.

Profit before taxation fell from $175 mil to $26 mil. That is massive!

We would like to see in this upcoming year whether there are any improvements in this segment.

In 1H 2017 to 1H2018, we see a decline in revenue of $41 mil from $372 mil to $331 mil.

Profit before taxation for 1H fell from $50 mil to $40 mil.

Has the rot stopped?

I do not know the trend of the profit fall for the media business so I took a look at one more 1H 2016 results. It seems the fall was from $102 mil to $50 mil to $40 mil.

It does show signs of slowing down.

In 2017 first half, the Media business earns $50 mil. Revenue fall was proportionate. In 2017 full year, the Media business earns $62 mil.  In 2016 first half, the Media business earns $102 mil and full year it earns $175 mil. Revenue fall was proportionate (not shown in this article).

Some how I am not so incline to say that in 1H 2018, the Media business earns $40 mil, therefore we estimate that full year 2018, the Media business will earn $80 mil. It seems in 2017, more of the earnings come from first half of the year. Either that, or that in 2017 the decline in revenue was so drastic.

That amount is more than the $62 mil PBT SPH earns in 2017 and business is declining.

Suppose I estimate that 80% of SPH’s Media business profits come from 1H, that would peg the full year 2018 media profit before tax to be $40 / 80% = $50 mil.

If I were to purchase the Media business as a standalone, how much would I purchase it at?

The configuration I would buy the business is that

  1. visible signs that the rot has stopped
  2. there are some slight growth or maintenance of growth rate

If #1 and #2 are visible, I can accept a 10% to 12% earnings yield, if the model is not dying.

10% earnings yield inverted is 10 times PE.

12% earnings yield inverted is 8.3 times PE.

The rough intrinsic value of the Media business is $400 to $500 mil. This is like 10-12.5% of current market cap.

As per the quarterly report, SPH have a net asset value per share of $2.14.

That puts the price to book value at 1.16 times.

It looks pretty close to book value.

Normally in the past, we would not put high priority to using price to book to determine the relative valuation of SPH.

This is because it was essentially a print and advertising business, and less of a holding company & property business.

A large part of it was high return on investment or asset. Given this if we break it up, assigning an appropriate price earnings, earnings yield, EV/EBIT or EV/EBITDA would be more appropriate.

However at this point, SPH is more dependent on the property business.

Having some respect to price to book is not wrong.

When we go through this exercise, we are trying to see at current point what is the business selling at and based on the cash flow or asset value, whether its a good deal or not.

We are also trying to model what would be a conservative way to value SPH so that when we purchase it, there is a margin of safety.

2. Valuing the Treasury and Investment

SPH, like a lot of those blue chip companies was a rather big conglomerate with a lot of business that might not be related.

They used to have Belgacom, a Belgium telecom company for example, before they divest it.

Right now, the prominent one are their stake in M1 Limited, the local Singapore telecom company.

The good thing is that these assets are held on SPH balance sheet as Short term and Long term Investments and Asset-held for Sale.

Since these assets are computed based on fair value (their value is frequently recalculated and recorded in the balance sheet, instead of at cost), it makes our job easier.

The non-current available for sale assets is worth $513 mil and the short term ones is worth $363 mil. There is an additional $18 mil in asset held for sale.

Thus in total the Treasury and Investment is worth 513 + 363 + 18 = $894 mil

3. Valuing the Property Segment

SPH do own a lot of properties, however some of the properties such as Media Centre and Print Center are used by their Media Segment. Since we are already valuing the Media segment using price earnings, thus valuing it by cash flow, we cannot include this under their property segment.

From what I see on SPH’s balance sheet, they have $4034 mil in investment property. This is likely to be Paragon, Clementi Mall and Seletar Mall. SPH owns 70% of SPH REIT, which in turn owns Paragon and Clementi Mall.

(from the above screen capture you an also see the amount of loans that is granted as a result of SPH securing with Paragon and Seletar Mall. This would be useful later to determine the debt)

They also own 70% of Seletar Mall, with United Engineers owning the other 30%.

Since SPH owns more than 51% of these investment properties, they account 100% of these malls’ profits and asset value, debt value on SPH balance sheet.

Thus, it might be easy to take only 70% of the investment properties’ value. This will come up to $4034 x 0.70 = $2823 mil.

4. Valuing the Property Management

In #3, we value the investment properties by their investment values.

What we have not included is SPH’s role in managing SPH REIT.

SPH earns a recurring management fee for managing SPH REIT.

How much is earned currently can be found in SPH REIT’s annual report.

From the statement of total return in SPH REIT, we can see the manager earns $16 mil on a recurring basis.

Thus, we could probably use discounted cash flow or number of times price earnings to value this portion of the business.

But how much could we pay for the manager?

In an older article, we discussed Croesus Retail Trust’s Internalization of their REIT manager. You can read about it here.

In that article, we said:

At SG$50 mil, the shareholders would be purchasing the manager at 13.5 times income. Not cheap, but not too expensive either.

I manage to coincidentally pick up the following from a 2015 Morgan Stanley Report:

When Frasers Centrepoint bought over Allco REIT’s manager in 2008, it was at 3.8% of AUM and 10x management fees.

YTL bought half the REIT and property managers of Macquarie Prime REIT for a combined 7.2%
of AUM and 18x management fees, and a 26% stake in Macquarie Prime REIT at a 52% premium to its last close
and 0.5x P/B.

If we put the internalization side by side with them, Croesus have existing 96 bil Yen of properties, and the 2 sets of new acquisitions would add 6.1 bil and 3.3 bil respectively. Total investment properties to be manage is around JPY 105 bil. This translates to SG$1.4 bil.

3.8% of SG$1.4 bil is SG$53 bil.

When Frasers Centrepoint bought over the manager it was in the GFC. This makes Croesus internalization deal not look too expensive.

The conservative valuation should be around 3.8% of AUM and 10 times SPH REIT’s management fees. Honestly, given the predictability of this business, we could pay 15 times management fees for it.  But lets be conservative, and value it at $16 mil x 10 = $160 mil.

Currently, SPH REIT have $3278 mil worth of property under management. In 2018 Apr, SPH REIT announced that it will purchase The Rail Mall for $63 mil with debt. This will bring future assets under management to $3341 mil.

3.8% of 3341 mil is $127 mil.

That is about pretty close to $160 mil.

We could take it that the Property management function be worth close to $150 mil.

5. Deducting the Debt, adding the Cash

Now that we have worked out the rough value of  the Media, Investment Property and Treasury & Investments segments, we have to deduct away the amount of debt and add the cash holdings on SPH balance sheet.

Just like the investment property assets, the job is complicated due to some of the debt is owned by non-controlling interest at SPH REIT and Seletar mall.

There are 2 strategies here:

  1. We can try to find out the debt, specific to SPH REIT, Seletar Mall and SPH, and then take 70% of SPH REIT and Seletar Mall debt
  2. We can take all of SPH’s debt and deduct the 30% of SPH REIT and Seletar Mall’s debt

I find #1 to be tougher, because we have to itemize more. With #2, it is easier because SPH REIT is listed so we can have an easier time to find out.

In the notes section of the annual report, the report goes into detail on the debt.

From SPH REIT’s annual report, we know that their debt is $848 mil. This coincide with note 20a above, where they say SPH REIT’s debt is secured with Paragon.

Note 2b shows us that $300 mil is attributable to Seletar Mall, with Note 2c stating that $53 mil is attributable to Seletar mall’s non controlling share holders.

Thus we can compute the debt attributable to SPH to be $1499 – $848 x 0.30 – $53 – $300 x 0.30 = $1101 mil.

From SPH balance sheet, SPH have a cash and cash equivalent of $312 mil. We know SPH REIT has $63 mil in cash but not sure about Seletar Mall. But since we can’t do much about Seletar mall, we can deduct the 30% non-controlling cash of SPH REIT from SPH total cash.

Thus SPH’s cash and cash equivalent is $312 – $63 x 0.3 = $293 mil.

6. Valuing Others – Associates, Joint Ventures (Property Development), Intangibles, Healthcare (Orange Valley)

Other than these 3 main segment, SPH have been buying many businesses and starting healthcare and property business.

This can be quite a mess.

We can include the property development business if we know more details.

However, a lot of their other businesses can be accounted under treasury and investments, associates or joint venture.

As a summary:

  1. Associates fair value: 68.7 mil
  2. Joint Venture fair value: 8.7 mil
  3. Intangible Assets: 204 mil

#1 includes their 22% stake in Mindchamps and 27% stake in Perennial Chinatown point.

#2 includes a joint venture in which they are awarded a land development deal to develop a 99 year leasehold mixed commercial and residential site at Upper Serangoon Road at a tender price of $1132 mil. SPH commitment is $168 mil with an outstanding commitment of $454 mil.

This should be their 50/50 joint venture at Bidadari. There is good potential that they get to manage the commercial and retail mall, but there is absence of details.

At this point we will value #2 as zero value.

#3 includes a goodwill of $129 mil and technology, trademarks, licenses of $74 mil.  They impaired 26 mil in goodwill in 2016 due to poor magazine business and 19 mil in 2017 due to online classifieds poor performance.

Goodwill records the above market price purchase of subsidiaries, associates. It is of value if SPH value enhance and these subsidiaries and associates can be worth more than their purchase price.

Since this is so subjective, and SPH have been impairing goodwill by quite a fair bit, the safe assumption is to assume that #3 is zero value.

In 2017, SPH spent $164 mil to buy Orange Valley Healthcare to kick start their elder care healthcare business.

This could be substantial in the future.

Normally we would value the healthcare segment based on cap rate, discounted cash flow or how many times the EBITDA.  However, because it is at its infant stage, we can’t really tell the cash flow generation, so we will take the value of this at asset value.

From the above part of the annual report, we can see that SPH eventually paid $157 mil as cash outflow for it.

On the balance sheet, this is accounted under property, plant and equipment and intangibles (excluding goodwill) ($85 mil) and goodwill intangible assets ($78 mil).

There are substantial goodwill paid for Orange Valley, and SPH is expecting that they can grow the healthcare business such that those goodwill eventually becomes real tangible value.

So how certain are we that this would happen?

At this stage it is difficult to assume that.

I would be comfortable to say that 30% of the $78 mil in goodwill to be realistic.

I would add $85 mil + $78 mil x 0.30 = $108.4 mil to the sum of the part valuation.

As a summary, under Other segment we add $68 mil in associates and $108.4 mil in Orange Valley to the overall sum of the part valuation.

Summing things up: The Final Sum of the Parts Valuation

So what can we derive?

Lets add everything up:

  1. add $450 mil for the Media Segment (I calculate $400-$500 mil based on 8.3-10 times PE, so I use the mid point of $450 mil)
  2. add $894 mil for the Treasury & Investment Segment
  3. add $2823 mil for the Investment Properties Segment
  4. add $150 mil for the Property Management
  5. add $68 mil + $108 mil for the Other Segment
  6. deduct $1101 mil for the debt attributable to SPH
  7. add $293 mil in cash attributable to SPH

We get $3685 mil or $2.30 per share.

My, that is pretty far off from the market cap of $4304 mil. That is nearly a $619 mil difference. I might have made a mistake in my sum of the parts computation, or that I am very conservative in my valuation.

The conclusion seem to be that SPH is trading at 14% above my computed intrinsic value based on conservative metrics.

The delta difference of this is that I may be missing out 1 segment that cannot be determine at this point (at least with my competency):

  1. The future property development function

Let me know if you guys came up with something else.

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Engr

Monday 16th of July 2018

Hi Kyith,

Some other points to consider:

1. Business Competitive Advantage: SPH core business seems to be disrupted (apart from property segment). There are many channels that offer free news. Even for magazines, it's unlike different as compared to the past. Even if based on property / investments, there are much better counters out there.

2. Management: Core veteran ex-CEO Alan Chan has left the company. Superseded by an Ex-SAF General who used to be NOL ex-CEO. He approved the sale of NOL to another company. The company managed to turn around and reverse NOL into profit.

3. Intrinsic Values you have touched on already. Usually I will do a 5 year average on various parameters such as dividends, ROE, etc. Yes overall it's a defensive stock.

4. When to buy? I will not buy SPH due to the first 2 tenants. But if I were to buy, in general I will buy when the historical PE is low.

Anyway these 4 tenants are based on Warren Buffett's investment Principles.

Regards, Engr

Kyith

Saturday 21st of July 2018

Hi Engr, thanks for sharing. Actually don't be surprise about the flexibility they could do. It just requires contacts, capital and a balance sheet that they can use to secure financing. This might be their advantage.

The can achieve some stabilization in the media business, more so that we think.

Pythia

Monday 7th of May 2018

I'm less optimistic on the value of the media business. It's fundamentally a terrible activity to be in, few papers make money and the industry outlook is grim all across the world. Furthermore, if it gets worse, the group will likely be stuck with it for political reasons, holding it then as a liability that eats profits from other divisions.

At a good discount to book value this could be an interesting play, but right now I don't see the point of buying SPH over buying SPH Reit, Perennial or Mindchamps directly at their fair market value.

Kyith

Monday 7th of May 2018

i am curious why everyone immediately look at it at book value.

KPO

Monday 7th of May 2018

Interesting. I was expecting it to be less than the NAV but it turns out to be roughly the same. Hahaha. One can either see it as there is no safety of margin or as a blue chip, it deserves to trade at the 20% premium.

Kyith

Monday 7th of May 2018

if you view it from a book value perspective but a lot of its value might lie in the future not on the book

Financial Horse

Monday 7th of May 2018

Fantastic post. I had always thought of SPH as a sinking ship due to their declining core business, but viewing them as a property holding / investment holding company instead is a very interesting proposition. Thanks for working out the numbers as well, my gut feel is that you've been slightly conservative in your numbers but 20% is still a huge premium. Might be best to stay away from this stock until it hits a more attractive price.

Kyith

Monday 7th of May 2018

It depends on how you look at their healthcare component and the developer component. I might be underestimating it.

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