The broad market apathy towards shares in Singapore Press Holdings belies the confidence with which the company is pursuing its next major property development project, and its solid track record in creating value in the real estate sector. The problem is that its core business remains newspaper publishing, which does not appeal to investors in the public market. The time may have come for a restructuring exercise that separates non-media assets from the group and sets its media division in a bold new direction as a privately held entity.
SPH’s media business once generated reliable cash flows that it invested in other ventures, especially property development. But the dynamics of the media and property businesses have changed dramatically in the last 15 years. The internet is disrupting the traditional newspaper business, while major property developers have formed property securitisation platforms to support their growth. Having a property business and a media business in the same public-listed company no longer makes as much sense.
SPH’s property business has already overtaken its media business as the group’s main source of earnings. For 1HFY2017 (ended February), SPH reported $81.75 million in pretax profit from its property division, and only $50.61 million from its media business. During the period, pre-tax profit from its media business dropped by half, while pre-tax profit from its property business climbed 11%.
Now, SPH is aggressively pushing ahead with further expansion of its property division. Over a week ago, it won a hotly contested bid for a 273,842 sq ft development site in Bidadari. SPH will pay $1.13 billion — only 1.1% more than the next highest bid — for the site, for which it unveiled plans on June 21. Besides developing 600 residential units, it will build a mall adjacent to the Woodleigh MRT station covering 310,000 sq ft of gross floor area.
The retail property component of the project is larger than some analysts had expected, and underscores the long-term value that SPH could tap from the project. A wellmanaged shopping mall in an area with a growing catchment population would be a good pipeline asset for SPH REIT, which currently holds Paragon and The Clementi Mall. SPH also owns a 70% stake in The Seletar Mall, which could also eventually be shunted to the REIT.
Yet, with the media business in its fold, SPH has seen its shares lag other major property developers. Since the beginning of the year, its shares have fallen 9.3%, while those in City Developments, CapitaLand and Frasers Centrepoint are up 32%, 20% and 19.7%, respectively.
What are SPH’s assets worth? Estimates vary widely, not least because the media business appears to be sinking fast. Prior to the Bidadari acquisition, UOB Kay Hian valued SPH at $4.64 billion, or just $2.90 a share. It put the value of the group’s newspaper business at $1.73 billion, or $1.08 a share. That implied its non-newspaper business and other assets were valued at $1.82 a share. On the other hand, DBS Research has a sum-of-the-parts valuation for SPH of $3.39 a share, with its newspaper operations valued at $1.44 a share, and its property business and other assets accounting for the remaining $1.95 a share.
Whatever the case, with SPH’s share price in an accelerating downtrend, the company ought to begin examining restructuring options. And, it seems obvious that the group’s property business would be more interesting to investors in the public market if it were separated from the media business.
The big question is what the media business would be worth and what can be done to revive it. While some analysts see no immediate prospect of a bottoming in earnings for the business, reliable and accurate news is an important public good. Indeed, SPH has a capital structure that reflects the important role it plays in society.
The company had 1,614.8 million outstanding shares as at June 21. Of these, 16.36 million were “management shares”. On any resolution relating to the appointment or dismissal of a director or any member of staff of the company, a holder of each of these management shares is entitled to 200 votes.
The major shareholders of the management shares are Great Eastern Holdings with 22.6%; Oversea-Chinese Banking Corp 16.8%; NTUC Income Insurance Co-operative 16.35%; Singapore Telecommunications 13.3%; DBS Group Holdings 9.5%; United Overseas Bank 8.05%; and National University of Singapore 5.36%.
In a sense, SPH’s media business faces the same problem as SMRT Corp. The MRT train operator suffered weak profitability for years in the face of hefty investments and public opposition to fare hikes. It sustained itself for a while with rental income from retail space at its MRT stations, before it was taken private by Temasek Holdings last year. A similar privatisation of SPH’s media business could be just what is needed now.
This article first appeared in The Edge Singapore Market Report.