Home grown media organization Singapore Press Holdings (SPH), through publishing and distributing of newspapers and magazines as well as broadcasting of radio stations and free-to-air television channels since its incorporation in 1984, has enriched lives of Singaporeans across multiple languages and platforms. On an average day, 2.4 million individuals or 58 percent of people aged above 15 years old, read one of SPH’s news publications in print copies or one of its digital platforms.

SPH possesses some of the attributes which are typical of a monopoly business well sought-after by value investors, namely:

  • Market leadership – SPH dominates the media industry in Singapore as the sole publisher of daily print newspapers across four languages, with leading titles including The Straits Times, Lianhe Zaobao, Berita Harian and Tamil Murasu.
  • Investment moat – Under the Newspaper and Printing Presses Act, a newspaper permit is required to be obtained from Infocomm Media Development Authority for printing or publishing a newspaper in Singapore. As such, this acts as a secure barrier to entry for new entrants.
  • Price setter – SPH initiated a cover price increase for its newspaper publications with effect from 1 March 2016. Although the daily average for print circulation fell five percent following the exercise, some publications remained resilient and led to the group benefitting from the inelastic demand with higher overall revenues.

Nevertheless, SPH’s share price sank 2.6 percent to $3.03 on 17 July 2017, upon release of its 3Q17 results which reported 10.8 percent and 40.7 percent decline in its operating revenue and net profit respectively.

Once a darling of income investors well-liked for its high yield and stable business, SPH has now fallen from its grace and lost its allure among investors. This issue, we will pay closer attention to this struggling giant and look at some of the difficulties SPH faces in the current challenging media industry.

Changing Consumers’ Reading Habit Hurts Earnings

In today’s Information Age when news feeds are readily accessible online, consumers reading habits have shifted drastically towards relying on the digital platforms as their main source of information instead of the traditional prints. Much of this phenomenon could be explained with the former’s timeliness, convenience and at almost zero cost. According to Nielsen report on Singapore media, SPH Newspapers Readership Trends have been falling steadily since 2009.

Source: SPH’s FY16 Annual Report

Source: SPH’s FY16 Annual Report

SPH’s business model is such that its operating revenue and profit are mainly driven by its core media segment. As at FY16, SPH’s media revenue contributed 74.2 percent towards the group’s total revenue while property revenue made up another 21.5 percent, with the remaining 4.3 percent coming from others sources comprising revenues from the exhibitions and online classified businesses.

A drop in readership will not only affect SPH’s circulation revenue directly but also reduce corporates’ willingness to invest in advertisements to a smaller targeted audience, thereby forming a vicious cycle, which leads to SPH’s persistent declining advertisement revenue.

Over the last five years, SPH’s operating revenue has been on a consistent decline from FY12 to $1.1 billion in FY16, falling at a negative compounded annual growth rate (CAGR) of 3.1 percent. Likewise, net profit after tax also slid at a negative CAGR of 4.6 percent to $306.1 million in FY16 over the same period.

Source: SPH’s Annual Reports

Source: SPH’s Annual Reports

Futile Efforts To Turnaround

To mitigate revenue loss from its core media business, SPH has over the last couple of years diversified into the property sector by investing in a portfolio of an income-producing retail real estate comprising Paragon, The Clementi Mall and The Seletar Mall. The property segment looks promising and property revenue has been growing at a CAGR of six percent to $241.3 million in FY16. From contributing 15 percent to FY12’s revenue, property revenue has now expanded to account for 21.5 percent of FY16’s revenue. Without which, SPH’s diminishing media revenue would have been even more apparent.

In spite of that, unfortunately, in absolute terms the growth of property revenue still failed to keep pace with the sharper drop in media revenue, resulting in the gradual decline in total operating revenue year after year. From FY12 to FY16, although property revenue has jumped $49.9 million to $241.3 million, it was not sufficient to compensate for the $168.5 million plunge in media revenue. As a result, total revenue was lower by $148.6 million in FY16 at $1.1 billion.

Source: SPH’s Annual Report

Source: SPH’s Annual Report

Apart from the diversifying revenue streams, it is commendable that management has also made conscientious efforts to boost operating efficiencies and keep costs in check. From SPH’s operating expenditure composition, we can see that staff costs and materials, production and distribution costs are two major components of SPH’s cost structure. Most notably, materials, production and distributions costs have decreased by around 25.1 percent over a period of five years from $221.1 million in FY12 to $165.6 million in FY16. This has resulted in its proportion of total operating expenditure at 25.1 percent in FY12 to improve to merely 20.2 percent in FY16. Staff costs, on the other hand, did not show much improvement over the years. In fact, it inched up 0.7 percent to $362.6 million from FY12 to FY16 and constituted 44.2 percent of FY16’s operating expenditure.

Deteriorating Dividend Payouts

Income investors who have been holding SPH’s shares for their dividends would not be too happy with the yield so far. SPH’s dividend per share has been declining over the last six years, from a payout of $0.27 per share in FY10 to $0.18 in FY16. That is more than a 33.3 percent drop in just over a couple of years.

This may not come as a surprise, as SPH has been paying out at a dividend payout ratio of more than 90 percent out of recurring earnings since FY12, and more than a hundred percent from FY14 to FY16. Given SPH’s weak financial performances and bleak outlook amidst the challenging disruption of the media industry, we are not too optimistic that its payout could improve significantly in the years to come.

Source: SPH’s FY16 Annual Report

Source: SPH’s FY16 Annual Report

Valuation

At its last closing price of $2.91 as at 31 July 2017, SPH’s share price has plummeted more than 31.4 percent from its peak of $4.24 in April 2013. Current market price implies a price-to-earnings ratio of 23.6 times and a price-to-book ratio of 1.4 times, with an expected annual dividend yield of around 6.2 percent.

SPH reported 9M17 operating revenue and a net profit of $776.2 million and $156.5 million, which came in at only 69 percent and 51.1 percent of FY16 results respectively. Unless 4Q17 turns out to be exceptionally spectacular, it is very likely that SPH is going to report another year of lower revenue and profitability. While current yield seems rather attractive, much remains to be seen if SPH can successfully reinvent itself and adapt to the changing new media environment in order to forge ahead for survival.