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SPH media business review

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On 17 October 2016, media conglomerate SPH finally dropped the bombshell. In a media release which highlighted the result of its business review, SPH announced that it will be “right-sizing” to reduce operating costs.

To put things into perspective, this is not the first time that the media company is downsizing. It had previously retrenched more than 100 staff in 2003. It is also no secret that SPH’s revenue has been decreasing at an alarming rate for the past 5 years.

Revenue for FY2012: $1.27 billion

Revenue for FY2013: $1.24 billion

Revenue for FY2014: $1.21 billion

Revenue for FY2015: $1.18 billion

Revenue for FY2016: $1.12 billion

Return on Equity (ROE) declined at an even worse rate, from a respectable 19.3% in FY2012 to a ridiculous 7.129% for FY2016. What exactly went wrong for SPH?

Make no mistake, the company is still making money. In fact, profit after tax for FY2016 was $306 million, a decrease of 17.4% compared to FY2015. The company is also giving out dividends as usual for FY2016.

But SPH investors must realize that it is not exactly business as usual for this media giant. The continuing decline in its business is not a cyclical problem, but really a structural issue that requires massive transformation in its business model.

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Perhaps I am stating the obvious but Singapore market is far too small for SPH to sustain its printed publication. With a population of only 5.5 million, SPH’s printed publications like The Straits Times and Business Times have very limited international reach. To stop the frightening decline in newspaper advertisement revenue, it must rapidly grow its digital subscriptions.

Another questionable approach by SPH management is its foray into property. SPH’s core business should be in media and logically it should focus on growing this segment, Instead, the company stretched its core competencies into other unrelated businesses. Even though its property arm racked in profits amounting to $149.5 million in FY2016, I still feel that SPH should focus on growing its core business.

Will SPH navigate through this storm? This is a difficult question to tackle because a lot will depend on whether the management of SPH can stay relevant in this new economy. The government has often stressed that Singapore is transforming into a Smart Nation but until now, SPH still has not fully embraced technology. The main bulk of its newspaper daily circulation is still in paper.

Technology can be very disruptive and if business owners are not careful, their product can become obsolete rapidly. In the 80s, type-writers were replaced by PC computers. The 90s had witnessed the mighty Nokia cellphones being made irrelevant by Apple’s smartphones. Very soon, I am not surprised that readers will not buy newspaper. After all, in this day and age, readers will not want to read yesterday news from printed publication.

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I am not vested in SPH shares but I know there are many loyal SPH investors out there. Indeed, SPH has an excellent dividend track record. But when it comes to investing, there is a need to be objective and assess the business fundamentals. SPH’s outlook is murky and perhaps the media giant has seen its glory days.

To re-ignite growth, SPH must wisely invest its billion dollar war chest in digital websites that are scalable and profitable. It is now or never. Reducing excess fats in staff cost may help the company to stay nimble but in order to grow, SPH must continue to invest in new digital projects like HardwareZone, HungryGoWhere and ShareInvestor.

My strategy is to avoid this stock until the company successfully transform its business model.

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Updated: October 18, 2016 — 3:34 pm

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