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Judgement day for SPH?

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It certainly seems like Judgement Day for SPH as the media conglomerate’s shares plunged to an 8-year low. The share price free fell to $2.95 on 18 July 2017, below the $3.00 support level. During the dark days of the Great Financial Crisis, the lowest trading price was $2.40. But hey, we are not having a major market crisis now, aren’t we?

What’s going on and what’s wrong with SPH? Should investors run for their lives?

Like fellow SGX-listed SingPost, SPH belongs to the old economy. Both are struggling to adapt themselves in the new digital era. Technology has devastating impacts on their businesses as their models are being disrupted by consumers’ lifestyle changes.

For SingPost, most companies are switching to electronic statements instead of traditional postages. Hence, SingPost is now transforming itself into an eCommerce logistics by leveraging on its existing postal networks. Similarly, SPH is facing disruptions from technology as most people switch to digital instead of printed newspaper. This is understandable as who would want to read yesterday’s news when you can receive the latest updates on the breaking news from online or through social media?

SPH

But what is shocking for investors was the massive decline seen in SPH’s advertisement revenue.

For 3Q2017, the advertisement revenue declined 21.5% year-on-year. Previous quarter witnessed decline of about 18%. This is indeed worrying for the media giant as advertisement revenue is regarded as the “bread and butter” for the company. In light of the unfolding crisis, something must be done to stem the rot.

According to the latest financial results, net profit was $23.8 million or 45.2% lower against the corresponding period last year (3Q 2016). The poor results were due to impairment charges of $37.8 million, which primarily related to the poor performing magazine business. However, the impairment charges should not be an excuse for management to justify the poor showing.

Group operating revenue slid $31.6 million or 10.8% year-on-year to $260.0 million. Specifically, the Media business saw a $34.1 million or 15.7% dip in operating revenue as advertisement revenue fell $29.2 million or 18.7% year-on-year and circulation revenue declined $4.8 million or 10.6% against 3Q 2016.

To be fair to management, SPH did make an effort to trim costs when it announced headcount culling of 10% in 2016. The retrenchment exercise help to reduce cost by 6.7% year-on-year despite inflationary pressures. Although news of retrenchments is always sad, this is not the first time that SPH is culling staff to reduce costs. Nevertheless, it is the change in senior management that raised many eyebrows.

In May, SPH announced Mr Ng Yat Chung as the new CEO with effect from 1st September 2017. Mr Ng is a former army chief known for selling Singapore’s shipping flagship, Neptune Orient Lines (NOL) to French giant, CMA CGM in 2016. The loss of Singapore iconic shipping line was one of the most earth- shattering events that occurred in Singapore stock market. After all, for decades, Singapore has leveraged on its strategic geographical position by positioning itself as a major trading hub. To lose a national carrier like NOL is akin to Temasek Holdings selling Singapore Airlines.

Most Singaporeans may recall that NOL used to reign supremacy and was even rated as one of the top 5 shipping lines in the world. But the horrendous plunge in freighter rates and overcapacity in the shipping industry changed the game forever. Without the economy of scale, NOL struggled to compete with rivals and had been making losses for years.

But what riled investors was the fact that CMA CGM amazingly turnaround NOL within three months of taking over and made it profitable. In fact, NOL contributed USD91.3 million to CMA CGM’s 1Q2017 profits and became the French shipping line’s crown jewel. Under Ng Yat Chung’s leadership, NOL had been bleeding for many years till Temasek Holdings decided to throw in the towel.

Should NOL be given more time to achieve a turnaround? On hindsight maybe yes, but Temasek Holdings may not want to risk throwing good money after bad.

Of course, SPH would never suffer the same fate as NOL because Singapore government controls the media industry tightly and will never let any foreign entities acquire the media company. But the appointment of Mr Ng was controversial by itself because what SPH needed most is a visionary leader with proven track record of turning around companies. In Mr Ng, it is too premature to make judgement as he has not even started his tenure as CEO.

Then again, under current management’s leadership, SPH seems to lack direction. It’s foray into property and healthcare sectors are indeed strange although they may help to diversify revenue sources. Given that SPH’s core business is in the media industry, dabbling in other industries may be deemed as risky and could even affect its long-term branding. Just think about it, media, property and healthcare are all completely different industries. How is management going to derive any sort of synergies between the business units and what are the execution risks due to the lack of experiences in property and healthcare?

Usually I would avoid investing in companies undergoing business transformation or experiencing a change in leadership. This is because cases of successful turnarounds are very rare in Singapore corporate world. Currently trading at Price/Book Value of 1.431 and P/E ratio of 24.4, this stock’s valuation seems a bit on the high side. So now is not an ideal time for me to enter this counter, especially in light of the hazy outlook for SPH.

SPH is a stock favourite among many long-term investors because of its long history of dividend payouts. However, situation has changed and one should assess the business risks before investing in SPH.

I hope the management can prove me wrong and get its act together. As a Singaporean, obviously I hope home-grown companies like SPH and SingPost do well and create good paying jobs for fellow Singaporeans. But time is running out for SPH and for the new incoming CEO, the work is cut out for him. Perhaps the new CEO can figure out how to revive SPH’s fortune in the coming years. Till then, enjoy the ride.

Read my articles on SPH below:

  1. Will SPH acquire The Finance SG?
  2. SPH media business review
  3. SPH to retrench staff

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