Friday, July 25, 2008

SPH: To invest or cut loss?

For readers who have been following my blog, many of you will know that a significant weightage of my portfolio consist of SPH. I have also bought 6 lots this week at $4.005 per share but contra it off the following day at $4.08 when STI went up 3%, realizing a contra gain of $280. Of course the reason is I believe I will be able to buy SPH at the same or lower price soon. I queued to buy 6 lots of SPH at $3.38 yesterday but was unable to get it.

In the thread I started in Sgforum introducing my blog, there have been many discussions on SPH pertaining to its growth outlook, potential dividends payout and fair value. Some forummers wanted to cut loss when SPH drops to $3.90, to my surprise. Below are some excerpts of the postings:

Sgbluechip:

Some opinions on SPH:
Sky 11 will continue to recognise profits till 2010; operating revenue has increased 20% to 344m, profits before investment is up 26% to 135m or a 39% profit margin. I see the core business still steady at current point of time. If you consider in 2005, net profit was 488m, dividends was 28 cents, in 2006 net profit was 428m, and dividends paid was 24 cents. At current point, I see FY 08 profits to be somewhere between 460m-500m. Hence dividends should at least be the same as last year's 26 cents. This means there is an outstanding dividend of 18cents, or 16 cents if you choose to be conservative.
Outlook: Singapore is a knowledge economy and a high percentage of the population read papers, which is an effective way for business to reach potential clients, compared to the net. With limited channels in Mediacorp, SPH is in a strong position to increase it's revenue from advertisements, benefiting from increasing population and foreign investments. (SPH has a 20% stake in Mediacorp).
PE ratio will be 14 if assuming FY 08 EPS is 28.5 cents, price at $4. I will be happy to pick up more when it falls further. I have already bought 6 lots today, 15 lots this month. My holding period is min 2 years, but I will be happy to sell if it reaches $4.60. It reached a high of $4.82 last yr, one day before Dec XD. For investors thinking of cutting loss, do so only if you need the funds for better investments elsewhere. Or else just treat it as FDs, you get at least 6%.


Chantc:

I have to disagree with that (on my outlook). A large number of my friends do not read the local papers because they feel that its bias and its information is outdated. Articles inside are also not creative. Instead, they would rather subscribe to wall street journal or some other papers. They only tune in to the TV news for local news. If I remember correctly, take a look at the latest circulation numbers. You will see some dropping numbers. The only thing that is propping SPH now is Sky Eleven and Paragon.


Jfc 18:

If you have analysed SPH results fully, you should realise that their advertisements revenue has been steadily growing instead of declining. For YTD 2008, the ad revenue has grown by 8.2%, while in 2007 the growth for ad revenue is 6.8%. If you have analysed SPH results fully, you would realise tat SPH valuation ain't tat expensive as most people thought to be.
SPH sum-of-parts valuation (outstanding shares 1,586,318,621):
Paragon: $2bn, Per Share $1.26 (recently valued by Frank Knight)

Other properties in balance sheet: $481m, PS $0.30 (includes Toa Payoh News Centre, Jurong Print Centre, Hong Kong Lippo Tower unit, 3 properties in Nassim Rd, etc)

Cash and Investment portfolio: $1.256bn, PS $0.79

Debt: $574m, PS $0.36 Hence at the share price of $4, after stripping off all the assets above and adding debt, the balance is $1.99.
This is the price of SPH Newspaper operation.
The YTD 2008 profit from its Newspaper ops is $292,320,000, which is $0.1842 per share. Hence at $1.99 (divided by $0.1842), the SPH Newspaper ops PE ratio is an undemanding 10.5x.
Mainstream newspaper is clearly still the most effective form of advertisement in Singapore. SPH enjoys a monopoly in its newspaper ops. And the best testament of a wide economic moat company is to be able to increase cost in an inflationary environment. SPH will be increasing its ad cost by 3-9% starting Sept 2008. Will advertisers stop advertising on SPH newspaper/magazine because of this rise in cost?? I do not think so. For a high margin and ROE newspaper business (augmented by a wide economic moat), is a PE ratio of 10.5x considered expensive? Again, I do not think so.

Sgbluechip:

For me, I am not an aggressive investor and prefer steady returns, liquidity (for bargain hunting) and relative little volatility with a 6% or more target return on investment. Although I can't beat the inflation, technically, I make do with less by spending lesser. In fact, being more prudent these days with spending has allowed me to save more. Hence, I still buy SPH for the predictable returns and a piece of mind. Btw, SPH bought slightly more than 1m of its shares from the open market when its price fell below $4 yesterday. I am expecting some directors to pick up the stock soon. I remembered a few directors picked up SPH last year at an average price of $4.50.

Danyap:

Hi all, I know I'm a little late on this particular discussion, but I would like to share my opinion having worked for 9 years in the advertising/journ industry. I own a share in a pte ltd creative agency. From an investment perspective, SPH and all media publishers are losing their economic moat. In addition, advertising as an industry has lost more than 40% of its power over the last 10 years because of the rise of PR. I am personally not confident that SPH will be able to sustain good growth in the long run. It's primary market is saturated and under heavy assault from electronic media. I'm not going to put my money on mass media publishing ever. I'm not even going to put my money on advertising. The ad industry is not growing much at all. It will continue to be profitable for the company, but I think shareholders looking for growth will be disappointed. Just my insight into my own industry.

There are also many replies to other views on SPH not shown here, but from what I see, everyone has his/her take on SPH. The reason is because different people are analyzing SPH from different perspectives. Of course this is not exclusive to SPH but to any other stock listed in the world. This is also the main reason why people buy and sell at different prices! It is impossible everyone sees SPH the way I look at it, or everybody is bearish/bullish on the same stock. Or else, everyone will be buying and selling it at the same time! However, judging from the price trend, it seems that SPH is losing its appeal to investors.

Why is this so?

Some random reasons include:

SPH had a poorer YoY results, due to M1 and Starhub capital distribution the previous year and poor equities return from its investment portfolio.

The general market is really bad for equities. Component stocks like NOL, Cosco, Citydev, SGX, Yangzijiang has retreated 50% from their peak. Other more established blue chips like DBS and UOB has retreated 30% from their all time highs (last year). Compared to SPH, it’s Dec 07 high of $4.82 to recent low of $3.97, it has only retreated 17.6% outperforming the decline of STI index of 25% from its Oct 07 peak. Shrewd investors would rather invest in stocks that have declined by a larger margin than steadier stocks like SPH.

As interest rates are expected to rise across the world, yields for long term bonds are on the uptrend. Dividend stocks prices will take a beating as investors will demand the same risk premium spread to compensate them for investing in equities over bonds.
Example: Assuming risk premium is 3% above the 4% 10 year bond yield, investors will only purchase dividend stocks that are yielding 7%. With dividends payout unchanged, prices of these stocks will have to come down to yield investors the 7%. This explanation can be used to explain the price decline of Singpost, Starhub, SPH and other dividend stocks.

The rising interest and awareness of REITS, shipping trust and other high yielding instruments perhaps also contribute a little to the loss of appeal for SPH.

Conclusion:

As I have mentioned earlier in my post on Sgforum, my aim for investment is only a modest 6% per annum or a cash flow of $1000 monthly. So far, I am able to achieve the objectives from trading blue chips and collecting dividends. One thing to note is that dividends usually pay me better than capital appreciation. SPH fulfills most of my criteria listed here:
http://sgbluechip.blogspot.com/2008/05/can-i-invest-in-this-business.html and hence I will again be buying more on dips if there are no better alternative to invest my cash.

The current market is worth a second look at current gloom and doom. We all know that the bear market usually doesn’t last more than 2 years. Some end in 8 months. As long as we stay invested and hold on to fundamentally sound companies, profits and dividends will increase ultimately. It will be too late to buy by than and tell yourself, “ Damn.. I should have bought earlier!”

2 comments:

Daniel said...

What in your opinion is the FMV of SPH stock?

A good company at the wrong price is still a bad investment.

Sgbluechip said...

When considering the fair value (FV) of SPH there are a lot of quantitative and qualitative factors to consider. Bond yields and interest rates trend for example will move SPH's price.

The evoulution of news for instance will also dictate it's future FV.

Hence using discounted cash flow, dividend discount modals or other valuation methods will give very little accuracy to my estimate of it's FV.

I would rather guess that SPH is probably near it's price bottom. I do not see SPH breaching the $3.60 price level.

Hence, it is a good time to accumulate now. I believe it will be able to reach $4.40 in 10 years time.

With a dividend yield of 6%, one will get 70% gain or average of 7% per annum based on $4 a share 10 years later.