Singapore Press Holdings- Review of FY2018 Results and Cut In Special Dividends

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SPH had announced their full year results for FY2018 on 15 October 2018. The media segment had continued its decline. Good news here is that the rate of decline had slowed down. However, the decline is serious enough on its free cash flow to warrant SPH to cut down on their year-end special dividends. In its results announcement, SPH mentioned that the Media segment continued to be highly profitable. I actually think otherwise. Operating GP margin for Media segment is only at 14.1% based on annual revenue generated of S$655.8Mil and profit margin of S$92.3Mil. I would think that the real super profitable SPH business is in its current property business. The operating GP margin for property is highly profitable at 62.6% based on annual revenue generated of S$242.4Mil and profit margin of S$151.8Mil.

Extract of operating revenue by business segments

Extract of profit before tax by business segments

In terms of the profitability driver, the contribution from property segment has far outstripped the contribution from the media business. It is only contributing a mere 26.7% of total profits before tax and this is expected to further decline to below 25% in future. The future growth engine for SPH thus comes from its up and coming Property segment which is expected to make up more than 50% of its profitability going forward since any further decline in revenue from Media segment translates only into less significant profit drop based on the operating profit margin of a mere 14.1%. For example, a drop in S$10Mil of Media segment revenue will only cause a decrease of in profits.  An increase of S$10 Mil in Property segment revenue will add on over S$6.26Mil to the bottom line.

Weightage of each business segment against total profits
The growth driver for SPH burgeoning property segment will come from the below business catalyst:
  1. Recently acquired student accommodation business in UK;
  2. Development of residential project Woodleigh Residences in Singapore Development and 
  3. Management of upcoming Woodleigh shopping mall for rental income
Thoughts on the Dividends Declared and Fair Valuation
The SPH Board has declared a final dividend of 7 cents per share comprising (i) 3 cents of ordinary dividend and (ii) 4 cents of special dividend. Coupled with the interim dividend of 6 cents per share, the total dividends for FY2018 is S$0.13. Based on closing price of S$2.62 on 19th October 2018 (Friday), this represented a dividend yield of 4.96%.

My personal thoughts are that the business of SPH has actually stabilized now that new growth engine has been put in place. The current dividend yield of approximately 5% is very attractive as it gives a payback annually while waiting for the business to continue growing and to realize its potential. The main risk now is whether SPH can maintain at least S$1,800psf in the average selling price of its units in the Woodleigh residential development project in view of the new cooling measures announced by the government this year. SPH and its partner Kajima had invested over S$1.132 billion to acquire the Bidadari commercial and residential site. Any severe economic downturn from the global effects of US China trade war and interest rate hikes will adversely impact the returns on this property development venture.  

Hence, I will say at S$2.62, SPH is fairly valued. If the price drop below S$2.60, it will be a good price to start accumulating some of its shares for a reasonable margin of safety while waiting for the new property projects to bear fruits. 
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