Singapore Press Holdings Limited - Would a REIT actually create shareholder value - which of the brokers is right?

29/4/2013– With Singapore Press Holdings' (SPH) planning to list its properties in a Real Estate Investment Trust, brokers are divided over the value of its properties, and how it will use the cash proceeds.

Its retail properties, Paragon and The Clementi Mall, are fully leased and continue to turn in a steady performance.

The development of Seletar Mall is in progress and is expected to be completed at the end of 2014.

Meantime, on its core publishing business, SPH guided that it expects newsprint to get more expensive in the medium-term, as supply tightens because of reductions in newsprint mill capacity.

The company just announced earnings for Q2 FY13:

Revenue: -5.7% YoY to S$285.5 mln
Profit: -15% to S$71.6 mln
Cash flow from operations: (S$240.9 mln) vs (S$215.6 mln)
Dividend: 7 cents per share vs 7 cents per share

SPH’s Q2 revenue suffered mainly due to a 7.6% fall in advertisement revenue to S$168.5 mln.

Car dealers and property companies spent less money on advertising after the government introduced cooling measures on car and property sales.

Bullish analyst report


The analyst at Maybank Research expects SPH’s earnings to recover in the next quarter, especially in property advertising revenue.

The reason for optimism is management’s indication of a recovery in property advertisement revenue since late March.

The analyst expects this momentum to continue into the next quarter, backed by many new homes being completed in the coming months.

Management did not give much detail on its plan on the spinoff of its properties, but it believes that proceeds from a REIT would be reinvested to pursue a better return.

SPH could become more aggressive and hard working in the property sector.

It could also make more acquisitions, such as in internet and digital media.

It has already launched an iPad app for its flagship Straits Times publication, which has borne fruit.

Circulation of digital copies has more than doubled in the first half of the year, compared to a year ago.

Maybank Research believes that stable cash flows could sustain a dividend of 24 cents per share at least until the REIT spinoff takes place, which would further unlock value for SPH shareholders.

Hence, it maintained a BUY rating with a target price of S$4.95.

OCBC Research believes the expectations SPH will launch a REIT is realistic due to the size and quality of SPH’s retail malls.

Hence, it maintained a BUY rating with an unchanged fair value estimate of S$4.94.

DBS Vickers Research also continues to believe that current market conditions are conducive for SPH to spin off its investment properties into a REIT.

It says the share price may face resistance in the near term and some profit taking after appreciating about 10% in the past month.

But, downside should be limited, and likely to be supported by the expectation of an eventual REIT listing.

The analyst thinks advertising revenue may pick up slightly in the second half, because the house view at DBS Vickers is that the Singapore economy will pick up after a slow first half.

With advertisement revenue historically tied to economic growth and consumer sentiment, this could point to a pick up for SPH advertisement revenue.

Hence, it maintained a BUY rating with a target price of S$4.75.

Bearish analyst report


CIMB Research thinks it is still unclear if spinning off its prized property assets into a REIT actually creates shareholder value.

It is unsure if there will be a special dividend because it depends on how much management decides to sell down.

If management sells a large stake to the REIT, it will take away valuable property earnings when the media earnings are struggling.

On the other hand, if SPH sells only a small stake, there might not be special dividends, and investors who bought in anticipation could be disappointed.

The analyst has downgraded SPH from NEUTRAL to UNDERPERFORM as it thinks the recent share price gains are unwarranted.

It also lowered FY13 to FY15 estimates by 5% to 9%.

But the target priced has been raised to S$4.32 to reflect the appraised value of the properties that are likely to be spun off into a REIT.

OSK DMG Research says SPH’s share price ran up some 10% since it announced it was exploring listing a REIT on the SGX.

Though it understands there are advantages of a REIT spin off, such as potential cash inflows, it thinks valuations appear stretched.

With an unexciting core publishing segment, and FY13 dividend yields compressing to 5.2%, the analyst has downgraded SPH to SELL with a target price of S$4.00.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Would a REIT actually create shareholder value?

Let’s not jump the gun: SPH is still in the early stages of studying whether to spin off its properties into a REIT.

But the key point is whether SPH will be better off reinvesting the cash currently tied up in the properties.

To use the jargon, can it find yield accretive investments with the proceeds, which generate a higher return than the properties themselves?

Its rationale for exploring the spin-off of its property assets into a REIT is to recycle capital into higher yielding assets.

Whether a special dividend materialises will then depend on how much of a stake in the Paragon and Clementi Mall it sells.

CIMB Research says SPH could raise S$812 mln and still keep a majority stake of 60% in the properties.

But most of that cash would be used to bid for more land, with little left over to pay a special dividend.

If SPH retained only a 30% interest in the properties, a special dividend would be possible.

The key then for this special dividend to be "worth it" is management's ability to redeploy the remaining proceeds into high- yielding development projects, similar to the successful Clementi Mall.

If management is not able to do so, then SPH would have lost a good chunk of Paragon’s rental income that had been steadily growing and propping up the slowly declining media revenues.

Question

2. Is it crazy to sell its property assets?

Property income is the one item which is not in a long-term decline, like newspaper publishing.

And yet, SPH is planning to sell its properties?

Even if SPH argues that it wants to recycle the capital into buying more properties, it is taking on more and more risk.

Also, it is behaving more and more like an active property developer, rather than generating stabilising income passively.

Question

3. Was a REIT actually suggested by investment bankers?

The fact is, investment bankers don’t sit back and wait for deals to come through the door – they frequently call companies to suggest what they should buy or sell, and then they collect a fee if the company goes ahead with the deal.

In that sense, investment bankers in these deals are like the shops selling shovels and pick-axes during a gold rush: they collect fees, whether the listing is a success or not.

Bottom line: did SPH come up with the idea of a REIT itself? Or did some close investment banker friends and associates suggest it?

Question

4. What considerations is management currently going through?

A decision on whether to launch a REIT or not should be fairly clear cut.

Anyone with even an entry-level knowledge of Excel could sit down and work out whether a REIT is a good idea.

What is there to study?

It sounds more like SPH has already made the decision to launch a REIT – hence the announcement – and it’s now really just trying to figure out the finer details, such as how much to sell.

Question

5. Will the REIT take off?

The valuations of the properties are the subject of some conjecture – and this uncertainty is not likely to go away once the IPO of the REIT has been priced and the prospectus launched.

In the end, market forces will determine whether the properties are priced correctly. The price of the REIT will reflect what the market thinks of the valuations.

That’s the risk investors face. For all we know, like so many REITs in Singapore, the price on the stock market could be below the value of the properties.

Question

6. Will the acquisition of SGCM backfire after the government’s cooling measures in the automotive sector?

SPH recently completed the acquisition of SGCM Pte Ltd for S$60 mln, which owns and operates online car classifieds, a car auction platform called Quotz, and other operations which are into online marketing and car loans, insurance and settlement services.

Sure enough – SPH is trying to diversify, to capture growth online.

But buying a car in Singapore just got more expensive with the new policy measures unveiled by the government.

The measures - car loan restrictions and the introduction of a new tiered tax - are intended to help reduce demand for cars and alleviate the high Certificates of Entitlement (COE) prices.

Hence, our question.

Question

7. When will online be able to take over from print?

SPH’s strength lies in its near-monopolistic position in newspaper publication in Singapore and rental income from investment properties Paragon and Clementi.

These bring in consistent income.

But, newspaper circulation has been on a declining trend over the past decade and e-substitution is a threat to newspaper circulation.

However, SPH’s internet editions of newspapers enjoy over 270 mln page views with 18 million unique visitors every month.

Its online and new media initiatives include ST701, where jobs, property, cars and other goods are advertised.

It also also launched iPad and iPhone apps for The Straits Times and The Business Times.

Hence, we would like to know how close SPH is to overcoming the declining trend in newspaper circulation with these online initiatives.

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

The company has declined to comment further at this time.


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