SPH’s Net Profits Continue To Plunge; Will Diversification Help?

Singapore Press Holdings (SPH) (SGX: T39) has released its results for the third quarter of the year and net profit plunged by 45.2% to $28.9 million.

A major culprit for its poor performance was the magazine business which suffered a one-off impairment of $37.8 million. Stripping off one-off items, net profit stands at $68.8 million, which is still a 13.8% decline from the previous year’s performance.

Media business

Media revenue came down by 15.7% as all segments experienced a double-digit decline, especially for display revenue which came down by 24% year-on-year to $65.1 million whereas the other segments like Classifieds, Magazine, and circulation revenue all came down by 11 to 12%.

The weakness in the media revenue was expected. UOB KayHian Research has already seen a decline in total ads by 13.7% in June 2017, which continues the downward trend experienced in the first and second quarters of 2017 which declined by 12.2% and 3.7% respectively.

Permanent weakness

Historically the third quarter should be one of the stronger quarters of the year, reporting higher revenue, but as print media continues to fight an uphill battle against digital media, it seems that revenue will continue to be hit.

As online media continues to cause irreversible disruptions to the traditional media, SPH’s core media business is likely to continue to see a fall in its revenue for the long term.

Furthermore, DBS Research highlighted that SPH’s “core adex performance has continued to disappoint despite a better GDP outlook”, suggesting that the business is unlikely to recover or reach new heights even if Singapore’s economy were to bloom.

Diversification gains

SPH’s diversification into the property industry has proved to be a worthwhile investment as revenue increased by 2.0% with higher rental income.

Furthermore, the management has continued to search for opportunities for revenue growth elsewhere as they shift away from their core media business. Recently, they acquired Orange Valley Healthcare and won a tender for a mixed site at Bidadari in a joint venture with Kajima Development Pte Ltd.

SPH has also finished the sale of 701Search at the end of June, and is now expecting to report a $150 million profit from divestment in the next quarter, though UOB KayHian Research has predicted that special dividends from the divestment is unlikely.

However, analysts at UOB have warned that such diversification efforts are “not expected to arrest the earnings decline in the near term” since the earnings from the new investments in Orange Valley Healthcare and Bidadari are still relatively small. The decline in media earnings is also likely to continue to outpace the increase in revenue from these new businesses.

Diversification only way out?

Perhaps the best bet for SPH to save its performance is to continue to reduce the percentage of revenue coming in from its media business, since it is set to decline in the long-term, and shift their focus to its property business instead.

In the long-term, such efforts are likely to pay off is SPH is willing to venture out far enough and invest significant amounts in these projects to replace the fall in income from the media business.

Overall, UOB KayHian Research recommends investors to HOLD, with a target price of $2.90 and an entry price of $2.75.