Thanks for all readers who helped share views on the SPH valuation I did over the weekend.
It turns out the one big piece of the puzzle I missed was SPH’s stake in M1, and iFast.
So I went back and reran the numbers for whole valuation, using market numbers as at 10 May 2021.
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Updated Valuation of SPH
Here are the results (I attached the excel so feel free to play around with the assumptions):
My updated SPH fair value of 2.00 is much closer to SPH’s own NAV of 2.08, which indicates to me I’m on the right track here.
And because I did the valuation, I can comment on how accurate the assumptions I used are.
What are the key assumptions used?
The Newspaper Business
The value of the newspaper business was a big question mark before this.
But post restructuring, the value of the business is clear.
It is negative 110 million, being the amount used in cash, SPH REIT units and SPH shares that will be used to capitalise the new media company.
Listed entities (SPH REIT, Prime US REIT, iFast, Coupang etc)
These are easy too – I just used the market price as at 10 May 2021.
You could argue that the SPH REIT stake should be priced at a premium to market because it is a majority stake (and they also own the REIT manager), and I don’t disagree with that.
So the valuation of SPH REIT is probably on the conservative side here.
Property (UK Student Dorm, Overseas Aged care)
For most of these, I used a cap rate of about 5%.
You can argue that the price has gone up because of the COVID recovery, or you can argue that the prices are still depressed because of COVID.
But either way, I think 5% cap rate is about a fair valuation.
Outside of a distressed sale scenario, I think that’s a reasonable sale price.
M1
This is the big one.
SPH and Keppel jointly privatised M1 in 2019.
But unfortunately we don’t know SPH’s exact stake in M1, and we also don’t know the current valuation of M1, which makes this a tough one to value.
Based on public information, SPH should have a stake of around 20% to 40%. To be on the safe side, I assumed a 30% stake.
And the privatisation offer was around $1.9 billion.
Again I wanted to be conservative so I assumed the valuation today has dropped to $1.0 billion.
Which gives me a valuation of $300 million, or $0.18 per SPH share.
To be fair, I think I was being extra conservative with the valuation here, so there could be potential upside if they execute the turnaround well and divest the stake in due course.
What is the fair value of SPH then?
Using my revised $2.00 book value, I then did a bunch of sensitivity testing.
The current market price of $1.57 puts it at around 0.8x book value.
If it goes up to 0.9x book value, that’s a 12.5% upside. If it goes up to book value, that’s a 25% upside.
But… my numbers are being conservative
Now I don’t deny that I’ve been extra cautious with my valuation assumptions.
In reality, I think some of the stakes like M1, SPH REIT could be sold at a premium if they execute well. Property prices have generally gone up across the board too.
And I also didn’t account for a number of other stakes like Sgcarmart or their other VC holdings.
Who knows, maybe SPH is holding onto another Coupang?
What about conglomerate discount?
Conglomerate discount is defined as:
“A conglomerate discount refers to the tendency of markets to value a diversified group of businesses at less than the sum of its parts. A conglomerate discount can occur when multiple divisions or companies are not performing as well as the overall conglomerate.”
Basically, 1 + 1 + 1 = 2.5, is what conglomerate discount means.
The market values the individual parts higher than the group.
We see that quite commonly in the Singapore context, with everything from Keppel to CapitaLand to SPH suffering from this syndrome.
There are 2 main ways to unlock the conglomerate discount:
1. Corporate restructuring
Something like what SPH announced last week, is the textbook way to do it.
Sell a loss making business, and watch the share price jump.
Unfortunately the market missed the memo, so instead of it leading to a jump in share price, it actually led to a drop in share price.
The details matter guys, if you pay someone to take a core asset off you, doesn’t really look great.
2. Break it up and sell for parts
The other way of course, is to break up SPH and sell the parts individually.
And here there are 2 ways to do it.
You either sell it on (1) a portfolio basis, or (2) individual basis.
Which to pick depends on the assets you own, and your timeline.
Portfolio sale
If you own a bunch of lousy assets with some great assets, and you want to close the deal fast, you do a portfolio sale.
So you put a crown jewel asset in, and you tell any buyer that if they want to buy it, they need to take the lousy assets too.
Then you watch the offers roll in.
Because it’s a portfolio sale, the sale can be done quick. But the problem is that you usually don’t get a great price, because the buyer if forced to take the assets they don’t want, and they need to figure out what to do with it.
Individual sale
Individual sale works best if all the assets are great, and you’re not pressed for time.
So you take your time to put individual assets on the market and get the best price for them, and you don’t have to worry about any asset not being able to sell.
The benefit is you get a good price, but the drawback is that it is slow.
And it only works if your assets are good stuff that people want.
What is SPH likely to do?
Now for obvious reasons I do not have inside info here, so I genuinely do not know what SPH management is going to do.
I’m just reasoning from publicly available information here. Agree or disagree – feel free to share views below.
The problem with SPH’s portfolio is that it is, for lack of a better word, a “rojak” portfolio.
You have Coupang, you have student accom, you have real estate, you have aged healthcare, you have a telco business.
Seriously… What’s the broader strategic vision here?
I think a portfolio deal for SPH will not be easy, unless you can really find a strategic investor whose interests are completely aligned with you.
For example – let’s say I want to buy M1. Do I necessarily want to buy the student accom and SPH REIT stake with it?
So if I absolutely had to guess, I would say an individual sale is *probably* the more likely outcome here.
What’s the risk-reward?
Now as investors, what we really care about is (1) how long does it take to realise the value, and (2) what is the upside.
An individual sale is great because you get a better price, but it is slower.
And it probably happens sequentially, instead of all at once.
So they may sell the listed stakes first, then the property etc. All of which takes time.
Don’t forget the earliest the Phase 1 restructuring can complete is end 2021, so if we give another 3 to 6 months to negotiate a deal, we’re already looking at mid 2022 before any part can be sold off.
That’s real opportunity cost for the funds sitting in SPH stock.
But big caveat – I don’t know what I don’t know, and SPH could genuinely have a big strategic investor in the shadows waiting for this deal to complete to swoop in.
Additional Risks
And don’t forget there are additional risks here.
A big one is if shareholders don’t approve the deal. It’s unlikely in the Singapore context to be honest, but with all the “umbrage” taken at SPH’s CEO, you never know.
And SPH is not a company where any single shareholder has more than 5% stake, so there’s no big boy here who can move things.
Another big risk is execution.
Even after the restructuring, SPH management needs to execute the sale of their assets to realise value. How quick they do it, how well they do it, how good a price they get, all come back to affect the upside.
Would I invest in SPH?
With the revised numbers, the risk-reward definitely looks better than it did over the weekend.
A 20% discount to my fair valuation is decent, and implies the downside here would not be big.
Again – it is an interesting play, which all goes back to price for me.
If it goes back to fair value, that’s about a 25-30% upside from here. But how long would that take, how likely would it be?
Not easy questions, so the key would be risk-reward.
I will definitely be watching the share price in the months ahead. If risk-reward picks up, could be an interesting purchase.
Note: This article is a premium article that first appeared on Patron. If you enjoy articles like this, do consider supporting Financial Horse and getting access to premium articles, my personal stock watch list, as well as my personal portfolio allocation.
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