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Tea with Mike: A fundamental analysis of SPH (Part 1).

Friday, September 13, 2013

SPH is a media company and many believe it has a dying media business. However, in the short to medium term, I think we cannot be so sure to deliver such a verdict.

First, let us look at the table below.

Click to enlarge.

Advertisement revenue has some correlation with economic activity, and the number we look at here is the GDP.
Margin is also not declining in a straight line but is rather volatile, with better margin during boom years, as can be seen in 2010 and 2004.

But, what about the onslaught of digital platforms? Do they not have an impact on SPH? Well, the answer is  "no". Huh? Am I contradicting myself here?

Advertisement comes from three segments: Display, Classified and Magazine & Others.

As I have posted in a forum before, if we track the revenue of these segments from 2009 to the most recent quarter (i.e. the most recent trough to recovery), the weak 2008 Q4 to 2009 Q4, Classifieds and Recruits ads suffered the biggest drop as compared to Display. When the weak recovery started in 2010, total advertisement revenue was smaller than in 2012 and 2013 YTD, yet Classified's revenue was higher in 2010 than in 2012 and 2013 YTD.

Hence, declining business was due to the decline of the Classified segment, which included the Recruits segment. It makes sense too, if you want to buy a house, or look for a job, you may no longer turn to the newspaper Classified segment anymore as there are many websites offering such services.  However, if you are talking about M1 or other telcos, or the supermarkets trying to market their promotions, chances are they will still do it through the Display segment of the newspapers.

The "Display" sections will probably be around for a long time and might even grow from strength to strength due to Singapore's growing economic strength with a bigger domestic economy over time.

The "Classified" section revenue was 28% of 2012 Ad revenue, at 218 million and continues to shrink in 2013.

Now, to look at it from the perspective of whether SPH's other businesses can offset this shrinkage, a 5% annual deterioration is only $11 million which is about 1.3% of annual advertisement revenue and less than 0.5% of total revenue. I seriously do not think it would be a tall order to offset this.

Another concern is circulation figures, the circulation of printed papers have been in constant decline, 2012 figures was pumped up because they included digital subscriptions, which I feel resulted in double accounting as the print and digital version would likely overlap (i.e. people who subscribed to print would automatically be given digital accounts).
So, if circulation keeps falling, wouldn’t Display advertisement revenue be affected too? My personal opinion is that as long as there is no drastic fall in circulation, Display segment revenue will be more affected by economic activity than by circulation, simply because SPH is a monopoly (and we might want to remember that they have a stake in Today too) and there are no credible alternatives.
In Part 2, Mike will talk about SPH REIT and what it means for SPH: Continue reading here.


Solace said...

Hi Mike,

Thanks for the well written post. I like the insight you have provided.

weakness lies in the decline of print circulation which has been in this trend for the past ten years.

Also, ad revenue remains reliant on the strength of the domestic economy.

I think Digital Media is both a threat and opportunity. Ease of digital Media provide a threat to print Circulation. But at the same Time SPH is also investing in Digital Media.

On the bright side, SPH maintains its monopoly in newspaper publishing.

There could be opportunities to acquire online media businesses.

Rental income from investment properties Paragon and Clementi will bring in consistent income.

There is also a few questions about SPH Reits that i like hear your insight. I will ask at your part 2 of yr post, Looking Forward :)

Anonymous said...

Hi Solace,

Thank you for dropping a comment, I am glad someone find the reading enjoyable.

I don't see the acquisitions of online business a growth opportunity, rather, it is a inevitable choice to reduce bleeding.

SPH has been millions for sgcarmart, and most recently another car auction site, the kind of services the "classified" provide. I actually hope they start buying some online platforms dealing with properties, like property gurus and etc.

I think Digital platforms will be problematic for SPH, although SPH does not have a choice.

First, how much to pay for a high traffic site? It does not cause a bomb to get a site up and going and earn some decent money. But it is not easy for SPH to make any money after paying millions to pay the site and recover the capital.

Second, limited value for money choices. Lets assume such purchases become a capex, cost and not revenue generating investment, how then to make it value for money. Digital plaforms sphere is highly fragmented, even the leaders might not have significant market shares (>30%), of course there are exceptions, so what is there to buy after mopping up the few exceptions.

Third, competition. The online world is rather unregulated if you compare how printed business in SIngapore is regulated. You might have bought a winner, or a leader, but if there is not innovation, how long can they stay a winner? The barrier to competition is almost nonexistence.

SPH cannot grow but tapping into new markets, I doubt they can replicate the success overseas. I doubt they can innovate their products such that it further increase existing market shares (It is already a monopoly), so it did the next best thing, diversifying into retail properties development.

I am just imagining here:
Singpost is trying to build up an online retail presence and used its logistic arm to support such transactions, shouldn't the two tie up and explore the area?

Kyith said...

Hi Mike. Very well done. Really appreciate the interpretation.

I think like what Solace say it is a opportunity as well as a threat.

They are obviously going the telco model where the different medium is bundled together as part of "circulation" to stem it.

But we will not know about the success of digital.

Even they way to go is different.

If i pay for the straits time, why show me ads???? why are you degrading my experience?

Pay wall is a rather bad concept. they will need to find better ways to monetize.

they have many channels, can SPH create their own publisher advertiser network and bundle their advertising across medium? what they could do is let the advertisers show the signal-to-ads ratio that SPH have gathered.

news print are the only channel that the publisher have the signal-to-ads success rate.

the more analytics you provide to the advertisers the more they will be willing to advertise with you

Anonymous said...


Thank you for dropping a comment. Appreciate it. I notice the bundling effort and have thought of multiple platforms advertising, malls, expo etc.

Then again, I wonder how much growth there can be through such measures. It's a highly effective strategy for the telcos to try to gain market shares. But I wonder if it will work for SPH. Pay TV, broad band and phone are essential 3 different products each with own demands, if I want 3 and can get a better deal, of course I would. But here we are talking only about platforms, the product is still advertising.

I am not sure if starhub says u can now watch our shows on TV, through app and our channel online, will u actually pay more?

Wow u are the expert on advertising, can u explain what does " the more the analytics SPH provide, the more willing advertisers are to pay"? Does it mean the target numbers reached ? And the profile of ppl reached??

Anonymous said...

Hey kyith,

Are u also drizzit fromVB??

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