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Tea with Mike: A fundamental analysis of SPH (Part 2).

Friday, September 13, 2013

Now, let’s talk about the recent move to spin off some properties to become SPH REIT. There was some very misleading info and I thought it might be a good idea to clear it here once and for all.
SPH has stated that NET gearing would fall to 9.3% from 40.6%.  That led some to think the interest cost might be lower now, and given such low gearing now, SPH could gear themselves up to 40% again without any new consequences to develop their malls.

First of all, I do not know how the management will utilize the proceeds, and whether they will pay down debts using the proceeds. But NET gearing fell simply because the cash level went up. Absolute debt remains the same and hence finance costs will remain the same.

Also, it is very unlikely SPH will increase gearing further to fund the mall management business.  If they do increase gearing, and start using their cash, NET gearing is going to jump quite drastically.

So let’s assume, they simply use their proceeds for mall expansion, they will have a warchest of $760 million, and gearing will be back at 40%.

What can $760 million do?

Clementi Mall is valued at about $560 million. Well, it depends on which valuation report you take. So, the money can be used to buy or develop another mall of such a scale. If Clementi Mall is any guide, the potential mall would have an NPI of $31 million.
Seletar Mall has GLA of similar size to Clementi Mall. So, let’s assume they have the same NLA, and we take a 30% discount to the NPI, and that given the fact that Seletar Mall is  only 70% SPH owned, Seletar Mall will contribute $15 million. $15 million is hardly exciting but more than enough to offset the deterioration of revenue from the Classified section.

So, in conclusion, if you are looking for growth catalyst in SPH, and hence higher dividend yield, don’t get your hopes too high, but if you are worried that SPH might start going to the dogs soon, I think you worry too much.

Buying SPH will be buying into a stalwart, with a yield of between 5-6%, which is unlikely to see downward revision anytime soon, is not too bad a deal for me.
Read Part 1: here.
AK71: I agree with Mike in that SPH is a good investment for income and it is a stock I will be accumulating on weakness. If share price should retreat to $3.60 a share, a DPS of 21c to 24c would mean a dividend yield of some 5.83% to 6.67%. Pretty decent.
Peter Lynch classified stocks into 5 categories. "Stalwarts" are "big companies which are not likely to go out of business. The key issue is price, and the PER will tell you whether you are paying too much. If you plan to hold the stock forever, see how the company has fared during previous recessions and market drops." (Page 230 in "One Up On Wall Street".)


Musicwhiz said...

So what's the attraction? If everyone knows SPH is going into decline and they are probably going to use their cash and increase net gearing, it doesn't sound exactly compelling. Unless they reduce their gross debt, they will still be coughing up the same interest expenses and cash will still flow out.

Why would they "double count" the subscriptions? Why not just state things as they are (i.e. how many PEOPLE are subscribing)? As for ad revenue, yes it is a captive market but the question here is growth - is the market saturated and has growth been priced in?

Next would obviously be ASP - SPH can probably raise ASP to offset the drop in volume but would this result in zero growth overall in revenues and cash flows? Good question to ask and to find out.

Because to me, if you are buying something without growth and would in fact face a decline, then you've got a risk of dividends falling at some point in the future, which means you are paying too much at this time for a yield which may not be sustainable. Investors have got to take a long hard look at the business and ask if they are paying too much - not on a PER basis but on a FCF yield basis.

P.S. - The table in Part 1 would need some formatting. I had a hard time reading the ratios as it was in decimal places. What you could do is to use Excel to format it to % format and centre it for all cells, then do the same for all numbers to 2 dp. Thanks!

Solace said...

Hi Mike & AK,

When i was looking through the prospectus of SPH Reits, a question comes to my mind.

There is the issue of the income support SPH is still receiving and will continue to receive for another five years for its Clementi Mall from the vendor CM Domain

income support represents almost one-fifth of property income at Clementi Mall (18.1%).

And without income support and all else being equal the yield will fall to 5.35% for FY13, and 5.58% for FY14.

This income support boosts the yield. What happens when this support ends?

There also seems to be shortfall in its operating cash flow to pay all its bills. it may have to roll over loans, or issue new units.

Perhaps the concerns i have explains why i did subscribe to SPH REITS.

Solace said...

typo, i did NOT subscribe to SPH reits.

AK71 said...

Hi MW,

We can always expect some thoughtful questions from you and I am sure Mike will be replying to you soon. :)

I just want to say that I am investing in SPH for income. Through good times and bad, it has been dependable.

I definitely did not look at SPH as a growth company although its forays into the real estate sector held promise. Its recent spin off of SPH REIT was a master stroke. If it does more of this, it could become a growth company akin to CapitaMalls Asia (which, however, pays miserly dividends).

So, I find SPH attractive on these two counts now. From an investment purely for income, it could morph into an investment for income and (modest) growth. :)

AK71 said...

Hi Solace,

I did not take part in the SPH REIT IPO either. I thought it wasn't value for money. :)

Well, the way income support works is to ensure an attractive return for investors while waiting for the mall to deliver the expected (higher) return over time. So, the question is whether the mall's rental income will rise high enough to pick up the slack when the income support ceases.

Actually, for new malls, this is not unusual. When leases are due for renewal, after 2 or 3 years from the opening of the mall, that is when we see rental rates increasing and in some cases by as much as 50%. That is when a mall is mature and if the income support lapses then, it is a non issue.

Having said this, I still prefer investing in SPH instead of SPH REIT. :)

Anonymous said...

Hi MW,

They didn't actually "double count" literally, they have a total subscription number that include BOTH printed and digital. They do break down the figures for both. What I am trying to say here is, the number for digital subscription is highly questionable since I will get it free if I subscript to the printed.

I agree about growth as a margin of safety, I was not interested in SPH before until they spin off their properties into reits. They still cost the same now ($4)as compared to before they do the reit exercise.

I did some quick calculations I found that with 30% less income from reits, their DPU should still be 21 cents, (they might keep it at 24 cents using their cash to keep shareholder happy)

I am not so optimistic about growth as compared to AK, but I am confident (rightly or wrongly)that the decline the whole world is doing about will be be insignificant or nonexistence baring a recession, it should be (barring a recession), good for at least a decade.

Here is why:
1)The revenue fall in classified can be offset by the display or/and the mall development business.
2)They recycled their capital through reits (very similar to what capital land is doing again and again, CMA,CMT). Yes interest cost remain the same, but they have 760 million to use for mall development if they otherwise have not gone for reits, they might have to increase gearing, now gearing can stay at current levels while they pursuit expansion.

Seletar mall will be contributing on 2015 onwards, the next development from SPH by using the warchest will take another 3-4 years earliest. By then, Seletar should be ripe enough for picking from SPH reit and get capital recycled again. If we look at SPH Reit gearing, they should have rooms for 2 acquisitions of Clementi mall scale.

GIven SPH reit is internally managed, I believe they will buy from SPH to benefit the parents than actively sourced for value buys to benefits unithollders solely.

That is why I say SPH should be good for the next decade. Beyond a decade, I think is really too far for me.

This year economic numbers are better, we should see if the display revenue increase this year or next, to see if my hypothesis hold. Of course, if classified deterioration is faster than 5%,the sums will need to be rework.

If they bid too aggressively for a mall now, they can wait for valuation to improve and undo their mistake by selling it to the Reit

As for cashflow, you got me here, I know they are generating FCF years after years but have not dig deep into the trends and ratio, well there is sometime to do for some nights.

Thank you for posting your thoughts, didn't expect a comment from you =)

Anonymous said...

Hi Solace,

I didn't buy the reits too, the yield just isn't worth it. In fact I dissuade my family members from buying it.

AK can answer your qn about rental gurantee, I am not too familiar with this so I can't comment.

I do believe that yield might improve when they geared for acquistions, but even if they do so, it is still not attractive in my opinon.

I believe reits are a spin-off for parents company for "asset light strategy", there is nothing wrong or detrimental with that, but I am not sure (no track records),how yield accretive the reits acqusition of seletar mall in the near future will be.

When I invest in Reits, yield is a very big consideration although I consider other things too, so with SPH reit and SPH giving roughly the same yield, its quite a obvious choice to me

Solace said...

Hi AK and Mike,

Thanks for replying. It helps to clear the questions i have. :)

And AK & Readers, There is a discount for "The Five Rules for Successful Stock Investing" at Better World Book.

Selling for $14.48 (Save 27.4%). An excellent book and nicely priced. 3 copies left :D

Singapore Man of Leisure said...


I think the recent corporate action by Sabana Reit can be applied to this interesting SPH discussion.

Same stock, same private placement. One investor sanguine, one "investor" quite emotional (no offense).

What gives?

Yes, you've guessed right!

Different price entry ;) LOL!

Our views on SPH may differ depending if we have bought (or intend to buy) SPH at $4.50 or $3.50...

Or maybe if you have too high share of cyclicals in your portfolio, you just want a boring defensive counter-weight just to re-balance a bit.

Context and perspective.

AK71 said...


You good! :D

I will add by asking some questions:

So, what is considered a good price? At what price do we see value for money? What are our motivations for being invested? Do we have what it takes to be invested? Are the fundamentals still the same as before or have they strengthened or weakened?

There is a whole gamut of questions we can ask but might not want to or have to ask, depending on what kind of investors we are and what kind of resources we have.

OK, if this has not confused you, I am confused. ;p

Singapore Man of Leisure said...


What is good price?

I remember someone in cbox says he tries to buy 1 bid below AK.

I agree.

Buy below AK's entry price is GOOD price! Good, better, best!


AK71 said...


Buy one bid lower than a confused AK? This person is more confused than AK. Bad idea lor. ;p

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