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When to buy SPH's stock?

Saturday, July 5, 2014

A reader who attended InvestX Congress wrote to say he enjoyed my presentation at the event and that he was especially enlightened as to why I thought SPH made a better investment for income compared to SPH REIT which led to me plonking down more money in SPH's stock. He then went on to ask if this is a good time to buy more of SPH's stock.

Yikes! I am very afraid of questions like this, regular readers of my blog would know.

So, I asked him what did he think the fair value of SPH's stock was? If he were a value investor, he would want to buy it undervalued. Of course, I reminded him that valuation is a subjective exercise and depending on what he focused on, he could come up with different fair values.

Personally, I feel that the fair value is about $4.20 a share, give or take a few bids. So, I do what I sometimes do and which I did not talk about during InvestX Congress. It wasn't something I was supposed to talk about at the event.

What did I do?

I looked at the charts.

Click to enlarge.

I see lower highs on the MACD, a momentum oscillator, as higher highs in the share price were reached at $4.17, $4.26 and $4.27. This is a negative divergence. This is an indicator that weakness is on the horizon.

Immediate support is currently provided by the flattening 200 days moving average (200dMA) at $4.14. Is this support going to be tested next week? Possibly.

Bearing in mind that the 200dMA is a long term moving average, if support at $4.14 should be breached, we could see SPH's share price moving much lower. How much lower? That is hard to say but we can use Fibo retracement lines to get a glimpse of where the supports are likely to be.

Click to enlarge.

Share price could retrace to $4.10 (the 50% golden ratio) or $4.055 (the 38.2% golden ratio). The support provided by the 23.6% Fibo line is a weak one at $4.00. So, if share price should go that low, we are likely to see $4.00 support breached.

So, given the technical analysis I did, if I didn't yet have a long position in SPH, I might wait to get some at immediate support which might be moved higher to $4.15 since the 61.8% golden ratio is at $4.145.

If I already had a long position in SPH (which I do), I will wait to accumulate on weakness which, given the negative divergence observed in recent weeks, looks likely to happen.

Related post:
SPH: Within expectation.

11 comments:

Capricon said...

Hi AK,
Can share how and why you value SPH around $4.20?
I understand valuation is subjective.

Thanks

AK71 said...

Hi Capricon,

I look at SPH very much as an investment for income and I feel that it is pretty REIT-like. So, the valuation technique is similar to how I would value a REIT.

Here is a relevant blog post on SPH where CIMB shared how SPH was a cheaper alternative than retail properties S-REITs: SPH: Better investment than retail S-REITs?

If we look at the distribution yields of "blue chip" retail S-REITs, we see:

CapitaMT 5.34%
Suntec REIT 4.95%
SPH REIT 5.4%

And these yields are achieved on the back of gearing levels of between 27 to 37%. Compared to these levels, SPH's leverage is almost negligible.

So, even if SPH should have a dividend yield lower than these REITs, it would still be "cheaper".

A 5% dividend yield is more than enough compensation to me for the risk of being invested in SPH which is pretty low. Hence, the belief that a fair value is $4.20. :)

Happy_heart said...

Thanks for sharing,AK. :) adding this to my shorting and longing watchlist.

Capricon said...

Thanks AK, interesting way of valuation without those complicated formulas base on ratios, assets, cash flows ... ๐Ÿ˜„๐Ÿ˜„๐Ÿ˜„๐Ÿ˜„๐Ÿ˜„

Kyith said...

when it was 4.40 at 2004-2005 it was yielding 6-7%. now its yielding 5% at 4.20 and thats fair value. i dont really understand how this valuation thing worked out since both are rather unleveraged.

AK71 said...

Hi Happy_heart,

Aiyoh, I am just talking to myself as usual. ;p

AK71 said...

Hi Capricon,

I try to keep things as simple as possible and one of the things I do is comparative analysis. Of course, I have to hope that the comparisons and the analysis make sense. -.-"

AK71 said...

Hi Kyith,

Er... 2004 was so long ago. I can only try to make sense of things now using current day realities and, currently, a 5% dividend yield is not too bad given SPH's balance sheet strength when we look at the alternatives available.

If we feel that a 5% dividend yield is not attractive enough, we should avoid retail properties S-REITs like CMT, Suntec REIT and SPH REIT at current prices too.

It has definitely become more challenging for income investors to work their money harder compared to just a few years ago.

Sanye ◎ ไธ‰้กต said...

Nice analysis. This "uncle stock" has been my anchor stock since ages. By your FA, my cost of it is below its fair value. You just made my day! :)


AK71 said...

Hi Sanye,

I like the analysis too since I got in at $2.80+ to $3.50+ before. ;p

However, SPH has always had difficulty trading much higher than fair values offered by analysts. LOL.

AK71 said...

What I am interested in is the recurring income.

In a press release on Tuesday (Apr 14), SPH said recurring earnings for the quarter ended Feb 28 was S$68 million, an increase of 27.1 per cent. This was attributable to a 9.1 per cent drop in total operating expenditure as 2014’s results included an impairment charge of S$9.9 million and special bonus costs of S$10.4 million.


Meanwhile, investment income was S$19.2 million compared to a loss of S$5.5 million in the same period last year, and comprised mainly gains from sale of investments, SPH said.


SPH’s group operating revenue fell 3 per cent to $270.3 million, dragged down by the performance of the media business. Revenue from the media business declined by 7.1 per cent year-on-year, with advertisement and circulation revenues falling by 8.0 per cent and 7.7 per cent respectively.


However, the company noted that the decline in the media business was partially cushioned by stronger performance from the property segment. The segment’s revenue rose 17.2 per cent to $60.6 million, boosted by the contribution of S$8.1 million from The Seletar Mall.


Source:
http://www.channelnewsasia.com/news/business/singapore/sph-reports-14-4-decline/1783946.html

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