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Is Singapore Press Holdings a good buy? Part 1 / 2

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One of the first ever articles I wrote (this was back in 2011) was on local companies with economic moats. 

This was really long ago and thanks to the power of the internet its still out there:

https://quantitativevalue.org/2011/01/16/economic-moats-of-locally-listed-companies/

Back then, I wrote:

SPH is the dominant provider of printed newspaper and magazines in Singapore. It has done extremely well over the years. However, its economic moat has weakened somewhat in recent years with the rising popularity of the Internet.  

Ah, if only I realized the significance of what I wrote.

It was also one of the first companies I ever analyzed by familiarity seeing that it was within my simple circle of competence.

The company was one of the “blue-chip” stocks, and traded within a very tight region of $3.80 to $4.00. I never found the stock particularly cheap or expensive and that was that.

Simplified Financial Ratios:

Before digging deeper, let’s just take a simple look at SPH’s operating metrics.

Source: Morningstar

Return on equity has been declining dramatically to high single digits in recent years. Its pretty startling consider that SPH was posting ROEs of 20%+ back in the day/ 

Dividends have not been spared in recent years either. So what’s been happening?

Source: Shareinvestor.com

Traditional media is dying

When’s the last time you bought a magazine or The Straits Times?

That pretty much sums up what’s wrong with SPH. The world has changed dramatically – and more importantly the way we consume information has altered with it.

Operating Profit Before Tax 2011 2012 2013 2014
Media $362 $326 $289 $252
Property $107 $142 $141 $148
Others ($20) ($14) ($28) ($15)
Treasury and Investment $49 $32 $13 $47
  Total Operating Profit Before Tax $499 $485 $415 $432
         
Operating Profit Before Tax 2015 2016 2017 2018
Media $240 $175 $62 $92
Property $174 $179 $188 $183
Others ($25) ($17) ($9) ($17)
Treasury and Investment $50 $50 $49 $101
  Total Operating Profit Before Tax $439 $388 $291

$359

In ‘ Millions; Source: CapitalIQ

The rise of internet giants like Facebook and Google has also seen the decline of traditional publishers (Global Yellow Pages has also seen its fortunes change).

On the flip side, you have plenty of new different content providers popping up taking market share from SPH.

As a result, its traditional advertising business which was pretty much the cash cow of SPH has been cut off. When the core cash flow goes, so does the dividend.

 

The dangers of buying based on past performance

You’ve probably seen the line “Past performance is no indicator of future performance”. In this case, its 100% true.

Investing is not just about looking backwards at old financial metrics. It involves a qualitative judgment about the future of the business too.

After all, dividends can only be paid from cash flows generated for the business. Just because a company is no guarantee of success going into the future.

Adding to that is that “halo effect” of old timer blue chip companies that can command high valuations until the general public actually realizes that the underlying business is no longer what they think it is. 

When that happens, the result is often painful.

 

 

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