Tug-of-Fools: SPH – The Bear Case

250px-Bulle_und_Bär_FrankfurtAnyone who has ever grabbed hold of a copy of The Straits Times, or watched a TV show produced by MediaCorp, will have seen Singapore Press Holdings (SGX: T39) in action. In addition, it also has substantial interests in property development, magazines and online media.

Over the last five years, though, the company has trailed the Straits Times Index’s (SGX: ^STI) cumulative return of 9.8% by 2.8 percentage points (dividends not included), as seen from the chart below.

SPH Share Price

Source: Yahoo Finance

Those returns aren’t good, but unfortunately, SPH investors might be in for even rougher times.

Adverts are no longer worth what it was

SPH’s main revenue source has been from clients placing advertisements in its print media. From 2006 to 2012, that form of advertising revenue has made up at least half of its total annual sales. In 2012, it comprised 60% of SPH’s top line.

In other words, SPH’s fate over the next few years will be closely tied to how attractive its print-media is as an advertising platform. But, judging from the numbers over the past three years, it does not look good.

SPH YoY Growth

Source: SPH’s Earnings Release

The chart above shows the year-on-year change for quarterly advertising revenue at SPH. After rebounding sharply in FY 2010, following a slump in the previous year brought on by the Great Financial Crisis, growth has slowed and is now in decline again.

That’s really not much of a surprise if we look at the chart below. SPH’s newspaper readership has been in decline since 2010, possibly caused by easier access to international news from the internet.

The decline in readership does not fulfil advertisers’ aims of reaching as wide an audience as possible with each advertising-dollar spent.

SPH Readership Trends

Source: SPH’s 2012 Annual Report

Property and Online Media can’t save the day either

So, even if print-media might be in decline, can’t the company’s forays into property development and an increasing online presence help? Turns out, those two can’t save the day either.

SPH’s overall pre-tax profits have fallen from S$558m in 2005 to S$441m in 2012. Pre-tax profits from its property business have been erratic, fluctuating between S$45m to S$242m in that period, and is currently at S$214m for the last 12 months.

SPH counts ownership of Paragon, The Clementi Mall (both malls will be spun-off into a real estate investment trust soon) and the upcoming Seletar Mall as part of its property business, along with developing residential properties. Meanwhile, the online business is lumped into the “Others” reporting-segment which has yet to post any profit since FY2005 with losses of between S$9m and S$58m.

Put them all together, and it seems that SPH faces an uphill struggle in trying to generate growing profits in the years ahead.

The declining bottom-line

Ultimately, businesses become more valuable over time as they churn out bigger profits for their shareholders. The reverse is true as well – businesses can also lose value as profits start declining. Will the latter fate befall SPH?

That concludes the bear argument. Click here to find out why James is bullish on SPH.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.