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Can Singapore Press Holdings Limited Be A Winning Blue Chip Stock?

At the Motley Fool, we favor businesses with superior operations as they are the ones that can deliver long term returns for investors.

To figure out how well a business is run, we can look into a company’s return on equity (ROE). The ROE is a measure of how much profit a company generates for every shareholder dollar used in the business.

While the ROE is a good measure in itself, we can go a step further to gain even more insights. Breaking the ROE down into three other ratios may help us see how well a company is actually being managed.

Breaking up the ROE

In particular, we are looking to break down the ROE into three metrics, namely the return on sales, return on assets, and financial leverage.

ROE return on equity

With reference to the equation above, the first ratio (net income divided by sales) can be referred to as the return on sales or net margin, the second ratio (sales divided by assets) is the return on assets or asset turnover, and the third (assets divided by equity) is financial leverage.

For a succinct description of the individual elements, I turn to a passage from author and analyst Dennis Jean-Jacques’s book 5 Keys to Value Investing:

“Return on sales (ROS) indicates the amount of profits a company is able to keep for each dollar that the company takes in from the sale of goods and services. Asset turnover show the amount of revenues the company is able to generate for each dollar of assets committed. Financial leverage shows investors how many dollars of assets the firm can use for every dollar of equity.”

Putting SPH to the test

Let’s run media giant and property developer Singapore Press Holdings Limited (SGX: T39) through this exercise today.

Singapore Press Holdings, which is better known as SPH, owns many of Singapore’s largest and most widely-run news publications like The Straits Times and The Business Times. Its property business sees it having ownership stakes in retail malls The Paragon, Clementi Mall, and the recently opened Seletar Mall.

The company’s also widely known as a blue chip stock by virtue of its status as one of the 30 constituents of Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI).

In the chart below, you can see how the three components of SPH’s ROE have changed over its past five fiscal years:

image

Source: Morningstar

First off, we can see that SPH’s ROE has been slashed by half over the period under study, moving from above 23% in the financial year ended 31 August 2010 (FY2010) to around 11% in FY2014.

When we dig into the components of the ROE, we may attribute the change in the important financial metric to a marked decrease in both the return on sales ( see red line in the graph) and the asset turnover (orange line).

SPH’s net margins have declined from 36% in FY2010 to around 33% in FY2014. And as mentioned, the asset turnover has been on a downtrend as well, declining from 0.37 in FY2010 to 0.19 in FY2014; part of the reason is that SPH has seen its revenue fall over the past five years.

Meanwhile, SPH has been keeping its financial leverage steady at around 1.8 (see green line) for the timeframe we’re looking at.

Overall, the rapidly shrinking ROE is a cause for concern with SPH. While the company is still able to keep its ROE at a decent level at the moment, the pace of the decline is particularly troubling and investors may want to keep a close eye on how this trend develops in the future.

A Fool’s take

A winning stock may be found when a company demonstrates a consistent track record of generating superior value for each shareholder dollar it has at its disposal.

In this case, SPH has its own set of challenges if it wants to push its ROE back to its previous highs. It’d likely be a tough upward climb because the newspaper giant seems to be facing a difficult transition in its media business from its traditional print format to the newer and arguably more relevant digital format. In the meantime, the company also has to fend off the threat of online advertising.

With that, the onus remains with the Foolish investor to decide if SPH’s current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.