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Singapore Press Holdings Limited Just Did Something Super Investor Peter Lynch Would Likely Frown Upon

Yesterday, newspaper publisher and property developer Singapore Press Holdings Limited (SGX: T39) announced that it has acquired Orange Valley Healthcare for S$164 million.

Orange Valley Healthcare runs five nursing homes scattered across Singapore. These homes have a total of 900 beds and are strategically located near major hospitals or housing estates with a high elderly population density. Prior to this acquisition, Singapore Press Holdings had no experience with running nursing homes.

This move by the company would likely be frowned upon by the super investor, Peter Lynch.

A great investor

Lynch is an investor worth learning from. He ran the US-based Fidelity Magellan fund from 1977 to 1990 and in those 13 years, he racked up annualised returns of an astonishing 29%. For perspective, a compound annual return of 29% for 13 years would turn a $1,000 investment into over $27,000.

In his classic investment text One Up On Wall Street, Lynch wrote (emphasis is mine):

“Restructuring is a company’s way of ridding itself of certain unprofitable subsidiaries it should never have acquired in the first place. The earlier buying of these ill-fated subsidiaries, also warmly applauded, is called diversification. I call it diworsification.

In the passage above, Lynch introduced the term diworsification to the investing lexicon. It can be understood as the act of a company acquiring completely unrelated businesses, and in the process, causing its overall results to suffer.

Singapore Press Holdings’ desire to diversifiy

There may be a good reason why Singapore Press Holdings is trying out something completely new.

In the six months ended 28 February 2017 (1H FY2017), the company saw its Media segment’s profit before tax fall by over half from S$102 million a year ago to S$50.6 million. The Media segment, which houses Singapore Press Holdings’ newspaper publication business, is the largest revenue contributor; in 1H FY2017, the segment accounted for 72% of the company’s revenue.

The Media segment has been under threat for a while now. As you can see in the chart below, Singapore Press Holdings’ newspaper ad revenue had fallen in each year from FY2012 to FY2016. In 1H FY2017, the company’s newspaper ad revenue continued the trend by posting a 16.6% year-on-year decline.

Singapore Press Holdings' newspaper total ad revenue year-on-year changes
Source: Singapore Press Holdings’ earnings presentation

In July 2016, the company also announced that it had undertaken a comprehensive review of its Media business. “The aim is to better address the evolving needs of our advertising customers and deliver effective, integrated solutions across our various media platforms,” said Alan Chan, Singapore Press Holdings’ chief executive officer.

When Singapore Press Holdings announced its earnings for the first quarter of FY2017, it also revealed that the review of its Media business had ended. Part of the review involved a retrenchment exercise and impairments to certain assets in the Media business.

What the future may bring

It’s too early to say for sure that Singapore Press Holdings’ acquisition of Orange Valley Healthcare would end up being an example of Lynch’s concept of diworsification. But, there really is no common link between running nursing homes and Singapore Press Holdings’ current line of businesses.

Sure, the company has a property arm where it develops retail malls and residential projects, and invests in retail malls. But, they are completely different activities when compared to operating nursing homes. This makes me think that Lynch would not have a high opinion of the acquisition.

But, that’s just conjecture on my part. Nonetheless, current and prospective investors in Singapore Press Holdings may want to keep their eyes on the performance of the company’s business in the future.

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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 writer Chong Ser Jing doesn't own shares in any companies mentioned.