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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 21 Sep 2018, 04:14 PM

 

Singapore Press Holdings (SPH) - Johnny Come Lately

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  • SPH’s acquisition of UK student dormitory assets for £181m leaves us unenthused. The bulk of the acquired portfolio lies in regions that have rental growth below the country’s average of ~3%, while half of the properties are in regions that exhibit oversupply issues.
  • The current acquisition arrests earnings decline at best. Raise earnings by 3-4%.
  • Maintain HOLD, with an unchanged target price of S$2.58. Entry price: S$2.45.

What’s New

Acquires 14 student dormitory assets for £181m.

Singapore Press Holdings (SPH) had on 10 Sep announced the acquisition of 14 student dormitory assets across six towns and cities, with capacity of 3,436 beds, from Unite Group. The transaction was for £181m (S$321m), with a net initial yield of 6.3% according to Unite’s announcement

The deal comes with conditions that allows for a downward adjustment in rates, as well as a rent guarantee for any shortfall up to 30 Nov 18. On a pro-forma basis, the acquisition adds an estimated S$12m to SPH’s net earnings.

Stock Impact

  • Following a review and due diligence into the acquisition, our conclusions are:

Net initial yield of 6% for a less-than-attractive portfolio of assets.

About 84% of the assets are found in regions that are likely to exhibit rental growth rates below the country average of 2.9% seen in 2017. Realistic growth rates are closer to 2.5%, and it is possible that certain regions will face further downward pressure owing to oversupply (see next point).

Whilst SPH has acquired a portfolio of student dormitories at a discount to prime regional yields of ~5.5%, it is not without reason.

Half of assets are concentrated in regions facing oversupply.

According to Cushman and Wakefield (C&W), the regions of Huddersfield and Sheffield have a student-to-bed ratio of 1.4 and 1.6 respectively. These two areas make up 52% of the acquired portfolio. Based on C&W’s benchmark, an oversupply situation exists when the ratio is below 2.0.

New developments in the pipeline will likely exacerbate the situation, as they make up 10-30% of existing supply. Even if occupancies are currently > 90%, it is likely that intense competition will suppress or even drive negative rental growth.

Acquisition mitigates earnings decline from media business.

At the heart of it, the acquisition serves to stem the earnings decline arising from the media business, which has fallen by S$10m-12m p.a. over 2016-17. Assuming that print revenue decline re-accelerates into FY19 (due to abating tailwinds from property advertising), the acquisition only stabilises SPH’s earnings.

Further acquisitions will be required to grow earnings meaningfully.

Risky strategy to grow earnings inorganically.

SPH is late to the student accommodation game. Yields are at or near 10-year lows. With rental income for the current student accommodation portfolio unlikely to grow at above average rates, the only valuation upside left is from falling cap rates. This is a high risk gambit as SPH is acquiring assets at the late stage of the cycle.

Extrapolating the strategy to one or two more assets could help SPH grow earnings, but at risk of overpaying.

Earnings Revision / Risk

Interest expense likely to rise by ~20% for FY19.

Assuming a debt:equity ratio of 60:40, and 3% interest on the debt, interest expense is expected to rise by ~18% to S$40m for FY19 as a result of the transaction.

Tentatively raise earnings estimates by 3-4% for FY19-20.

Our earnings estimates for FY19 and FY20 rise to S$215m (+4%) and S$218m (+3%), less than the indicative S$12m in incremental net profit from the acquisition. This stems from our expectations of slightly higher staff costs in FY19. It also assumes that print revenue will decline at a slower rate of 6% in FY19, vs FY18 assumption of 13%.

Should the coming results not be indicative of lower print revenue decline rates for FY19, our estimates are likely to revert to the previous forecast of S$207m or lower

Valuation / Recommendation

Maintain HOLD with an unchanged target price to S$2.58.

Our target price of S$2.58 is largely unchanged, as the cash and additional debt for the acquisition is offset by the marginally higher value of the UK student dormitory assets. The student dormitories are valued at S$337m, reflecting a 6% cap rate.

We are not enthused by the recent acquisition, and maintain our HOLD call.

Source: UOB Kay Hian Research - 13 Sep 2018

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