• SPH (SGX:T39) is deconsolidating and transferring its media business to a not-for-profit entity. SPH will incur one-off capitalisation for the media business.
• We view this positively as the restructuring removes the drag from media business and gives financial and shareholding flexibility to grow its business.
• Reiterate ADD on SPH with an unchanged target price, pending the completion of the exercise.

SPH to Transfer Media Business to a Not-for-profit Entity

• SPH announced that it will transfer its media business to a not-for-profit entity (CLG) amidst the ongoing challenge of failing advertising revenue.
• SPH will provide one-off initial resources and funding by capitalising SPH Media with a cash injection of S$80m, S$30m worth of SPH shares (S$10m) and SPH REIT (SGX:SK6U) (S$20m) units as well as SPH’s stakes in four of its digital media investments.
• Post transfer of SPH Media to CLG, SPH will no longer be bound by the provisions under the Newspaper and Printing Presses Act (NPPA). While still subject to shareholders’ and JTC Corp’s (lead agency in Singapore to spearhead the planning and development of industrial landscape) approval, it has received the in-principal approval from the Ministry of Communications and Information (MCI). EGM could be held in Jul-Aug 2021 and the exercise is targeted to be completed 3-6 months later.
• Ministry of Communications and Information (MCI) has said that they support the exercise and is prepared to provide funding support to CLG. A ministerial statement will be delivered on this next Monday (10-May).

Short-term Pain, Long-term Gain

• Although SPH will provide CLG one-off capitalisation, we view the exercise positively as it
  1. removes the drag from media business which reported a PBT loss of S$9.7m in 1HFY21,
  2. removes NPPA restrictions which will give SPH greater financial flexibility to tailor its capital and shareholding structure to seize strategic growth opportunities and
  3. free up resources to focus on other businesses.
• Due to one-off restructuring adjustments and 48.1% and 9.4%, respectively, while PATMI (ex-job support scheme grants and restructuring adjustments) to improve by 35.3% and 11.4% in FY20 and 1HFY21 respectively.
• NAV per SPH share will take a hit and fall 7.0% to S$2.08 while gearing will increase from 30.9% (1HFY21) to 32.4% on a proforma basis due to the restructuring exercise.

Reiterate ADD on SPH With An Unchanged Target Price

• We retain ADD call on SPH and our sum-of-parts-based target price of S$2.09 which is pegged to a 20% holding discount, pending the completion of the exercise.

• If we exclude the media cash balances by S$80m, our sum-of-parts target price for SPH will be S$1.94.
• Assuming the assumptions from target price for SPH will be S$2.18 and S$2.43 respectively. Comparison of the sum-of-parts valuations before and after the restructuring is available in report attached below.

Source: CGS-CIMB Research - 6 May 2021