SPH launches new SGD senior 10-year notes at 3.4% IPG

After issuing the SPHSP 4.500% Perpetual Corp (SGD) in June and SPHSP 4.000% Perpetual Corp (SGD) in November, Singapore Press Holdings Limited (“SPH”) is tapping the SGD bond market again, this time with a senior unsecured 10-year straight bond. We highlight the company’s recent financial performance and provide some commentary on the bond pricing.

About SPH

• Incorporated since 1984, SPH is Singapore’s largest print and media company. The firm manages a number of newspapers including The Straits Times, Lianhe Zaobao, and Shin Min Daily News.
• Listed on the Singapore Exchange with a market cap of S$ 3.4 billion as at 14 Jan 20.
• Over the years, SPH’s property segment has grown to become its largest profit segment. The group owns approximately 70% in SPH REIT, a retail REIT listed in Singapore; 85% equity stake in Figtree Grove Shopping Centre (“Figtree”), a shopping center in New South Wales, Australia; 50% stake in Westfield Marion Shopping Centre, a shopping center in Adelaide, South Australia; The Seletar Mall; and a portfolio of student accommodation in the UK.
• Excluding treasury shares, we estimated that holders of management shares had just about 0.3% of SPH’s total share capital. However, each management share entitles its holders to 200 votes for "any resolution relating to the appointment or dismissal of a director or any member of the staff", effectively giving the management shareholder group control of 67% voting rights in management and director appointment decisions. The Great Eastern Life Assurance Company Limited and Oversea-Chinese Banking Corporation Ltd are the largest management shareholders, together controlling effectively 26.5% voting rights for special resolutions.

Credit highlights

SPH’s total revenue fell 3.8% YoY to S$ 249m in its first financial quarter ended November (“1QFY20”), primarily because of lower operating revenue from the group’s media business (-13.6% YoY to S$ 140m). Contributions from additional student accommodation assets (acquired in 2019) and Figtree (acquired in December 2018) in the property segment helped offset the decline in revenue. In 1QFY20, SPH’s property business contributed S$ 81m of operating revenue, up 18.9% YoY.

The recently acquired student accommodation assets seemed to provide lower profit margins, as SPH’s total costs rose climbed 6.1% YoY to S$ 195m. One-time retrenchment costs of S$ 7.2m, coming from a rationalization exercise involving the sales and content teams in SPH’s media division, also pushed costs higher. The group’s operating profit consequently declined 27.9% YoY to S$ 54m, which translated to a lower reported operating margin of 22.1% (1QFY19: 29.4%).

SPH’s reported operating profit excluded fair value gains on investment properties, net income from investments, and share of results of associates and joint ventures, and provides a good measure for the group’s recurring earnings. Taking SPH’s operating profit plus finance costs as its earnings before interest and taxes, we find the group’s interest coverage ratio (EBIT over finance costs) at 5.1x in 1QFY20, a decent level albeit significantly lower than the 8.0x recorded in 1QFY19. Besides a lower operating profit, a 22.6% YoY jump in finance costs to S$ 13m also weighed on SPH’s interest coverage. The higher finance costs were in line with additional borrowings taken to fund the acquisition of the student accommodation assets and Figtree.

SPH also accrued around S$ 1.7m of distribution payable on its S$ 450m worth of perpetual securities in 1QFY20. Including perpetual distributions, we find the group’s adjusted interest coverage at 4.5x.

Including lease liabilities, SPH’s total borrowings increased from S$ 2.06 billion to S$ 2.18 billion in the three months ended November. The increase in borrowings was primarily due to the recognition of lease liabilities totaling S$ 101m following the adoption of new accounting standards (SFRS(I) 16). Meanwhile, cash and cash equivalents rose from S$ 554m to S$ 855m over the same period, after the company issued S$ 300m of 4% perpetual notes in November.

SPH’s net gearing (net debt over equity) thus dropped from 32% as at end-August to 27% in 1QFY20, while its gross leverage ratio (total debt over total assets) were stable at 28% (4QFY19: 29%). Treating the S$ 450m worth of perpetual securities as debt, we estimated SPH’s adjusted net gearing and gross leverage ratios at 39% (4QFY19: 36%) and 34% (4QFY19: 31%) instead, still reflective of a healthy balance sheet.

Bond pricing

We have considered the valuation of SPH’s new SGD ten-year note primarily relative to comparable property firms as we think SPH is now more of a real estate company than a media group. Taking SPH’s profit before taxation (“PBT”) for instance, the group’s property business contributed approximately 80% of its PBT in 1QFY20. Also, we focused on the unadjusted credit metrics (in other words, treating perpetual securities as equity) of SPH and its peers, as the new bond ranks senior to its existing perps.

At its initial price guidance (“IPG”) of 3.4% area, the new SPH SGD ten-year note offers around 169 basis points above SGD swap rates. Looking at a selected list of comparable credits (see Table 1), our first observation was that Frasers Property Limited’s (“FPL”) 4.15% ‘27s look interesting with their yield to maturity of 3.65%, which is high among comparable property non-perpetual credits. FPL had a much higher net gearing than SPH, but FPL’s operating scale was also much larger with total assets of S$ 37.6 billion (SPH: S$ 7.7 billion). On the other hand, the 3.4% IPG of the new SPH note looks decent versus the company’s perpetual securities, conceding little yield for its senior unsecured ranking.

Overall, we think the new SPH SGD senior ten-year issue is priced fairly at the IPG of 3.4%, although we would be unsurprised if market technical factors tighten the final pricing or push prices up in the secondary market. In contrast to the robust Asian USD new-issue market since the turn of the year, new SGD corporate papers have been relatively scarce, and the new SPH note offers a rare opportunity for SGD investors to diversify into the media sector.

Table 1: Relative valuation

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in FPLSP 3.650% 22May2022 Corp (SGD) - Retail. The analyst(s) who produced this report holds a NIL position in the abovementioned securities.