SINGAPORE (Aug 23): UOB Kay Hian is maintaining its “hold” call on media group Singapore Press Holdings (SPH) with a lower target price of $2.85 compared to $2.90, as well as a recommended entry price of $2.60.
This is based on the valuation benchmark for SPH’s healthcare business at 20 times of its 1-year forward price-to-book ratio, with every $1 million in additional earnings for SPH to impact the group’s valuation by 1.5 cents.
The research house is in the view that SPH’s recent acquisition of Orange Valley Healthcare (OVH), which was announced earlier this year in April, is unlikely to be an earnings game-changer in the near term.
See: SPH acquires nursing home operator Orange Valley for $164 mil
In a Wednesday report, analysts Foo Zhi Wei and Andrew Chow opine that negatives from SPH’s media business have been largely priced in, and that another steep decline in the group’s share price is not expected unless its media segment sees another sharp drop in revenue.
While OVH reported relatively stable revenue over FY14-16, the analysts point out how the nursing home operator’s net profit was in a downtrend due to rising staff costs. Other factors eroding the company’s bottomline included rising raw material costs and depreciation, they add.
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Regardless of OVH’s expected contributions of $5-6 million to SPH’s financials over FY18, Chow and Foo estimate the projected sum to make up only about 3% of the group’s projected net earnings of $217 million.
Furthermore, the positive contribution is anticipated to be largely offset by an expected drop in SPH’s media earnings, which the analysts highlight have already fallen by $58 million in the year to date (YTD).
Based on the assumption of $104/day per bed and a net margin of 17%, they calculate that OVH would have to increase its current bed capacity from about 900 beds to over 2,800 in order to achieve a net profit of $18 million to make up for SPH’s expected core earnings decline in FY18.
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This is unlikely to happen in the near-term, say Chow and Foo, unless done through multiple acquisitions.
“An organic expansion of that scale also seems unlikely as the difference of 1,900 beds represents more than 65% of additional nursing bed supply from 2016 to 2020, based on a study by Oliver Wyman and the Ministry of Health,” they add.
Shares in SPH are trading 4 cents higher at $2.82 as at 11:39am.
For FY17F, the stock is trading at 18.9 times earnings and 1.3 times book. It has a dividend yield of 5.8%.
