We recommend a long SPH/short STH pair trade. Investors would pick up a 63 bps dividend yield spread (to offset transactions costs) and gain significant upside exposure to the scenario that SPH lists its REIT. Two bases for our trade: first, we believe SPH’s 63 bps spread over STH is attractive. Newspapers are generally perceived to have weaker prospects than telcos but SPH has a virtual monopoly in its market while STH perennially competes against the much larger SingTel and has been losing market share in both its mobile and Pay TV segments. Second, from our calculations, we believe a SPH REIT listing scenario is realistic given the current yield/valuation dynamics of its assets and the size of its portfolio. Assuming SPH retains a 51% stake in the REIT, we see potential divestment gains of S$625m to S$744m or 39 to 46 S-cents per share. This could consequently lead to a special dividend and/or distribution in specie of REIT units for SPH shareholders.
ACTION: Long SPH / Short STH
We recommend a long SPH/short STH pair trade. Investors would pick up a 63 bps dividend yield spread (to offset transactions costs) and, in addition, gain significant upside exposure to the scenario that SPH lists its REIT successfully. Equivalently, we also recommend STH shareholders switch into SPH to pick up the additional 63 bps yield and potential upside from a REIT listing.
SPH a virtual monopoly while STH competes in tough market
First, we believe SPH’s 63 bps dividend yield spread over STH is attractive. While the newspaper sector is generally perceived to have weaker prospects than telcos, we note that SPH has a virtual monopoly in its market. Moreover, an already significant 27% of SPH’s group EBIT (as at FY12) is derived from its retail mall segment, which would grow further when Seletar Mall completes in 2014. In contrast, STH perennially competes against the much larger SingTel and has been losing market share in both its mobile and Pay TV segments.
REIT listing is realistic and could lead to special dividend
Second, from our calculations, we believe that a retail REIT listing for SPH is realistic given the current yield/valuation dynamics of its assets and the size of its portfolio. The unlocking of its retail malls’ full market value is a key potential catalyst for the share price. Assuming SPH retains a 51% stake in the REIT, we see potential divestment gains of S$625m to S$744m or 39 to 46 S-cents per share. This could consequently lead to a special dividend and/or distribution in specie of REIT units for SPH shareholders.
We recommend a long SPH/short STH pair trade. Investors would pick up a 63 bps dividend yield spread (to offset transactions costs) and, in addition, gain significant upside exposure to the scenario that SPH lists its REIT successfully. Equivalently, we also recommend STH shareholders switch into SPH to pick up the additional 63 bps yield and potential upside from a REIT listing.
SPH a virtual monopoly while STH competes in tough market
First, we believe SPH’s 63 bps dividend yield spread over STH is attractive. While the newspaper sector is generally perceived to have weaker prospects than telcos, we note that SPH has a virtual monopoly in its market. Moreover, an already significant 27% of SPH’s group EBIT (as at FY12) is derived from its retail mall segment, which would grow further when Seletar Mall completes in 2014. In contrast, STH perennially competes against the much larger SingTel and has been losing market share in both its mobile and Pay TV segments.
REIT listing is realistic and could lead to special dividend
Second, from our calculations, we believe that a retail REIT listing for SPH is realistic given the current yield/valuation dynamics of its assets and the size of its portfolio. The unlocking of its retail malls’ full market value is a key potential catalyst for the share price. Assuming SPH retains a 51% stake in the REIT, we see potential divestment gains of S$625m to S$744m or 39 to 46 S-cents per share. This could consequently lead to a special dividend and/or distribution in specie of REIT units for SPH shareholders.
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