ARE THERE STRUCTURAL LOSERS
WITHIN MY PORTFOLIO? WHAT CAN I DO ABOUT THEM?
In our last issue, we had shared about mature and stable companies, or “sluggards”; and if it’s worthwhile to keep or buy them.
What about companies that are structural losers – do we keep those on the portfolio or cut our losses?
And what are structural losers?
Structural losers are companies that were or are being disrupted, mostly by other companies that are disruptors, or their services and products are no longer being valued. In the post-pandemic world, “the virus is permanently changing how businesses, consumers, and governments operate — which impacts investors’ portfolios, according to PGIM1.”
It was argued in their report that “four structural changes will reshape global business: re-imagined global supply chains, larger and more expensive inventories, upheaval in residential and office real estate, and so-called “weightless” firms”. The report also predicted that there will be “an acceleration towards these “weightless” or tech-oriented, capital-light business models that are focused on software, online platforms, or proprietary data”.
Take the example of a listed company that we are familiar with, Singapore Press Holdings (SPH).
Its share price was $2.40 at the bottom of the Great Financial Crisis in 2009.
Currently, it is trading at $1.47 – almost 40% lower than its price at its lowest point in the previous crisis. It even used to be one of Singapore’s “blue-chip” counters; and as mentioned in our previous issue, companies do not remain in the same category forever, and they can fall victim to companies with strong structural growth.
20 years ago, 75% of their revenue came from advertisements2 (see chart below). However, as demand from print advertisements dropped in favour of other competing media, SPH pivoted into other industries and businesses such as property and aged care. It also runs a regional events arm and is also invested in the education business. Now, it gets the bulk of its earnings from property3.
But earnings have still been dropping over the years, and their dividends paid out have also been declining since 20144. Perhaps one day it could be a turnaround company, but the businesses they have diversified into are also not businesses that would enjoy tremendous structural growth into the future.
Thus, if you do have structural losers within your portfolio, and structural losers usually turn out to be value traps, i.e. their share prices getting cheaper and cheaper over time, you may
consider divesting them as soon due to value destruction. And instead of the divesting as selling at a loss, you could consider it as a replacement from a low-quality company to a better one.
If a portfolio making a loss can be likened to a car that has broken down, would you prefer to let your car sit in your car park and see if it would sort itself out on its own, or would you send it for repair as soon as possible, so that you have absolute certainty that it is of good use again?
Do speak to your Unicorn consultant if you would like to know more or have further queries.
Note: We will increase the frequency of our communication with you during the current turbulent times. We will continue to communicate monthly with you during usual times.
1. Institutional Investor (PGIM is the investment management arm of Prudential Financial)
2. SPH Annual Report 2000
3. Nikkei Asian Review
4. SPH Annual Reports 2019, 2018, 2017, 2016, 2015, 2014, 2013
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