SPH – UOBKH

Ad spend recovery is well ahead of expectation

SPH remains a BUY with a target price of S$4.40. November page-counts suggest ad spend recovery is well ahead of expectation. Ex-div share price of S$3.59 offers 23% upside to target price.

Corporate Event

Faster recovery pace in the last two months. The Straits Times’ Saturday papers suggest ad spend recovery is well ahead of our expectation. Apart from the last Saturday of November (advertising was trimmed during the Pilgrimage Festival long weekend), the Saturday papers in November surpassed 240 pages, above the average 230 pages in October (Aug-Sep: 214). Singapore Press Holdings (SPH) maintains the ratio of editorial to advertisements at 50:50. It would appear that ad spend grew at a faster pace in the last two months.

Ad spend growth has finally turned positive. Ad spend is seeing the first yoy growth in the current economic upcycle. Based on the trend of the pagecounts of Saturday papers, we estimate ad spend growth has improved from a contraction of 16% in September and 7% in October to a positive growth of 9% in November. At the height of the crisis in late-08 and early-09, the average page-counts of the Saturday papers fell below 200 pages. At today’s page-count of 240 pages, going forward the Saturday papers in some months could see high yoy double-digit growth rates in page-counts. The page-counts of The Straits Times are a leading barometer of SPH’s advertising revenue (AR) growth.

Stock Impact

AR will likely surpass our expectation. In our earnings forecasts, we have assumed flat AR growth in FY10 and a growth of 10% and 8% in FY11 and FY12 respectively. If Saturday papers can maintain above 240 pages (indeed, we believe page-counts will continue to grow), we see potential upgrade in our earnings forecasts. For every additional 5ppt in AR growth rate, SPH’s net profit would be enhanced by 6-8%. The extra revenue would more or less go straight to the bottom line.

We anticipate the opening of Singapore’s integrated resorts, Marina Bay Sands and Resorts World@Sentosa in 1Q10, to boost ad spend further as the hospitality and retail sectors ramp up advertising to capture more consumer spending. Thus, share price has a close relationship with UOB Kay Hian page-counts.

Pay cut restoration signals a recovery is underway. SPH will restore half of the pay cuts (2-10%) introduced in April this year. In FY09, total staff cost of S$286.9m was 35% of total cost. We understand from management the pay restoration would have a marginal impact on FY10 net profit (our est.: < 3%).

However, this does not include potentially higher bonuses which are tied to the performance of the media business. We have assumed in our earnings forecasts staff cost increases of 6% and 8% for FY10 and FY11 respectively. We estimate for every 5% extra cost above our projections, net profit would be trimmed by 3%.

Recommendation

The big picture of an AR recovery remains intact. SPH’s share price, cum FY09’s final dividend of 18 cents, will go ex-dividend on 9 December. Our target price of S$4.40 implies a 23% upside on the ex-dividend share price of S$3.59. Annual yield is forecast at 6-7%.

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