SPH – CIMB

Positives in the price

Results below; downgrade to Neutral from Outperform. 4Q10 net profit of S$75.3m (-44% yoy) was 21% and 10% below our forecast and consensus respectively on higher-than-expected staff and interest costs. FY10 net profit of S$497.9m (+18% yoy) was 4% below our forecast. Final dividend was 20scts/share (inclusive of special dividend of 11scts), slightly below our 22scts expectation. We cut our FY11-12 earnings estimates by 5% to incorporate higher staff and interest costs, mitigated by stronger print-ad revenue assumptions. We also introduce FY13 estimates and roll forward our valuation to CY12. Accordingly, our SOP-based target price climbs to S$4.51 from S$4.47. SPH’s share price has risen 15% since we upgraded it to Outperform in Jan 10. With positive ad demand likely priced in, we downgrade it to Neutral. Re-rating catalysts could come from higher-than-expected print-ad revenue and accretive property acquisitions, in our view.

Higher staff costs eroded print-ad revenue growth. SPH’s operating revenue rose 6.1% in FY10 as stronger newspaper and magazine revenue (+9.2%) offset a 2.6% decline in property revenue. Led by strong display and recruitment ads, printad revenue surged 13.1% yoy to S$733.1m, beating our expectations. Circulation revenue, however, dipped 2.4%, while property revenue declined 2.6% on lower contributions from Sky@eleven (temporary occupation permit obtained in May 10) but higher rental contributions from Paragon. While newsprint costs slid 29% yoy, earnings were hurt by increased staff costs (+19%) with higher variable bonus provisions.

Outlook. SPH expects newsprint prices to climb further in view of industry supply demand imbalances. It intends to raise its average ad ratio to above 60% from sub-60% levels to control its newsprint consumption, without hurting ad revenue. Observing trends of higher ad demand in the ‘Home’ section, it will be increasing its page count for this section from eight to 20. SPH will also step up marketing efforts to stem its dwindling circulation revenue. On the property front, marketing and fit-out work for The Clementi Mall is in progress. SPH remains on the lookout for long-term property investments, with a preference for suburban retail assets for their resilient cash flows.

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