SPH – CIMB

Slowdown in print-ad revenue

In line; maintain Neutral. 3Q11 core net profit of S$114.8m is in line with our forecast and consensus, accounting for 30% of our FY11 estimate. 9M11 core net profit forms 77% of our full-year estimate. Though profit is in line, earnings quality is weaker with a decline in the print business propped up by stronger investment income. Though we had been expecting margin pressures for its print business, we were slightly surprised by the yoy weakening in ad revenue. We fine-tune our FY11-13 EPS estimates by 1%, with higher investment income assumptions offset by higher taxes and opex. Accordingly, our SOP target price falls to S$4.24 from S$4.29. Maintain Neutral with continued cost pressures, the low likelihood of accretive property acquisitions and a potential slowdown in ad-revenue growth amid weaker macro-economic sentiment. SPH should, however, be supported by dividend yields of about 6%.

Ad revenue weakened yoy. Excluding revenue from Sky@eleven in 3Q10, operating revenue rose a smaller 4% yoy (2Q11: +8%) as higher rental and other revenue offset weaker print revenue. Though a moderation had been expected, the 4% decline in ad revenue in 3Q11 took us by surprise. This was the result of an 8% fall in classified revenue, stemming from reduced ad demand from the property and auto sectors. With companies potentially turning more cautious in the midst of weak macro-economic sentiment, any growth in ad revenue could be muted.

Print cost pressures persisted. Margins remained hit by higher newsprint costs (+10% yoy) on a higher charge-out rate of US$666/MT. Staff costs, however, slid 8% yoy, though this was mainly due to lower provisions for variable bonuses (with a weaker print business) which offset increments and a bigger headcount.

Stronger rentals for property but accretive acquisitions remain remote. Rental revenue grew 23% yoy and 9% qoq on a stronger performance from Paragon and with tenants progressively starting operations at Clementi Mall (which opened officially in May 11). Accretive retail property acquisitions remain remote, in our view, with continued aggressive bids by developers. SPH lost out on a bid to a CMT/CMA/Capland JV for the Jurong Gateway site in May 11.

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