SPH – DBSV

Weaker but yield should sustain

1Q was marginally weaker than expected

Print ad growth was weaker due to economic uncertainty, offset partially by property rental contribution

Muted growth outlook but full year DPS should remain intact at 24 Scts

Maintain HOLD, TP: S$4.01

Highlights

1Q13 slower than expected. 1Q13 net profit dropped by 6.6% y-o-y to S$91.1m, on the back of a 3.1% drop in revenue to S$322.1m and higher operating expenses to S$210.5m (+1.8% y-o-y).

Ad revenues dip on uncertain economic outlook… Revenue from Newspaper and Magazine businesses dipped to S$263.5m (-2.3% y-o-y) on weaker advertisement revenue (S$204.8m, -2%) and circulation revenue (S$49m, -2.6%). Rental income, however, increased marginally to S$49m (+2.9%) on the back of higher rentals from Paragon.

…and higher costs. Staff costs inched up 0.8% higher on salary increments, partially offset by lower bonus provisions, while newsprint costs were S$2m lower as charge-out rates fell to US$644/mt from US$691/mt a year ago. Other operating expenses also increased by 15.4% to S$32.9m on increases in promotional activities and online businesses.

Our View

Earnings growth to remain muted. Along with the muted domestic growth outlook, we expect SPH growth to remain lackluster. DBS economist expects GDP to grow by 1.6% and 3.2% for 2012 and 2013, respectively. With this, we expect print revenues to be weighed down by the muted economic outlook and expect 0%/2% ad revenue growth in FY13F/14F. Fortunately, growth should be supported by stable contribution from its property rental income.

Property rental to grow in importance. We continue to see SPH growing rental income as a key buffer for the group’s softening advertising and circulation revenue. Property rental now accounts for 15% and 21.7% of the group’s revenue and PBT in 1Q, respectively, up from 14% and 19.7% a year ago. This should be further increased with the expected completion of Seletar Mall at the end of 2014.

Recommendation

HOLD for 5.8% yield, TP: S$4.01. Our sum-of-parts based TP remains at S$4.01. Notwithstanding a muted outlook, we expect the share price to be supported by a healthy yield of 5.8%, based on our 24 Scts DPS assumption, similar to FY12. Downside risks to our forecast would be a sharp deterioration of economic sentiment, affecting the group’s core advertising revenue.

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