Inefficient Use Of Capital

Taking off the one-off items, SPH’s 2QFY14 results came in below expectation with SGD51.2m PATAMI (-32.3% y-o-y) on the back of SGD211.6m revenue (-5.7% y-o-y). This was largely on its poor print business and investment performance. While the business generates strong cash flow, we downgrade to SELL as we consider the company’s use of capital is not efficient.

Traditional print business a concern. Revenue from Singapore Press (SPH)’s newspaper and magazine (N&M) segment fell badly by 5.7% y-o-y as both advertisement and circulation revenue declined 6.6% and 3.8% respectively. The steep decline in advertisement topline was attributable to the Government’s cooling measures on the property and automotive markets. Going forward, management also shared its concerns over recent tragedies, ie the missing flight MH370 and the kidnapping of a Chinese tourist in Sabah, which may affect the local tourism industry and, in turn, hurt SPH’s advertisement business.

Costs will continue to go up. SPH announced initiatives to eventually achieve opex savings by SGD19m. However, we expect such savings to be offset by growing business costs like rising wages and utilities bills. Furthermore, the group recently adopted a new profit-driven remuneration system that will see costs go up by about SGD10m annually, albeit aimed at driving profit growth.

Lacklustre investment performance. Notably, SPH took an impairment on investments of SGD6.0m in the quarter under review, citing prolonged decline in value. Taking off this impairment, the group generated SGD5.9m in income from investments in 1HFY14 (-19.2% y-o-y). In our view, with SGD1.2bn book value of investments as at end 2QFY14, and SGD660.3m in cash, its use of capital is not efficient, in our view.

Downgrade to SELL. We believe that SPH should increase its payout or even carry out a capital reduction. We lower our TP to SGD3.57 (from SGD3.70), which is based on SOP valuation. This implies a 16.7x FY14 PE and 6.2% FY14 yield.

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