SPH – CIMB

Gains today, falling ads everyday

SPH’s 3QFY14 core net profit of S$89.6m beat expectations, forming 32% of our and 28% consensus FY14 forecasts, due to higher investment income. The key positive was operating margin expansion as expenses contracted faster than revenue. However, we believe that such margins are not sustainable without revenue growth. We raise our FY14 EPS by 2% to factor in the higher investment income, but cut FY15-16 EPS by 4% to adjust for more rapid decline in newspaper revenue. Our SOP-based target price rises to S$4.09 on better share price performance of SPH REIT. We keep Reduce, with declining advertisement and circulation volumes as potential de-rating catalysts.

Key positives

SPH’s diversification into new growth areas is bearing fruit – other revenue rose 23.8% yoy on the back of strong contributions from the online classifieds and radio businesses. This was driven in part by sgCarMart, which was acquired in Apr 13. The property segment’s revenue growth was steady at 1.6% yoy on higher rental income from Paragon and Clementi Mall. Operating expenses were kept in check (-9.7% yoy), resulting in the expansion of operating margin from 28.2% in 3QFY13 to 31.8% in 3QFY14. The key surprise in the quarter was the net investment income of S$24.5m (3QFY13: S$3.2m), derived from higher dividend income and lower impairment charges.

Key negatives

Newspaper and magazine revenue fell 7.6% yoy as newspaper advertisement revenue declined sharply (3QFY14: -9.1%; 9MFY14: -6.4%). The decline in circulation revenue also picked up pace (3QFY14: -5.4%; 9MFY14: -4.4%).

Maintain Reduce

SPH is showing improvements in keeping its operations lean (implementing cost cutting measures, reducing redundancies, exiting loss-making businesses) and diversifying into new growth areas, which contributed to the margin expansion in the third quarter. However, we believe that the higher margin is not sustainable without revenue growth. There are few cost cutting measures left to implement, and the rate of decline in revenue is likely to outpace the decline in expenses going forward. Advertisements, which contributed 58.7% of 9MFY14 revenue, are declining at an increasingly rapid pace and will continue to be a drag until a new key earnings driver emerges.

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