SPH – CIMB

Below expectations

Declining ads, weak shopper sentiment and unsustainable dividends are just some of the reasons for why we are negative on SPH. Excluding a one-off divestment and property revaluation gain, FY14 core net profit was below at just 85% of our estimate and 89% of consensus. We keep our Reduce call, and cut FY15-16 EPS by 5-9% to account for higher-than-expected minority interests and share of losses in its associates and JVs. Our SOP-based target price falls slightly to S$4.03.

Earnings hit by associates, JVs and minority interests

FY14 revenue (-2.0% yoy) met our expectation, but core net profit (-24.2% yoy) came in at just 85% of our estimate. This was due to: 1) higher-than-expected minority interests as a result of the fair value gain on investment properties in SPH REIT and 2) larger share of losses in its associates and JVs as SPH made further investments in the loss-making 701 classifieds business in Indonesia and the Philippines to face tougher competition. Advertisement revenue continued on a steep decline (-7.4% yoy) as property and car ads continued to slip, but this was countered by strong contributions from other revenue (+56.7% yoy); especially exhibitions, radio and sgCarMart (acquired in Apr 13).

Asset recycling of Seletar Mall only in 4-6 years’ time

Seletar Mall is slated to open in Nov, with an expected occupancy of c.90% at launch. SPH has guided for rents to be around S$11/psf, in line with our initial estimates. Management expects to inject the mall into SPH REIT upon the stabilisation of rents after 1-2 cycles, likely in 4-6 years’ time (vs. two years for Clementi Mall). Given that Seletar Mall is located on a relatively new estate and tenants are finding it difficult to hire staff due to a labour shortage, we believe that it may be difficult for SPH to recognise a meaningful step-up in rents.

Dividends may not be sustainable

SPH declared a final and special dividend of 8 Scts and 6 Scts, respectively, bringing the total DPS to 21 Scts. The dividend payout ratio reached a new high of 107.8%, a level which we believe is unsustainable. Until SPH finds a new growth driver to counter its declining newspaper and loss-making classifieds businesses, we believe that dividends may be at risk. SPH has already deployed c.10% of its S$100m new media fund in an online bidding website, Smaato, and made a small investment in an overseas e-commerce platform. We believe that these investments are still at the initial stages and could take time to contribute meaningfully. We prefer exposure to yield plays through the REITs.

SPH – CIMB

Below expectations

Declining ads, weak shopper sentiment and unsustainable dividends are just some of the reasons for why we are negative on SPH. Excluding a one-off divestment and property revaluation gain, FY14 core net profit was below at just 85% of our estimate and 89% of consensus. We keep our Reduce call, and cut FY15-16 EPS by 5-9% to account for higher-than-expected minority interests and share of losses in its associates and JVs. Our SOP-based target price falls slightly to S$4.03.

Earnings hit by associates, JVs and minority interests

FY14 revenue (-2.0% yoy) met our expectation, but core net profit (-24.2% yoy) came in at just 85% of our estimate. This was due to: 1) higher-than-expected minority interests as a result of the fair value gain on investment properties in SPH REIT and 2) larger share of losses in its associates and JVs as SPH made further investments in the loss-making 701 classifieds business in Indonesia and the Philippines to face tougher competition. Advertisement revenue continued on a steep decline (-7.4% yoy) as property and car ads continued to slip, but this was countered by strong contributions from other revenue (+56.7% yoy); especially exhibitions, radio and sgCarMart (acquired in Apr 13).

Asset recycling of Seletar Mall only in 4-6 years’ time

Seletar Mall is slated to open in Nov, with an expected occupancy of c.90% at launch. SPH has guided for rents to be around S$11/psf, in line with our initial estimates. Management expects to inject the mall into SPH REIT upon the stabilisation of rents after 1-2 cycles, likely in 4-6 years’ time (vs. two years for Clementi Mall). Given that Seletar Mall is located on a relatively new estate and tenants are finding it difficult to hire staff due to a labour shortage, we believe that it may be difficult for SPH to recognise a meaningful step-up in rents.

Dividends may not be sustainable

SPH declared a final and special dividend of 8 Scts and 6 Scts, respectively, bringing the total DPS to 21 Scts. The dividend payout ratio reached a new high of 107.8%, a level which we believe is unsustainable. Until SPH finds a new growth driver to counter its declining newspaper and loss-making classifieds businesses, we believe that dividends may be at risk. SPH has already deployed c.10% of its S$100m new media fund in an online bidding website, Smaato, and made a small investment in an overseas e-commerce platform. We believe that these investments are still at the initial stages and could take time to contribute meaningfully. We prefer exposure to yield plays through the REITs.

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