SPH – CIMB

Ads continue to be a dampener

SPH reported 1QFY8/15 net profit of S$69.4m, in line with our estimate at 25% of our full-year forecast, but slightly short of consensus forecast (23%). Its core newspaper business continued to be hit by poor advertisement and circulation revenue, but the bright spot was lower newsprint cost. We revise our FY15-17 EPS estimates marginally to adjust for higher-than-expected share of losses from its investments in the regional online classifieds business. We keep our Reduce call and trim our SOP-based target price to S$4.00 to factor in a lower valuation of SPH REIT. While contributions from Seletar Mall will feature from 2Q15 onwards, we believe the positive impact will be muted by the accelerated fall in newspaper advertisements.

Newspaper segment impacted by falling ads

Revenue in the newspaper segment fell 7.9% yoy (advertisements -8.6% yoy, circulation -6.5% yoy). Advertisements, which contributed 59.6% to total revenue, continued to be adversely impacted by vehicle ownership and property cooling measures. The only bright spot was lower newsprint costs, but this was offset by higher staff headcount, which narrowed the newspaper segment’s PBT margin to 32.9% (1QFY14: 35.2%).

Seletar Mall to contribute in 2Q

Seletar Mall opened on 28 Nov 2014 with committed occupancy of 99.6%. We forecast that the new mall will boost the property segment’s revenue by 9.4% yoy in 9MFY15, based on S$11/psf rent. However, we expect the positive contributions in the property segment to be more than offset by declining advertisements, while its share of net losses from investments in the regional online classifieds business will continue to erode its net profit.

Maintain Reduce

As SPH’s core business continues on a structural decline, it increasingly has to rely on income from its non-core segments and investments in new media to make up for the loss in newspaper revenue. This appears to be a stretch, and we believe consensus has yet to factor in a faster pace of decline in newspaper contributions. That said, upside risks to our call could stem from meaningfully accretive acquisitions in the new media space, and more advertisements from property developers as property completions are expected to accelerate in 2015-16, based on URA data (Figure 4). Our base case assumes 2-4% annual decline in newspaper advertisement revenue in FY15-16, which is already below 1QFY15’s 8.6% yoy decline and the 7.4% yoy fall recorded in FY14.

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