SPH divests its 35% stake in TOM OMG
SPH AlphaOne transfers stake for HK$60m
SINGAPORE Press Holdings (SPH) is divesting its 35 per cent stake in TOM Outdoor Media Group (TOM OMG) for HK$60 million, or about S$11 million.
The media group announced that its wholly owned subsidiary SPH AlphaOne entered into an agreement yesterday to transfer its entire stake in TOM OMG to TOM Outdoor Media Holdings, which owns the remaining 65 per cent.
In March 2006, SPH invested US$26 million to take up its 35 per cent stake in the billboard unit of TOM Group Ltd, a publishing, advertising and Internet company controlled by Hong Kong billionaire Li Ka-shing.
The strategic partnership was SPH’s maiden venture into China’s outdoor advertising sector aimed at gaining a foothold in that sector.
SPH said yesterday that the consideration of HK$60 million was arrived at on a ‘willing buyer willing seller’ basis, and took into account the financial performance and future prospects of TOM OMG.
TOM OMG had posted an audited net loss of HK$13 million for the year ended Dec 31, 2007, and an unaudited net loss of HK$102 million for the year ended Dec 31, 2008.
SPH said that the consideration will be fully settled in cash on the date of completion, which is expected to be 14 days from the signing of the agreement.
The company said that the transaction will have no material impact on its earnings, nor on its net tangible assets per share in the financial year ending Aug 31.
SPH’s chief executive Alan Chan, who is also a director of TOM OMG, will cease to be a TOM OMG director upon completion of the deal.
Steady for now
Page count has stabilised. The Straits Times newspaper has grown thicker since the start of the year. Our Saturday-edition page count indicates a steady 200-odd pages in April, above January’s low of 169 pages.
Pandemic impact. During the SARS period (1Q03), adex declined 16% yoy and 1% qoq, with all industries cutting their spending. Geographically, however, SARS-related infections and deaths were concentrated in Hong Kong, China, Taiwan, Vietnam and Singapore. This time round, we expect the impact of swine flu to be less severe than SARS as Asia is not the epicentre.
1Q09 adex fell by 19% yoy. AC Nielsen Media’s latest figures show newspaper advertising expenditure (adex) in 1Q09 declining by 19% yoy and 14% qoq. Extrapolating from this and recent data, SPH’s print ad revenue slid 8% yoy over Sep 08-Apr 09. April figures will be released in mid-May and we continue to expect a yoy decline but mom stability.
Outlook. Although the April page count was steady, we do not expect ad demand to rebound strongly anytime soon. However, we believe that the market has priced in recession-level ad demand, and any better-than-expected performance could catalyse its stock price, we believe. Also, SPH is likely to benefit from lower staff-related costs, thanks to pay cuts. Although management has guided for high newsprint charge-out rates in FY09, newsprint costs are likely to fall from FY10.
No change in earnings estimates. We continue to use past recessions’ print ad revenue declines (of 20%) as a benchmark to forecast FY09 earnings.
Results within expectations
2Q09 results came in 3% lower than our estimate but still within our expectations. This arose from lower revenue recognition at its Sky@Eleven project. As expected, ad revenues were down. Interim dividend of 7 cents was lower than last year. But, management indicated that there is no change to their target of maintaining a high payout ratio for full year. Current price has only c.10% total returns upside, after 25% increase since our upgrade. Downgrade to Hold.
2Q09’s operating profit down 15% y-o-y. 2Q09’s operating profit ended at S$99.4m. This is just 3% below our expected $102.5m, but still within our tolerance. The slight variance is largely due to lower revenue recognition from its property development project (Sky@Eleven). Total revenue for 2Q ended at S$287.2m, down 4% y-o-y. Staff costs were down 14% on lower bonus provisions.
Display and classified ads revenue fell 18% y-o-y in 2Q. Not surprisingly, display ads fell 15.9% y-o-y to S$82.8m. Classified ads revenue fell by a larger 26% y-o-y to $49.3m. Drop in both segments accelerated from 1Q09’s drop (c.4% and 17% y-o-y, respectively). We have assumed a 20% fall in ad revenues for FY09F.
Interim dividend of 7 cents, from 8 cents in 1H08. The cut in interim dividends to 7 cents arose from a lower operating profit. Management, however, indicated their target to maintain a high dividend payout ratio (80% to above 100% of operating profit). Our 20 cents DPS for FY09F is unchanged.
Downgrade to Hold; TP: $2.97. We adjust our TP up slightly as we now assume a lower newsprint costs of US$780/mt vs US$800/mt previously. The positive impact of this on our net profit is however offset by a higher interest expense on a higher debt level. Share price has appreciated by 25% since our upgrade on 13 Mar. This leaves only about 10% total returns upside (to our TP, including dividends). As such, we downgrade to Hold.
Risks. (i) Further significant and protracted deterioration of the economy; (ii) increase in newsprint costs; (iii) significantly lower dividend payout versus our expectations.