Laggard has legs to run
SPH gained 12.1% over the last three months but still underperformed the market by 25.1%. This laggard is closing the gap as the market sees the “green shoots” of an economic recovery. Print ad revenue to-date declined only 12.7% yoy compared to our full-year assumption of a 25% decline. Hence, our earnings estimates have a good potential for upside should the signs of recovery continue into 2H09.
Early signs of recovery in recruitment
The average page count in May for the Saturday editions of The Straits Times showed a robust m-o-m recovery. We also observed an improvement in job ads volume. However, we note that the pick-up is attributable to 2Q and 3Q being seasonally busier hiring periods. Job ads volume, being the key driver of Classified and a leading indicator of Display ad demand, provide insights on the outlook of SPH. Job ads data in the coming months is therefore crucial.
Improving sentiments tell of more news ad demand to come
The recent optimism in the property market is reflected in the Classified as more property ads have surfaced, and big, coloured Display property ads are increasingly being placed. There is hope for more Display property ads to boost revenue as an increasing number of developers are reportedly preparing to launch new projects in view of the positive sentiments in the property market.
Investible fund could get a boost from the rally
The improvement in the performance of the capital markets in the last three months, if it continues, will benefit SPH’s bottomline as its $0.9b investible fund still has sizable exposures to equities (30.6%), bonds (20%) and investment funds (12.5%). The remaining 36.9% is held in cash and deposits.
Dividend yield remains intact; maintain Buy
Our SOTP target price is raised to $3.46, reflecting a lower equity risk premium for its core media business. Our earnings estimates remain intact. At an implied PER valuation of 12.4x, the core media business is still trading close to its ten-year trough. We maintain Buy, based on a potential price upside of 11.6% and dividend yield of 7.2%.
Press is set to spin
• SPH’s valuation premium vs STI narrowed to 8%, vs average of 34% since 1997;
• Implied newspaper ops undervalued by market at 12x PER, -2 std deviation below average;
• Worst fall for newspaper ads seem to be over; Apr down by 9% yoy vs Jan’s drop of c.25%;
• Upgrade to Buy, TP raised to S$3.70.
Newspaper ops valuation should normalise. SPH’s PE valuation to STI has narrowed to 8%, significantly below 10-year average of 34%. Newspaper operations implied PE is now at 12x, -2 standard deviation from its average. We think the market has under valued it; and, this should trend up towards normalized levels (20x PER) as the economy recovers.
Worst fall in AdEx seems over. AdEx fell sharply during past 2 recessions. But, they also recovered shortly thereafter. Latest data from Nielsen media research shows April’s AdEx for newspaper display and classified ads fell by 9%, significantly better than the 25% y-o-y fall in Jan. We also noted that recent pagination for The Straits Times (Saturday edition) is hovering above 210-odd pages, up from Jan’s 100-plus pages.
Lowered newsprint costs. Newsprint spot price is at around US$550/mt. We lowered our average newsprint charge-out rate to US$760/mt for FY09F and US$580/mt for FY10F.
Paragon valuation out soon. The independent valuation for Paragon should be released in mid-Jun. We expect it to stay above our RNAV estimate of S$1.5bn. There should also be nominal defaults at its development property project (Sky@Eleven), in view of the up tick in transactions and stable prices.
Upgrade to Buy, SOP TP raised to S$3.70. We upgrade our recommendation to Buy, from Hold as we believe the worst fall in AdEx is over. We believe valuations should normalize, and we peg our newspaper operations to 16x FY10F earnings, -1 std dev. of its average (20x).
Advertising spending bounces back from depressed level
Advertising spending bounces back from a depressed level. Deep-value defensives will play catch-up with cyclicals, SPH being the favourite.
Advertising spending is bouncing back from a depressed level. This is evidenced in our page counts of The Straits Times. The Saturday papers, the barometer of advertising spending, point to the beginning of a recovery in advertising spending. Saturday issues typically more than double the average weekday’s pagination as advertisers prefer to advertise on Saturdays. As evidenced in the table overleaf, advertising spending hit a depressed level with The Straits Times’ Saturday issues falling to around 190 pages in March compared with 270 pages a year ago and 250 pages six months ago. Pagination bottomed in April and has since rebounded to above 210 pages in May, albeit The Great Singapore Sales started two weeks ago.
Nevertheless, monthly data from ACNielsen also points to SPH’s advertising revenue (AR) contraction getting smaller from -18% yoy in March to -9% yoy in April. A similar trend is emerging in our page counts of The Straits Times, which suggest SPH’s AR contraction has improved from -22% yoy in March to -16% yoy in April.
SPH offers an attractive risk-reward proposition. As high-beta cyclicals have rallied strongly, the defensives now offer a relatively more attractive riskreward proposition and should start to attract investor interest. SPH, trading at a P/B of 2.6x, offers a 36% upside to its long-term P/B mean valuation of 3.6x. The stock will likely be favoured by investors starting to search for value among the laggard defensives that have not rallied as much as the cyclicals. In addition, SPH offers annual dividend yield of 7-8%. Maintain BUY and our target price of S$3.90, which is based on our sum-of-the-parts (SOTP) valuation of S$3.94/share.