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.

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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.

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Still in good stead

• In line with our forecast but below consensus. 2Q09 net profit was S$87.0m (- 13% yoy) vs. our forecast of S$88.2m, accounting for 26% of our full-year estimate. While operating revenue was in line with our expectations, operating expenses were higher than expected on high newsprint costs. Net profit was within our expectation thanks to a lower-than-expected tax rate, as deferred tax benefits previously not recognised were utilised. SPH announced an interim dividend of 7cts/share, down from 8cts/share in 1H08.

• Operating revenue down 4% yoy. Newspaper & Magazine revenue, including print ad and circulation revenue, fell 14% yoy to S$204.6m. Property revenue rose 33% yoy to S$72.2m, boosted by S$16.3m from Sky@eleven, which is on track for a temporary occupation permit in 2010.

• Print ad revenue decline approaching previous recessionary levels. Led by a 26% fall in recruitment ad revenue, print ad revenue declined 18.8% yoy to S$145.9m, in line with our expectations. Circulation revenue rose marginally by S$1.5m, thanks to cover-price hikes. Our assumption of a 20% decline for print ad revenue – pegged to previous recessions – for FY09 remains unchanged. However, instead of a 4% decline in circulation revenue for FY09, we now project flat growth. There are also signs that adex is close to bottoming out. In Jan 09, AC Nielsen estimated that newspaper adex declined 23% yoy and 14% mom. However, the latest figures show that while newspaper adex fell by 3% mom in Feb 09, it only fell 1% yoy. As such, we are projecting a faster recovery for print ads in FY10-11.

• Investment income could beat expectations. We now forecast investment losses of S$40m (previously S$60m) for FY09, vs. the 1H09 loss of S$33m. There could be upside to our FY09 earnings estimate, if capital markets continue to rally in 2H09.

• Maintain Outperform. All in all, we have raised our FY09-11 earnings estimates by 6-12% on better-than-expected investment income and higher media earnings. Looking ahead, we believe SPH’s dominant position in newspaper advertising in Singapore will serve it well. While newsprint prices are unlikely to retreat in FY09, SPH guided for a moderation in charge-out rates in FY10. Maintain Outperform with a higher sum-of-the-parts target price of S$3.52 (from S$3.38) following our earnings upgrade.

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