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.

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.

Managing a downturn

Event

SPH Q2 net profit down 12.6% at $87m

Economic slowdown hits advertising sales; property revenue up 33%

SINGAPORE Press Holdings (SPH) yesterday reported a 12.6 per cent drop in second-quarter net profit to $87 million, from $99.6 million a year ago, as the economic slowdown hit advertising revenue and profits from its print media business.

For the three months ended Feb 28, 2009, SPH’s recurring earnings fell 16 per cent to $93.8 million, and its investment portfolio lost $0.1 million versus a gain of $5.1 million a year ago. Its share of losses from associates and joint ventures was $4.2 million, versus a share of profits of $2.6 million a year back.

Earnings per share for the quarter fell to five cents from six cents in Q2 2008. The group’s net asset value per share was $1.16 at Feb 28, 2009, down from $1.30 at Aug 31, 2008.

Revenue fell 3.7 per cent to $287.2 million.

The core newspaper and magazine segment saw a 13.5 per cent drop in revenue to $204.6 million. Print advertisement sales fell 18.8 per cent to $145.9 million due to fewer recruitment and display ads. But circulation revenue rose $1.5 million as newspapers’ cover prices were raised last October.

The decline in revenue from the print business offset a 32.9 per cent rise to $72.2 million in revenue from the property segment, with the ongoing Sky@eleven development and Paragon shopping mall contributing $16.3 million and $1.3 million respectively to the increase.

The group’s total operating expenses rose 3 per cent to $195.7 million.

Materials, consumables, and broadcasting costs rose 15.5 per cent, due to a 23.8 per cent jump in newsprint costs. Property development costs for Sky@eleven, recognised as more of the project is completed, rose 66.2 per cent to $11.5 million.

Staff costs fell 13.6 per cent to $69.4 million due to lower bonus provisions, despite total headcount as at February rising to 4,016 from 3,814 a year back. SPH’s recent wage cuts took effect only this month.

For the six months ended Feb 28, 2009, the group’s net profit fell 24.3 per cent to $160.1 million, from $211.5 million a year ago. Earnings per share for the half-year were 10 cents, three cents down from H1 2008.

Investment income swung from a profit of $15 million in H1 2008, to a $33.8 million loss in H1 2009, and revenue from the newspaper and magazine segment fell 8.8 per cent to $454 million. Overall operating revenue rose 2.8 per cent year-on-year to $627.4 million.

‘The recession in Singapore is expected to last through 2009 and this would have a continued impact on advertising revenue,’ the group said.

Newsprint charge-out rates are expected to remain high for the year, and to moderate in FY2010. The group’s investment portfolio will also continue to be affected by financial market volatility, SPH said.

The property segment is expected to contribute significantly to recurring profits. Paragon will ‘face downward pressure on retail and office rents, but is expected to provide a recurrent income stream’ along with progressively recognised profit from Sky@eleven.

SPH chief executive Alan Chan said: ‘Trading conditions are expected to remain uncertain until we can see a clear recovery in the economy.’

SPH will pay an interim cash dividend of seven cents per share on May 20, one cent below that paid a year ago. Its shares closed nine cents up at $2.89 yesterday.