Riding on economic recovery

• 9M09 advertising revenues fell YoY (-17%) but expect sequential improvement
• Latest Paragon valuation at $1.98bn, wide margin vs the $1.5bn we imputed in our sum-of-parts TP
• Expect performance to ride on economic recovery
• Reiterate Buy, SOP TP: S$$3.68

3Q09 ad revenues – no surprises. Headline revenue ($327m, -5% yoy) and operating profit ($137m, -2% yoy) were within expectations. At its newspaper division, classifieds revenue dropped slightly more than expected on lower job ads ($55.9m, -30% yoy), but display ads revenue ($90.3m, -17% yoy) was within expectations. Newsprint charge-out rate remains high at US$779/mt (+32% yoy), but down -6% from 2Q’s US$827/mt. We expect newsprint
charge-out rate to trend down further in 4Q.

Property the star. Property division helped prop up operating revenue, with revenue recognition from Sky@Eleven ($64m, +69% yoy) and Paragon’s rental ($30m, +3% yoy). Occupancy at Paragon remains at 98%, while Sky@Eleven is on track for TOP by 2010.

Paragon latest valuation at $1.98bn. This is 4% below the last valuation of $2.07bn done in Jul 08. However, it is still more than 30% higher than the $1.5bn estimate we have imputed in our sum-of-parts target price, implying a huge margin of safety.

Riding on economic recovery. DBS Group economist recently revised up his Singapore GDP forecasts for ’09 to -5.5%, from -6.6% previously. We maintain our view that we should see sequential improvement in the Group’s advertising revenues on the back of the economic recovery.

Buy, TP at S$3.68. Our operating profit forecasts remain intact, but we trimmed FY09F earnings down by 8% as we adjust for a lower return on its investment. We reiterate our Buy recommendation and SOP TP at S$3.68, on our view that the worst is over. Dividend yield at 6.2% also looks reasonable on our conservative DPS assumption of 20cents. Our TP would have been S$3.97, if we peg our TP to Paragon’s latest valuation of $1.98bn.

SPH Q3 profit dips 5% to $126.7m

MEDIA group Singapore Press Holdings (SPH) yesterday said net profit for the quarter to May 31 fell 5 per cent to $126.7 million from $133.4 million a year ago.

Revenue from its core newspaper and magazine division fell 17.4 per cent to $222 million from $268.9 million a year ago, as print ad sales fell 23.3 per cent to $159.5 million, led by the fall in recruitment and display advertisements. Earnings per share remained flat at eight cents.

However, SPH’s property division reported 40 per cent higher sales, or $94.4 million against $67.3 million.

SPH said staff costs fell 18.9 per cent as a result of pay cuts instituted in April and a decrease in bonuses, as well as a $3.4 million grant under the government’s Jobs Credit scheme.

Headcount rose slightly to 3,971 as at end-May, from 3,874 a year ago. Total operating expenses fell by $12.8 million or 6 per cent to $199.9 million.

For the first nine months of the year, net profit fell 16.9 per cent to $286.8 million from $344.9 million.

Sales were largely flat at $963.7 million but operating revenue from its newspapers and magazines was down almost 12 per cent to $675.9 million.

For the nine-month period, SPH lost $16.2 million on the value of its investments, due mainly to a $30.6 million loss in the value of its externally managed funds, which was offset by dividend and interest income.

SPH said performance of its investment portfolio will continue to be affected by financial market volatility and that it will continue to be conservative in allocating assets.

Of the roughly $900 million in its group investible fund, 44.4 per cent is in cash and deposits, with 28.7 per cent in equities and 14.2 per cent in bonds. Just under 13 per cent were placed in investment funds.

SPH said advertising revenue was expected to move in tandem with the performance of the economy.

Chief executive officer Alan Chan said: ‘Despite early signs that the decline in global demand is levelling out, the timing and extent of the economic recovery remain unclear. The threat of the Influenza A (H1N1) pandemic further clouds visibility on business conditions.’

SPH said that newsprint charge-out rates should remain high for the rest of the year with some moderation expected in FY 2010.

For the first nine months in FY 2009, newsprint costs jumped 18.7 per cent to $101.3 million from $85.3 million a year ago.

For its property segment – Paragon shopping mall along Orchard Road and the Sky@eleven residential project – ‘profits . . . are expected to contribute significantly to the group’s recurring earnings’, SPH said.

‘Paragon provides a stable, recurrent income stream (while) the group will continue to progressively recognise profit from Sky@eleven, which is on track to obtain (its Temporary Occupation Permit) in FY 2010.’

Mr Chan said: ‘As trading conditions are expected to remain uncertain, we will continue to be vigilant in managing our costs, growing our revenue and maintaining a strong balance sheet.’

Recovery underway

• Above our forecast and consensus. 3Q09 net profit was S$126.7m (-5% yoy), beating consensus expectations and 20% above our forecast (34% of our full-year estimate). The outperformance came mainly from higher-than-expected operating revenue of S$327.1m (-5% yoy) and lower-than-expected operating expenses thanks to lower-than-expected newsprint costs. In line with our expectations, SPH booked investment gains of S$17.6m. 9M09 revenue was flat at S$954.5m while net profit was S$286.8m (-16.9% yoy), to make up 76% our estimate.

• Ad demand beat expectations. 9M09 print ad revenue declined 16.4% yoy to S$493.7m vs. our forecast of a 20% decline while circulation revenue rose 3.6% to S$160.3m vs. our forecast of a 1% improvement. We modify our assumption from a 20% decline for print ad revenue (pegged to previous recessions) to a 17% decline as we expect 4Q09 print ad revenue to be fairly similar to YTD trends.

• Improving outlook. We continue to believe that ad demand is near a bottom and project a faster recovery for print ads in FY10-11. Concerns over buyers defaulting on Sky@eleven residential units should ease now that property prices have risen with the last transacted price for this project significantly above the launch price of S$975psf. Full-year newsprint costs are likely to be below US$800/MT given that 9M09 newsprint charge-out was US$791/MT.

• Maintain Outperform. We have raised our FY09-11 earnings estimates by 1-6% on the better-than-expected media earnings. We believe SPH’s dominant position in newspaper advertising in Singapore will continue to serve it well. Maintain Outperform with a higher sum-of-the-parts target price of S$3.62 (from S$3.52) following our earnings upgrade.

Ads recover

Positive numbers in-line with expectations; TP raised. SPH turned in a set of credible results, thanks once again to the Property segment, which witnessed an acceleration in contribution from its Sky@eleven project. Ad revenue also picked up versus 2QFY09. While we maintain our forecast, we have upped our price target to S$3.59 from S$3.40 previously, due largely to higher valuation ascribed to Paragon (S$1.98b, from S$1.69b). Dividend yield of 6.8% remains attractive, and should lend downside support as the market consolidates. Maintain BUY.

A better performance QoQ. 3QFY09 revenue and net profit both declined by 5% to S$327.1m and S$126.7m respectively. On a QoQ basis, however, the company experienced turnover growth of 13.9% while bottomline surged by 45.6% (recurring earnings: +39.9%). What was commendable was the print business, which saw revenue rise 8.5% QoQ (print ads +9.3%) and suggests the worst is over. Margins showed a general improvement in 3QFY09 with operating margins increasing due to an 18.9% drop in staff costs. Pick-up in classifieds. We see some life being injected back into the classifieds, with the strong pick-up in the property market. The recent news that firms are starting to hire again should drive demand for recruitment
section in the next few quarters.

Newsprint costs to head south. Charge out price increased by 32.5% to US$779 per tonne in 3QFY09 although it dropped 5.8% QoQ. We expect newsprint costs to fall to US$700 per tonne in 4QFY09 and average US$689 per tonne in FY10, which should prop up margins.

Dividends remain a draw. At S$3.21, it offers a dividend yield of 6.8% in FY09, well above the market average. There are worries that the Sky@eleven project is one-off and would leave a big vacuum when it is completed next year. But based on our estimates, the core print business and Paragon will be able to generate at least S$320m in recurring income. Assuming 100% payout, the yield post-Sky@eleven is still a palatable 6.3% at the minimum.