REIT expectations provide support

• 2Q13 lower than expectations, dragged by weak ad revenue
  
• 7 Scts interim DPS declared; maintaining our DPS estimate of 24 Scts for the full year
  
• Evaluation of a property REIT still in progress and is likely to underpin share price
  
• Maintain BUY, S$4.75 TP
  

Highlights

2Q13 down on weak ads revenue. 1Q13 Singapore advance GDP estimates released on the morning of 12 Apr was a good reflection of SPH 2Q results. SPH’s 2Q13 net profit dropped by 15% y-o-y to S$71.5m, while revenue slipped by 5.5% to S$282.2m, weaker than our expectations. Interim DPS of 7 Scts was declared, similar to 1H12. We continue to expect full year DPS of 24 Scts, equating to a yield of 5.2%.

Ads impacted by cooling measures, property rental remains robust. Newspaper & magazines’ revenue fell by 7.1% y-o-y to S$224.4m due to weaker advertising revenue. Display ads fell by 10.2% while classifieds fell 7.1%, which was attributed to the property and transport sectors arising from the various government cooling measures introduced. Property rental remained robust, up by 4.5% to S$50.2m.

Evaluation for the proposed REIT still in progress, mandate not signed. Contrary to media reports, management shared that no mandate has been signed yet. The assessment for a property REIT was still ongoing, and announcements would be made going forward when there are significant developments. We continue to believe current market conditions are conducive for SPH to spin its investment properties into a REIT.

Our View

Share price supported by asset realisation, yield. We are not particularly surprised by the weak 2Q results, given the uncertain economic outlook. That said, we believe share price in the near term may face resistance and some profit taking after appreciating about 10% in the past month. But, downside should be limited, and likely to be supported by the expectation of an eventual REIT listing.

Ad revenue may pick up slightly with the economy in 2H. Our economist expects to see a slower first half, followed by a pickup in the second half for the Singapore economy. With ad revenues historically tied to economic growth and consumer sentiment, this could point to a pick up for SPH ad revenues.

Recommendation

Maintain BUY, S$4.75 TP. Maintain BUY as we believe share price should continue to remain firm on expectations of the potential REIT and will re-rate once there are positive developments going forward. We trimmed our FY13F earnings slightly by 3.4%, on the back of weaker ad revenue in 2Q. Our sum-of-parts TP is adjusted marginally to S$4.75.

Tread carefully

We think it is still unclear if spinning off its prized property assets into a REIT creates shareholder value. This, coupled with the weak ad environment, suggests that the recent 10% run-up in the share price may be overly optimistic.

2QFY13’s earnings came in below expectations at 19% of our and consensus full-year estimates due to weaker-than-expected ad revenue. 1H13 formed 44%. We lower FY13-15 estimates by 5-9% but raise our SOP-based target price to reflect the appraised value of properties likely to be spun off into a REIT. Downgrade from Neutral to Underperform as we think the recent share price gains are unwarranted.

Weaker ad revenues drag down 2Q12

2Q’s ad revenues suffered as a consequence of the government’s cooling measure on both the car and property sectors. We think this situation is unlikely to change for the rest of the year. Property continued to do well, with Paragon registering a 5% increase in rentals. Both malls are 100% occupied.

REIT may not create value

We think it is unclear if there will be a special dividend. That depends on how much management decides to sell down. If management sells a large stake to the REIT, it will take away valuable property earnings when the media earnings are struggling. On the other hand, if SPH sells only a small stake, there might not be special dividends, and investors who bought in anticipation could be disappointed.

Optimistic share price

Our revised SOTP already capture Paragon (S$2.43bn) and Clementi Mall (S$598m) at SPH’s announced valuations. We estimate that these valuations are based on fairly aggressive cap rates of 4% when CMT and FCT’s retail malls are mostly valued at cap rates above 5%. A divestment into a REIT might not add more to our SOTP. Meanwhile, share price had re-rated well above our target price.

Tread carefully

We think it is still unclear if spinning off its prized property assets into a REIT creates shareholder value. This, coupled with the weak ad environment, suggests that the recent 10% run-up in the share price may be overly optimistic.

2QFY13’s earnings came in below expectations at 19% of our and consensus full-year estimates due to weaker-than-expected ad revenue. 1H13 formed 44%. We lower FY13-15 estimates by 5-9% but raise our SOP-based target price to reflect the appraised value of properties likely to be spun off into a REIT. Downgrade from Neutral to Underperform as we think the recent share price gains are unwarranted.

Weaker ad revenues drag down 2Q12

2Q’s ad revenues suffered as a consequence of the government’s cooling measure on both the car and property sectors. We think this situation is unlikely to change for the rest of the year. Property continued to do well, with Paragon registering a 5% increase in rentals. Both malls are 100% occupied.

REIT may not create value

We think it is unclear if there will be a special dividend. That depends on how much management decides to sell down. If management sells a large stake to the REIT, it will take away valuable property earnings when the media earnings are struggling. On the other hand, if SPH sells only a small stake, there might not be special dividends, and investors who bought in anticipation could be disappointed.

Optimistic share price

Our revised SOTP already capture Paragon (S$2.43bn) and Clementi Mall (S$598m) at SPH’s announced valuations. We estimate that these valuations are based on fairly aggressive cap rates of 4% when CMT and FCT’s retail malls are mostly valued at cap rates above 5%. A divestment into a REIT might not add more to our SOTP. Meanwhile, share price had re-rated well above our target price.

AD REVENUES IMPACTED BY COOLING MEASURES

• 2QFY13 numbers tracking below
  
• Ads hit by pty and automobile measures
  
• Still exploring REIT listing
  

2QFY13 PATMI of S$72m down 15% YoY

SPH reported 2QFY13 PATMI of S$71.6m – down 14.7% YoY mostly due to a lower contribution from the Newspaper and Magazines segment. 1HFY13 PATMI now forms 45% of our FY13 forecast; despite 2Q being a weaker quarter cyclically, we now judge earnings to be tracking marginally below expectations as SPH’s ad revenues suffered the impact of recent property and automobile cooling measures. Topline for the quarter came in at S$282.5m, which decreased 5.5% YoY mostly due to weaker newspapers numbers but partially offset by an increase in property rental income from Paragon’s positive rental reversions. An interim dividend of 7 S-cents per share is announced.

A challenging 2Q for newspapers

Overall, 2Q was challenging for SPH’s newspapers segment and we see the market likely showing a neutral/mildly negative reaction to this set of results. Ad revenues fell S$13.9m (down 7.6% YoY) to S$168.5m, as advertisers from the property and automobile segments pulled back in the aftermath of recent cooling measures. In addition, circulation revenue also dipped by S$2.4m (down 4.9% YoY) as the physical subscription base declined (including digital subscribers, however, total circulation volume remained steady). We see cost-side items mostly kept in check over 1HFY13: staff costs fell 2.1% YoY to S$174.6m while newsprints charge-out costs fell marginally to S$626-S$644/mt. SPH’s property segment continues to be the bright spot, with Paragon’s 1HFY13 rental income up by S$3.4m (up 4.5% YoY) from higher rental rates. Occupancies at Paragon and Clementi Mall were maintained at 100%. The Seletar Mall remains on track to be completed by end of 2014.

Still exploring REIT option

Management expressed that it is still in the midst of exploring a REIT listing and that one key variable being deliberated is the stake of its assets to be divested. A REIT listing continues to be a realistic event, in our view, given the size and quality of its retail malls and the potential for significant shareholder accretion. Maintain BUY with an unchanged fair value estimate of S$4.94.

Valuations Stretched; Downgrade To Sell

2QFY13 results came in slightly below our expectations with PATMI at SGD72m (-15% y-o-y, -22% q-o-q). A 7.6% y-o-y fall in N&M ad revenue was partially cushioned by a 4.5% y-o-y increase in property rental income. We lower our FY13/14 earnings by 5.8/6.0% on weaker domestic economic outlook, which impact ad revenue. Downgrade to SELL with lower SOTP TP of SGD4.00 (SGD4.30 previously).

• Share price enjoyed a great run up but valuations appear stretched. SPH’s share price ran up some 10% since it announced an exploration of a REIT listing on the SGX. Though we understand there are advantages of a REIT spin off, such as potential cash inflows, we think valuations appear stretched. With an unexciting core publishing segment, and FY13 dividend yields compressing to 5.2%, we are downgrading our call to SELL.
  
• Feasibility of a REIT listing would depend on how cash is deployed. SPH is still in the early stages of studying a REIT spin off possibility and we think visibility on any positive catalysts are lacking at this point in time. We think a key point that needs to be addressed would be whether SPH will be able to make yield accretive investments with the use of proceeds.
  
• Ad revenue weak but property segment held the fort. Property segment income continued to enjoy 4.5% y-o-y growth to SGD50.2m due to higher rental rates from Paragon but this was more than offset by a 7.1% y-o-y fall in Newspaper and Magazine segment revenue to SGD224.4m. Following weaker-than-expected 1Q13 Singapore GDP contraction (based on advanced estimates) of 0.6%, we have consequently lowered our FY13 earnings by 5.8% to reflect weaker ad spend going forward.
  
• Downgrade to SELL, yields looking less attractive. We value the core media segment based on 13.8x FY13 P/E, Paragon (SGD2.43bn) and Clementi Mall (SGD359m) at market value, M1 and Starhub at OSK TP and investments as at Feb 13. SPH has declared an interim dividend of SGD7¢ a share. We think SPH looks less attractive with FY13 yields at 5.2%.