Slightly weaker ending quarter

Slightly below our expectations; 4QFY12 recurring earnings fell 17% YoY. 4QFY12 recurring earnings of S$86m (-23% QoQ) came in slightly under our expectations due to lower than expected N&M advertisement revenue. FY12 recurring earnings were up a marginal 0.3% to S$410m. We lowered our FY13 PATMI by 7% due to lower advert revenue and higher operating expenses. SPH has declared a final dividend of 17S¢ a share bringing total dividends for FY12 to 24S¢ a share. Going forward we believe SPH’s cash flow is strong enough to sustain a dividend payout of 24S¢ per annum, implying a yield of 5.9%. Maintain NEUTRAL with slightly higher SOTP TP of S$3.95 (from S$3.85 previously) as we roll forward our valuations to FY13. We think SPH’s FY13 dividend yield of 5.9% remains attractive and will cushion any downside in share price, though we see a lack of near term catalysts to drive upside for its core publishing business.

Property segment offset decline in N&M. Property rental income grew 14% in FY12 to S$191m due to a 101% growth in rental income from Clementi Mall to S$37m (on the back of a full year’s operations), as well as a 3% increase in Paragon’s rental income to S$154m (due to higher rental rates). This helped offset weaker Newspaper and Magazine revenue which declined 1% due to weakness from both print adverts as well as circulation revenue. The Seletar Mall, SPH’s latest property project is expected to be completed by end 2014.

Slowdown in Newsprint charge-out rate could bring some cheer. Newsprint charge out rates averaged US$678/MT in FY12 and US$654/MT in 4QFY12. SPH will benefit from current lower rates which are hovering at ~US$600/MT. As such, we have lowered our FY13 charge out rate assumptions by 10%.

SOTP-derived TP of S$3.95. We value the core media segment based on 11x FY13 P/E, Paragon (S$2.5b) with assumption of a 5% revaluation gain, Clementi Mall (S$266m) with assumption of average passing rent of S$15/sqft, cap rate of 5.5%, M1 and Starhub at DMG TP and investments as at Aug 12.

Yield Still Attractive

Results in line. SPH announced its FY8/12 results, which were broadly in line with market expectations. Top line registered a 1.8% yoy growth to SGD1.27b, driven by strong performance from the Property segment (+14% yoy) despite marginally decline from Newspaper & Magazine segment (-1% yoy). Core earnings increased by 0.3% yoy. Maintain BUY with target price of SGD4.50, based on SOTP valuation.

Expecting improved core ad business going forward. SPH’s core print advertisement revenue dropped by 1% yoy in FY12 due to weak economy condition. However the advertising demand for property, fashion and automobile sector remains strong. We expect ad revenue to bottom out in FY13 in line with recovery in Singapore economy.

Property segment to support future growth. SPH’s property segment will be the main growth engine for the whole group in our view. In FY12, rental income rose by SGD23.5m (+12.8%) to SGD191.4m. This was driven by higher rental rate in Paragon as well as contribution from full operation of Clementi Mall. As Clementi Mall has not achieved its maximum rental rate and demand in Orchard Road remains robust, we believe there is still upside from property rental income for FY13.

Operating margin sustained at a healthy 32%. Cost was well managed in FY12, only marginally increased by 2.5% yoy, thanks to low newsprint cost and low interest rate. Operating profit margin remained above 30% level and we are confident that 30% OP margin is sustainable going forward.

Full year dividends 24cents, yield still attractive. Full year dividends of 24cents are the same as last year. We expect 25cents dividends for FY13 implying 6.2% dividends yield at current price of SGD4.07, which to us is still very attractive. The yield spread between SPH and 10-yr government bond is now 443bps, above historical average of 350bps. We maintain our BUY call with target price of SGD4.50 based on SOTP valuation.

• The final dividend of 17 cents (normal 9 and special 8) brings the total for the fiscal year ended Aug ’12 to 24 cents (unchanged from the year before), for a yield of 5.9%.
  
• This would have been a greater plus if the board had committed to a clearer dividend policy, of say a minimum or a certain percentage of recurring earnings, even if it were to mean a lower yield.
  
• Note that the $386.37 mln dividend in respect of ye Aug ’12 already represents 94% of recurrent earnings.
  
• Results for ye Aug ’12 (net profit down 5.9% to $365.54 mln) are in line with recent past, with decline in the core newspapers / magazines business being offset by property contributions. (The latest decline was also blamed on the drop in investment income.)
  
• Classified advertisements (almost 30% of display ads) continued to decline, by 8% in the latest fiscal year.
  
• Contributions from the Clementi Mall have replaced Sky @ 11, adding to Paragon. (The Seletar Mall, a 70-30 JV with UE is scheduled for completion in late calendar year 2014.)
  
• The 5.9% yield remains the sole reason for maintaining BUY.

Chugging along

The underlying business continues to chart a steady course, allowing management to declare a 24Scts dividend again. Earnings were lower because of weaker investment income. Property remains the star performer and could help make FY13's dividend payout even larger.

FY12 earnings came in largely in line, at 95% of our and consensus estimates. We tweak our FY13-15 numbers slightly on lower circulation revenue leading to a marginally lower SOP target price. Our Outperform rating is maintained; stronger rental income and ad revenue growth are rerating catalysts.

FY12 review

Operating profit came in slightly higher than last year, but earnings were lower yoy on weaker investment income. Management guided that newsprint charge out rates have come down slightly and if they stay around the current level, margins are likely to creep up in 2H13. FY12 saw the property arm continue to provide robust growth, offsetting the gradual decline in circulation revenue (-2.7% yoy). Ad revenue (-0.7% yoy) was down due to fewer property advertisements after the government introduced cooling measures.

Property outperformance

We expect the property arm to continue being the star performer in FY13. This year saw rental increases at both Paragon (+S$4.6m, +3.1% yoy) and Clementi Mall on the back of a full year of operations (+S$18.6m, + 3.1% yoy). As Clementi Mall matures, rentals will continue to see good upside. The expected completion of Seletar Mall by end-FY14 should further increase the group's recurring earnings base.

Dividends may possibly grow

We think there is a chance dividends may increase on higher recurring profit as Clementi Mall matures. The 24Scts of dividend declared represents a yield of 6% The balance sheet is still in good shape; net gearing stands at 0.4x.