Print Business Loses Its Edge

SPH announced full-year revenue of SGD1.22bn (-2.0% YoY) and PATMI of SGD404.3m (-6.2% YoY), broadly in line with our estimates. We see weakness in its core business as companies switch to online advertising from its traditional advertising platform. We keep our SELL call and SOP-based TP remains at SGD3.57 (14.4% downside), premised at 17.0x FY15 P/E and implying 6.2% FY15 dividend yield.

• Pessimistic outlook for its publishing business. Revenue from SPH’s newspaper and magazine (N&M) segment slid 6.0% YoY to SGD931.7m in FY14 (Aug). This was mainly driven by the decline in its advertising and circulation revenue, which were down 6.8% and 4.9% YoY respectively. We continue to hold a bleak view on its publishing segment as its clients are switching to better and cheaper alternatives to advertise on the internet via social media platforms such as Facebook.
  
• SPH REIT (SPHREIT SP, NR) provides a strong and stable income stream. The REIT’s portfolio, consisting of Paragon and Clementi Malls, has proven to be resilient as both assets maintain full occupancy rates. Revenue from SPH’s property segment inched up by 3.5% YoY, underpinned by a positive rental reversion of 8.5% and lower property expenses. Moving forward, we think that the portfolio could continue to provide stable support to its core business.
  
• Seletar Mall a near-term catalyst for its property division. In addition to its REIT’s contributions, the new opening of Seletar Mall – which recorded >90% pre-committed leases – in the next quarter could provide an additional income stream for the business. We think that the suburban mall will be able to attract good-quality tenants as residences within the area are underserved by retailers. (Seletar Mall has c.320,000 residences nearby vs Clementi Mall’s c.200,000)
  
• Maintain SELL. Despite the expansion in its property division, its core business continues to be a laggard. We maintain our SELL recommendation, while our SOP-based TP remains unchanged at SGD3.57, implying a 17.0x FY15 P/E and a 6.2% FY15 dividend yield.

Seletar Mall to open in Nov-14

• Dividend for FY14 at 21 S-cents
  
• FY14 ad revenues down 7.4%
  
• The Seletar Mall on target to open in Nov 14
  

Signing off on a muted year

SPH reported FY14 PATMI of S$404.3m, down 6.2%, mostly due to a 5.5% decline in operating profit to S$349.0m, a larger net loss from associates/JV, and a lower fair value gain from investment properties, partially offset by gains from the sale of 701Search and higher investment income. Overall, we judge FY14 results to be broadly within expectations. Management also declared a final dividend of 14 S-cents, comprising a normal dividend of 8 S-cents and a special dividend of 6 S-cents. FY14 dividends cumulates to 21 S-cents (payout ratio 107.8%), which is marginally lower than the 22 S-cents paid last year (excluding special dividend for SPH REIT).

Ad conditions remain difficult

FY14 revenues dipped 2.0% to S$1,215.2m as core newspaper and magazine revenues decreased 6.0% to S$931.7m. Conditions for the print ad segments remain difficult, with FY14 display and classified revenues falling 7.1% and 8.0%, respectively. Given persistent headwinds in the Singapore housing space and a continued structural shift in terms of readers moving onto new media channels, we expect ad topline pressure to continue into 1H15. In 4QFY14, newsprint prices inched down to S$598/mt versus S$607/mt in 3QFY14, while YTD staff costs increased 7.1% YoY to S$374.5m.

Signing off on a muted year

Seletar Mall on target for Nov 14 opening

We saw stable performance from the group’s property segment, with FY14 revenues inching up 3.5% to S$205.0m as higher rental income was derived from both retail malls. We understand the group’s new Seletar Mall is on target to open by Nov-14, with occupancy rates around 90% and rentals around S$11 psf pm (on an average basis including anchor tenants). Management

highlights that The Seletar Mall is located in a less established retail area, compared to The Clementi Mall, and stabilization of the new asset before it is ready for capital recycling could take between 4-6 years. Maintain HOLD on SPH with an unchanged fair value estimate of S$4.13.

Below expectations

Declining ads, weak shopper sentiment and unsustainable dividends are just some of the reasons for why we are negative on SPH. Excluding a one-off divestment and property revaluation gain, FY14 core net profit was below at just 85% of our estimate and 89% of consensus. We keep our Reduce call, and cut FY15-16 EPS by 5-9% to account for higher-than-expected minority interests and share of losses in its associates and JVs. Our SOP-based target price falls slightly to S$4.03.

Earnings hit by associates, JVs and minority interests

FY14 revenue (-2.0% yoy) met our expectation, but core net profit (-24.2% yoy) came in at just 85% of our estimate. This was due to: 1) higher-than-expected minority interests as a result of the fair value gain on investment properties in SPH REIT and 2) larger share of losses in its associates and JVs as SPH made further investments in the loss-making 701 classifieds business in Indonesia and the Philippines to face tougher competition. Advertisement revenue continued on a steep decline (-7.4% yoy) as property and car ads continued to slip, but this was countered by strong contributions from other revenue (+56.7% yoy); especially exhibitions, radio and sgCarMart (acquired in Apr 13).

Asset recycling of Seletar Mall only in 4-6 years’ time

Seletar Mall is slated to open in Nov, with an expected occupancy of c.90% at launch. SPH has guided for rents to be around S$11/psf, in line with our initial estimates. Management expects to inject the mall into SPH REIT upon the stabilisation of rents after 1-2 cycles, likely in 4-6 years’ time (vs. two years for Clementi Mall). Given that Seletar Mall is located on a relatively new estate and tenants are finding it difficult to hire staff due to a labour shortage, we believe that it may be difficult for SPH to recognise a meaningful step-up in rents.

Dividends may not be sustainable

SPH declared a final and special dividend of 8 Scts and 6 Scts, respectively, bringing the total DPS to 21 Scts. The dividend payout ratio reached a new high of 107.8%, a level which we believe is unsustainable. Until SPH finds a new growth driver to counter its declining newspaper and loss-making classifieds businesses, we believe that dividends may be at risk. SPH has already deployed c.10% of its S$100m new media fund in an online bidding website, Smaato, and made a small investment in an overseas e-commerce platform. We believe that these investments are still at the initial stages and could take time to contribute meaningfully. We prefer exposure to yield plays through the REITs.