Property & investment income impact otherwise in-line 2Q

SPH’s 2Q08 results were operationally solid with core revenues and EBITDA in-line with our expectations. But NPAT was impacted by significantly lower than expected investment income & Sky@Eleven recognition.

Specifically, although 2Q advertising revenues were seasonally lower QoQ, they increased +11% (+S$18m) YoY to S$180m driven by YoY growth in both classifieds & displays. Total 1H08 advertising revenues in-line at 49.8% DB FY08F. 2Q08 circulation revenues remained flat QoQ & YoY at $51m. As such, 2Q08 revenues (exc Sky@Eleven) increased +9% YoY to S$274m, as per expectations (1H08 revenues exc Sky@Eleven 49.8% DB FY08F).

Similarly, although costs increased slightly faster than revenues, the rate of growth was within our expectations as increases in staff costs (3yr high headcount & +4% in average per staff costs) were offset by declines in newsprint costs (on lower consumption and paper costs). Excluding Sky@Eleven, 2Q08 EBITDA increased +12% YoY to S$111m (a 40% EBITDA margin). In fact, total 1H08 EBITDA (exc Sky@Eleven) was 52% DB FY08F.

But low investment income performance dragging NPAT

But 2Q08 NPAT impacted by very low investment income which resulted in 2Q08 NPAT declining -6% YoY to S$99m despite strong operational performance (profit pre-investment income +36% YoY). The S$5m investment income (1Q08 S$10m) was the lowest in 4yrs and compares to DB FY08F S$90m. In addition, 1H08 NPAT was constrained by SPH booking just S $24m revenues in 2Q08 from Sky@Eleven – the project is currently behind schedule. Total 1H08 Sky@Eleven revenues (S$40m) were 18% DB FY08F (S$229m).

As such, 1H08 NPAT (S$211m) represented just 39% DB FY08F (S$543m) but we expect greater Sky@Eleven revenue recognition in 2H08 and the inline operational performance continues to under-pin.

SPH Q2 profit dips 6.3% to $99.6m

Recurring earnings surge 36% but investment income down 83.7%

SINGAPORE Press Holdings (SPH) turned in strong second-quarter recurring earnings for its media and property businesses. But a fall in investment income resulted in a 6.3 per cent dip in net profit to $99.6 million, from $106.3 million a year earlier.

The decline in net profit for the three months ended Feb 29 was due to an 83.7 per cent fall in investment income to $5.1 million from $31.6 million a year ago.

Stripping out investment income, profit jumped 36 per cent to $111.8 million from $82.2 million a year ago. This was backed by the strong performance of its newspaper and magazine operations and contribution from its Sky@eleven property development.

The drop in investment income was due mainly to higher profit on sale of investments last year. Also, this year’s fair valuation of investments was hit by the continued volatility in global financial markets. SPH restated its Q2 2007 results to take into account the retrospective adjustments relating to investment property under FRS (Financial Reporting Standard) 40.

Q2 earnings per share dropped to six cents from seven cents.

Operating revenue for the quarter grew 18.9 per cent to $298.1 million. Revenue from core newspaper and magazine operations rose 8.4 per cent to $236.4 million, with print advertisement revenue jumping 11.3 per cent to $179.8 million.

The property segment’s revenue almost doubled to $54.3 million from $27.3 million, with a $24.2 million contribution from Sky@eleven and a 10.6 per cent or $2.9 million increase in income from rental and related services from Paragon.

Total operating expenses went up by 10.8 per cent to $190 million. Property development costs for Sky@eleven amounted to $6.9 million while staff costs were up 9.7 per cent or $7.1 million, mainly due to increased headcount and annual salary increments. Headcount at end-February reached 3,814, up from 3,628 a year ago, mainly because of staffing for its new media businesses and increased operational needs for the magazine business.

Other operating expenses increased by 11.1 per cent or $4.2 million in tandem with the increase in business activity.

For the half-year ended Feb 29, 2008, net profit, including investment income, dropped 2.4 per cent from a year ago to $211.5 million. Excluding investment income, profit was up 26.9 per cent at $238.3 million.

First-half investment income was lower by 75.5 per cent or $46.3 million due largely to higher profit on sale of investments last year and this year’s lower fair valuation. H1 earnings per share fell to 13 cents from 14 cents last year.

SPH declared an interim dividend of eight cents a share, up from seven cents a year ago.

Chief executive Alan Chan said that recurring earnings for the current financial year are expected to be satisfactory. ‘Advertisement revenue will continue to be driven by the Singapore economy which is expected to grow at a more moderate pace in 2008. Profits from Sky@eleven will continue to provide an added boost to the group’s performance.’

He said that, in view of rising business costs amid the current inflationary climate, efforts will be focused on sustaining operating profit margins.

SPH shares fell eight cents to close at $4.43 yesterday, on volume of 3.9 million shares.

Core business going strong

Story: SPH reported a good set of operating results as at 1H08, which helped to offset poorer investment income. 1H08 PBT for the core newsprint and magazine business rose by 16% yoy to S$191m, boosted by double-digit ad revenue growth whilst PBT for Treasury and Investment dropped by 76% yoy to S$14.5m, due to a lack of special dividends and a poor equities market. Stronger contribution from the property segment, boosted by contribution from Sky@Eleven also helped offset lower investment income. As at halftime, net earnings for the Group declined by 2% yoy to S$212m. An S 8cts dividend was declared, vs S 7 cts a year ago.

Point: SPH continues to benefit from strong consumer sentiment in Singapore, as evidenced by the double-digit growth in ad spend in 2Q08 and we believe the Group can post double digit earnings growth for the full year for this business even with a slower second half. Meanwhile, we have lowered our investment income projections for FY08 and FY09 and also factored in a delay in construction for Sky@Eleven, which has been affected somewhat by a shortage in manpower and bad weather. These changes have not impacted our sum-of-the-parts valuation for SPH.

Relevance: We continue to like SPH for its attractive valuation and as a defensive stock, backed by a net yield of 7.2% (premised on 90% payout of EBIT; in line with last 6 years), and re-iterate our BUY call. Our 12-month target price is S$5.80, based on SOTP valuation.