Low growth but reasonable yields

• Core 3Q earnings in line with expectations

• Muted growth on cautious GDP outlook

• Dividend yield remains attractive at 6%

• Maintain Hold, TP unchanged at S$4.01

Highlights

Core 3Q results in line. Headline net profit fell 11.5% y-o-y to S$99.8m, slightly below our expectations, largely due to lower investment income (S$9.5m, -60%) and higher staff costs (S$94m, – 6%) as a result of bonus provisions. Core operations were otherwise resilient with revenue growth of 1%, helped by strong property rental revenue (S$48.7m, +13%). Despite worries about the global economy, print ad revenues remained resilient and registered marginal growth of 0.3%. This was offset, however, by slowing circulation revenue (-3% y-o-y to S$52.4m).

Revenue from the newspaper and magazine segment stayed relatively flat at S$261m vs S$263m in 3Q11. 9M12 earnings of S$281.4m now account for 72% of FY12’s earnings forecast, in line with expectations considering lower earnings, due to lower investment income. Investment income was strong in FY11 due to non-recurring recovery of losses arising from the Lehman crisis.

Our View

Growing rental income is key to growing volatility in media sector. We see SPH’s growing rental income as a key bulwark against potential volatility in ad spend and weakening circulation. The property segment now contributes 15% of revenues (13% last year) and 22% of profit before tax (14% last year). In contrast, newspaper and magazine’s PBT declined from S$95.7m to S$91.6m. The property segment has therefore become increasingly important in mitigating earnings volatility in the media segment, even as GDP expectations for Singapore this year are not expected to outpace last year.

Earnings growth likely to be muted, in line with Singapore’s cautious GDP growth expectations. Our DBS economist is forecasting GDP growth at 3.5% vs 4.9% last year. Since ad spend correlates well with Singapore’s GDP growth, we remain conservative over such growth in the coming quarters. We have imputed 2% growth in Ad Ex in FY13F, a marginal growth from our forecast of a 0% growth in FY12F.

Recommendation

Maintain Hold for 6% yield, TP unchanged at S$4.01. Even though growth may not be exciting, the stock is still attractive for its dividend yield of 6%. We therefore maintain HOLD with our sum-of-parts derived TP unchanged S$4.01.

Property segment continues to support growth

In-line; 3QFY12 recurring earnings grew 2.2% YoY. 3QFY12 recurring earnings of S$113m (+25% QoQ) accounted for 25% of our full year estimate. However 3QFY12 PATMI was down 13% YoY to S$100m due to a 60% YoY decrease in investment income (from fx related losses and lower dividend income). Property segment contributed to growth with rental income up 13% YoY with higher contribution from Clementi Mall and higher rental rates from Paragon. We tune downwards our FY12/13 PATMI estimates by 2%/1% due to lower Newspaper & Magazine (N&M) segment income partially offset by higher property related income. Maintain NEUTRAL with lower SOTP TP of S$3.85 (from S$3.91 previously). SPH’s FY12 dividend yield of 5.9% remains attractive though we see a lack of near term catalysts that could lead to share price upside.

We expect N&M to be weaker on slower domestic economic outlook. N&M advertisement revenue is correlated to Singapore’s economic performance. On 13 Jul 12, our OSK|DMG economics team trimmed our Singapore 2012 GDP growth forecast by 1.4ppt to 2.6% (see report titled “Singapore: Growth Momentum Slowed in 2Q12”). We correspondingly lower our FY12/13 N&M ad revenue by 3.5%/4.6%. On a positive note, falling newspaper circulation volume creates somewhat of a natural hedge seen through a 5.1% YoY decrease in 3QFY12 newsprint costs.

Property segment supporting growth. Rental income was up 13% YoY to S$49m due to a fully operational Clementi Mall and higher rental rates from Paragon. Acquisition of the Sengkang commercial site was completed in Apr 12, and the prospective mall is expected to become operational from 2015 onwards.

SOTP-derived TP of S$3.85. We value the core media segment based on 11x FY12 P/E, Paragon (S$2.4b) 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 May 12.

Cash is King

Respectable results. SPH announced its 3QFYMay12 results, which were broadly in line with market expectations. Top line registered a 0.9% yoy growth, driven by strong performance from the Property segment (+12.8% yoy) despite marginally decline from Newspaper & Magazine segment (-0.6% yoy). Core earnings increased by 2.2% yoy. Maintain BUY with target price of SGD4.43, based on SOTP valuation.

Core ads earnings remain stable. Print advertisement revenue remained stable with a marginally increase of SGD0.7m (+0.4% yoy) driven by 2.9% growth in Display ads. Circulation revenue declined in line with market expectation by SGD2m (-3.6% yoy) but circulation levels were maintained at an average of 1m copies daily.

Property segment to support future growth. SPH’s property segment will be the main growth engine for the whole group in our view. In 3QFY12, rental income rose by SGD5.5m (+12.8%). This was driven by higher rental rate in Paragon as well as contribution from full operation of Clementi Mall.

Operating margin sustained at a healthy 33.5%. Average newsprint cost declined for the second consecutive quarter to USD677/ton from USD690/ton last quarter. Staff cost increased by SGD6m (+6.8%) due to increased headcount from the acquisitions. Operating margin was sustained at 33.5%, marginally improved from last year. Net profit of SGD100m was 13.1% less compared with a year ago. It is mainly because of a 60% decline in investment income due to mark-to-market losses in volatile market condition, which to us is not very worrying.

Maintain BUY, with SOTP TP of SGD4.43. We maintain our BUY call on SPH with SOTP TP of SGD4.43. We believe a potential spin-off of its retail assets will add value to shareholders. Valuation is not expensive at 15.6x FY13F PE and 3.0x FY13F PB given SPH’s monopoly position in media business. Downside should be protected by 6.5% dividends yield.

Pseudo retail REIT

With a growing retail property arm and stable media business, SPH is increasingly like a retail REIT with limited cash-call risks, in our view. Offering forward yields of 6.4% vs.6.1% for retail S-REITs after its YTD underperformance, we think it offers a cheaper alternative.

We raise our EPS marginally on property rental adjustments and our SOP target price after rolling one year forward. We also raise DPS on less conservative payout assumptions. Upgrade from Neutral to Outperform. We see catalysts from higher-than-expected ad growth.

Retail malls for growth

With a stable and mature print business, we expect SPH’s growth to come increasingly from its retail malls. Revenue CAGR for SPH’s gem asset, Paragon, had been an impressive 8.3% over 2006-11, outstripping that for comparable assets under retail S-REITs. We expect similar success for its Clementi Mall during its first renewal cycle; with the success extending to its Sengkang Mall on completion.

Stable media business to underpin cashflows

We expect its newspaper & magazine segment to remain dominant and underpin SPH’s cashflows. We expect a seasonally stronger 3QFY12, as strong property, auto and telco display ads mitigate lukewarm GSS ad demand and weaker recruit and classifieds.

Pseudo retail REIT

With typical payouts of >90%, we believe SPH is akin to a retail REIT. Against retail REITs, SPH stands out for its stronger balance sheet and thus limited cash-call risks, in our view. 2Q12 net gearing is low at 35% with property asset values booked at historical costs less depreciation. With a growing property arm, we do not dismiss the possibility of a spin-off or sale of assets to a REIT over the longer term.

Cheaper alternative

SPH has underperformed retail S-REITs YTD and during the recent flight to safety. Yields are now 6.4% vs. an average of 6.1% for retail S-REITs. We see SPH as a cheaper alternative for investors seeking exposure to retail S-REITs.

Pseudo retail REIT

With a growing retail property arm and stable media business, SPH is increasingly like a retail REIT with limited cash-call risks, in our view. Offering forward yields of 6.4% vs.6.1% for retail S-REITs after its YTD underperformance, we think it offers a cheaper alternative.

We raise our EPS marginally on property rental adjustments and our SOP target price after rolling one year forward. We also raise DPS on less conservative payout assumptions. Upgrade from Neutral to Outperform. We see catalysts from higher-than-expected ad growth.

Retail malls for growth

With a stable and mature print business, we expect SPH’s growth to come increasingly from its retail malls. Revenue CAGR for SPH’s gem asset, Paragon, had been an impressive 8.3% over 2006-11, outstripping that for comparable assets under retail S-REITs. We expect similar success for its Clementi Mall during its first renewal cycle; with the success extending to its Sengkang Mall on completion.

Stable media business to underpin cashflows

We expect its newspaper & magazine segment to remain dominant and underpin SPH’s cashflows. We expect a seasonally stronger 3QFY12, as strong property, auto and telco display ads mitigate lukewarm GSS ad demand and weaker recruit and classifieds.

Pseudo retail REIT

With typical payouts of >90%, we believe SPH is akin to a retail REIT. Against retail REITs, SPH stands out for its stronger balance sheet and thus limited cash-call risks, in our view. 2Q12 net gearing is low at 35% with property asset values booked at historical costs less depreciation. With a growing property arm, we do not dismiss the possibility of a spin-off or sale of assets to a REIT over the longer term.

Cheaper alternative

SPH has underperformed retail S-REITs YTD and during the recent flight to safety. Yields are now 6.4% vs. an average of 6.1% for retail S-REITs. We see SPH as a cheaper alternative for investors seeking exposure to retail S-REITs.