RESILIENT RETAIL MALLS

•Retail rentals to be relatively resilient

•Growth in retail landlord segment

•Further pressure on ad revenues likely

Resilient retail mall landlord business

In the face of an increasingly uncertain macro environment, we expect SPH’s retail landlord business to provide a stable counterweight to its core print business which is expected to face pressure from dipping ad demand. The retail business, comprising of the Paragon and the Clementi Mall, contributed S$47.9m of profits before tax (PBT) in 1HFY12, making up a respectable 22% of total PBT. Given the limited retail pipeline in the Orchard area over FY12-13 (est. 543k sq ft net floor area), we expect rentals at the Paragon to stay relatively resilient. In addition, we expect the strategic location of the Clementi Mall, now fully leased, at Clementi MRT station and strong foot traffic of 60k daily to underpin rental levels.

Expect growth in retail mall segment

Going forward, SPH’s retail landlord business is set to grow with the expected completion of the Sengkang commercial development by 2016. Won in a tender in Jan 2012 for S$328m, the 99-year Sengkang site is expected to yield a retail mall with ~284k sq ft GFA which would add another suburban mall similar to the size of Clementi Mall into SPH’s retail portfolio. We also believe that SPH’s 70:30 partnership with UEL would create considerable synergy between UEL’s property development experience and SPH’s mall management capabilities. Moreover, with group investible funds at S$0.9b as of end Mar 2012, we believe there is sufficient capacity for SPH to allocate additional capital into its retail strategy ahead.

Maintain BUY at unchanged S$4.05 fair value estimate

For the current fiscal year, however, we expect to see sustained downward pressure on SPH’s core print advertisement and circulation business as demand softens in an increasingly uncertain macro environment. In 1HFY12, we saw newspaper ad revenue dip 2.3%, driven mostly by falling classified ad demand which fell 6.5%. On the other hand, newsprint costs are expected to stay relatively stable ahead and we believe SPH has some flexibility in managing staff costs should the top-line weaken further. Maintain BUY with an unchanged fair value estimate of S$4.05.

RESILIENT RETAIL MALLS

•Retail rentals to be relatively resilient

•Growth in retail landlord segment

•Further pressure on ad revenues likely

Resilient retail mall landlord business

In the face of an increasingly uncertain macro environment, we expect SPH’s retail landlord business to provide a stable counterweight to its core print business which is expected to face pressure from dipping ad demand. The retail business, comprising of the Paragon and the Clementi Mall, contributed S$47.9m of profits before tax (PBT) in 1HFY12, making up a respectable 22% of total PBT. Given the limited retail pipeline in the Orchard area over FY12-13 (est. 543k sq ft net floor area), we expect rentals at the Paragon to stay relatively resilient. In addition, we expect the strategic location of the Clementi Mall, now fully leased, at Clementi MRT station and strong foot traffic of 60k daily to underpin rental levels.

Expect growth in retail mall segment

Going forward, SPH’s retail landlord business is set to grow with the expected completion of the Sengkang commercial development by 2016. Won in a tender in Jan 2012 for S$328m, the 99-year Sengkang site is expected to yield a retail mall with ~284k sq ft GFA which would add another suburban mall similar to the size of Clementi Mall into SPH’s retail portfolio. We also believe that SPH’s 70:30 partnership with UEL would create considerable synergy between UEL’s property development experience and SPH’s mall management capabilities. Moreover, with group investible funds at S$0.9b as of end Mar 2012, we believe there is sufficient capacity for SPH to allocate additional capital into its retail strategy ahead.

Maintain BUY at unchanged S$4.05 fair value estimate

For the current fiscal year, however, we expect to see sustained downward pressure on SPH’s core print advertisement and circulation business as demand softens in an increasingly uncertain macro environment. In 1HFY12, we saw newspaper ad revenue dip 2.3%, driven mostly by falling classified ad demand which fell 6.5%. On the other hand, newsprint costs are expected to stay relatively stable ahead and we believe SPH has some flexibility in managing staff costs should the top-line weaken further. Maintain BUY with an unchanged fair value estimate of S$4.05.

Hold for decent sustainable yields

At a Glance

• 2Q12 within expectations; 1H12 forms 46% of our estimates similar to previous years

• Rental income shines, while Newspaper & Magazines posted anemic growth

• 7 Scts interim DPS declared; expect full year DPS of 24 Scts

• Hold for 6.2% yield, TP unchanged at S$4.01

Comment on Results

2Q within expectations; 7 Scts interim dividend declared. Net profit grew by 12% y-o-y to S$84.1m, aided largely by stronger rental property income and a tax write-back of S$1.2m. Interim DPS of 7 Scts was declared, as expected. Book closure will be on 9 May, with payment on 23 May.

Rental income from property shines. Total revenue growth was subdued at 4% y-o-y to S$298.5m. By segments, Newspaper and Magazines registered flat revenue growth (S$234.5m, +0.1%) while Property rental revenue increased strongly by 22% to S$48m, supported largely by a full quarter contribution from Clementi Mall (+S$7.8m to S$9.2m) vs partial in 2Q11. EBIT margins rose 1.4ppt y-o-y to 32.4% as operating costs increased by slower 2.2%. Staff costs decreased by a marginal 0.3%, but costs such as newsprint (+3.5%), depreciation (+6.8%) and other operating expenses (+6.3%) headed higher.

Print ad growth in line with our FY12F for flat growth. Revenue from print ads rose a marginal 0.8% y-o-y in 2Q12, versus the 1.3% decline in 1Q12. The cautious employment market took a toll on recruitment ads, which contributed to a 9% dip in classified ad revenue. Display ads, however, improved 4% helped by the property and auto sectors. 1H12 print ad revenue was down a marginal 0.3% y-o-y, on track to meet our assumption for flat growth for the year.

Recommendation

Hold for 6.2% yield, TP remains at S$4.01. We see share price trading within a narrow range on the back of an uncertain global economic environment, with support from its attractive 6.2% yield. Maintain Hold for 9% total return to S$4.01 TP.

Fairly priced

1Q12 media performance was flat, no surprises. Cost pressures appear to be receding with signs of a bottoming for ad demand. But we struggle to find compelling catalysts for outperformance at current levels.

2Q/1H12 profit is slightly below at 22%/47% of our FY12 estimate and consensus on lower investment income. We lower our estimates by 1-3% to factor in the quarter but raise SOP target, incorporating its Sengkang acquisition and higher property values. Maintain Neutral.

Ad demand bottoming

We think ad demand could have bottomed. Ad revenue still declined 2.3% yoy in 2Q12 but the drop had slowed from 1Q12’s -4% as stronger display ads (+3% yoy) partially made up for weaker classified ads (-9%). The former benefitted from property (stronger-than-expected project sales and launches in Feb) and auto ads while classified ads suffered from reduced job ads. Circulation revenue fell for the second consecutive quarter with SPH yet to reap the results of its subscription drives.

Cost pressures receding

Cost pressures receded, expectedly, on softening newsprint prices and lower variable staff bonuses. 2Q12 newsprint costs were up a marginal 4% yoy while staff costs shed 0.3% despite an increased headcount. Newsprint spot prices are softening and savings should flow through as supplies are absorbed. Other opex could remain high on costs from subscription drives.

Not attractive enough

An interim dividend of 7cts has been declared, unchanged from 1H11. The 6% yields are fairly attractive given low interest rates and S$ appreciation. However, we think the yields could have priced in a mature print business and a lack of compelling catalysts. Its exhibition business is doing well with Internet investments turning around though contributions are small. We prefer retail S-REITs like CMT and FCT for their retail exposure and stronger growth potential.

No surprises; maintain NEUTRAL

2QFY12 recurring earnings grew 14% YoY, within our expectations. SPH reported 2QFY12 recurring earnings of S$90m (-26% QoQ) which made up 20% of our full year forecast. 2Q has historically been a weaker quarter. Property segment was the main contributor with rental income up 21% YoY on the back of higher contribution from Clementi Mall and higher rental rates from Paragon. Another comforting note was that 1HFY12 “Others” segment PBT losses were narrowed by 64% to S$5.6m. We continue to see a lack of catalysts for share price upside and maintain NEUTRAL with TP of S$3.91. An interim dividend of 7S¢ per share has been declared. SPH’s FY12 dividend yield of 6.2% still remains attractive.

Decline in N&M performance offset by property and others. 1HFY12 N&M PBT was down 6% due to lower ads from the banking and FMCG sectors. This was offset by better performance from the “Others” segment (comprising of internet and exhibitions) whose decline narrowed by 64% to S$5.6m. Property continued to contribute strongly as expected with 1HFY12 PBT growth of 43% to S$48m on the back of higher rental income from Clementi Mall (100% leased) and higher rental rates from Paragon.

Newsprint and staff costs remain stable. 1HFY12 staff costs increased only by a marginal 1% to S$178.3m despite a 4% increase in average headcount (from the acquisition of ACP Magazines) as bonus pools were reduced from the weaker performance in the N&M segment. Newsprint charge out prices remains stable as well with 2QFY12 prices flat QoQ (compared to previous seven quarters of consecutive increases).

SOTP-derived TP of S$3.91. 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 Feb 12.