• SPH has cut the special dividend to 8 cents per share. Combined with the unchanged 9 cents final and 7 cents interim, the yield is 6.3%.

• While understandable (dividend for the year of $386 mln already represents close to 100% payout), it is disappointing, considering that the $109.3 mln profit decline to $388.6 mln* for ye Aug ’11 because of the absence of property development profit is long known (profit from Sky @ Eleven, which totaled $154.2 mln for ye Aug ’10, ceased from Q4), and management had kept the interim dividend for half year ended Feb ’11 unchanged at 7 cents.

* Recurrent earnings effectively improved by $24 mln / 6.3% to $409.0 mln, especially in Q4 when it came to $103.6 mln vs $75.4 mln year before.

• We maintain SPH’s board should commit to a clear dividend policy, given the monopoly of the newspaper business.

• Still, the 6.3% yield should continue to provide good cushion to SPH’s share price.

• BUY especially if the stock should react negatively to the dividend cut.

• SPH has cut the special dividend to 8 cents per share. Combined with the unchanged 9 cents final and 7 cents interim, the yield is 6.3%.

• While understandable (dividend for the year of $386 mln already represents close to 100% payout), it is disappointing, considering that the $109.3 mln profit decline to $388.6 mln* for ye Aug ’11 because of the absence of property development profit is long known (profit from Sky @ Eleven, which totaled $154.2 mln for ye Aug ’10, ceased from Q4), and management had kept the interim dividend for half year ended Feb ’11 unchanged at 7 cents.

* Recurrent earnings effectively improved by $24 mln / 6.3% to $409.0 mln, especially in Q4 when it came to $103.6 mln vs $75.4 mln year before.

• We maintain SPH’s board should commit to a clear dividend policy, given the monopoly of the newspaper business.

• Still, the 6.3% yield should continue to provide good cushion to SPH’s share price.

• BUY especially if the stock should react negatively to the dividend cut.

Downside risks

While SPH’s 6% yields are fairly attractive, we see downside with streetyet to factor in a sufficient falloff in ad growth momentum and investment income. Balance sheet is however strong, which coupled with recurring cash flows, could prompt us to revisit the stock.

FY11 core profit was in line at 102% of our estimate though final dividend of 17scts beat our expectations on a higher payout. We are however lowering our EPS estimates on reduced ad revenue forecast and investment income. Coupled with lower property valuations, we lower our sum-of-parts target price to S$3.90 from S$4.24. Maintain Neutral.

Falloff in ad growth momentum imminent

While print revenue chalked up a modest 5.7% yoy growth in FY11 on stronger display ad sales, we see downside for growth momentum next year amidst a slowing domestic economy. Print revenue fell by 17% in the last downturn. With slowdown in economic growth next year, we moderate our FY12 print revenue growth estimate to +2%.

Reprieve from moderating cost pressures

Cost pressures could alleviate, given a variable performance component in staff cost and a moderation in newsprint costs (spot: US$680/MT). These could offer some reprieve should top-line growth fall.

Risks from investment portfolio

FY11 earnings were propped up partly by a 28% increase in investment income. With equities (mainly M1 and Starhub holdings) and investment funds (some S-REIT holdings) accounting for 33% and 25% of its investible funds, downside risks could prevail on a deep market correction.

Revisit at lower valuations

While dividend yields of 6% are fairly attractive, we see downside in ad growth, investment and property portfolio. We are lowering our valuations of Paragon and Clementi Mall. Balance sheet is however strong, which coupled with recurring cash flows, could prompt us to revisit the stock at lower valuations.

SPH posts FY2011 net profit of $388.6m

THE financial year ended Aug 31 (FY2011) turned out to be a creditable performance for Singapore Press Holdings (SPH), underpinned by higher advertisement revenues, robust growth in rental income, and continued progress in the exhibitions and online businesses.

SPH achieved a net profit of $388.6 million for FY2011. Compared with FY2010’s $497.9 million net profit, the year when the group benefited from profits of $154.2 million from its Sky@eleven condo development, the FY2011 earnings were 22 per cent lower. But excluding the Sky@eleven effect, SPH’s group operating revenue surpassed the previous year’s by $91.5 million (7.9 per cent) and recurring earnings rose $24.1 million (6.3 per cent).

On the street, SPH’s results are in line with consensus as estimates compiled by Bloomberg reflected an expected net income of $380.3 million.

Earnings per share came in at 24 cents, down from FY2010’s 31 cents while group net asset value per share stayed at $1.39.

Group operating revenue, including other operating income, stayed above the billion dollar mark at $1.27 billion, down 9.2 per cent.

Revenue for the newspaper and magazine segment grew year-on-year by $39.2 million (4 per cent) to $1.01 billion. Print advertisement revenue rose by $41.6 million (5.7 per cent), boosted by strong display advertisement sales. Circulation revenue fell slightly by $1.9 million (0.9 per cent).

Rental income for the group continued to register robust growth in FY2011 with an increase of $33.4 million (24.9 per cent). Paragon contributed $15 million (11.4 per cent) to the rise on the back of higher rental rates. Clementi Mall achieved full occupancy, reporting a maiden rental income of $18.4 million.

Operating revenue from the group’s other businesses climbed 37.3 per cent to $69.8 million, driven by income from the exhibitions business for newly acquired and other shows, and higher revenue from online and other media businesses.

Newsprint costs were up $11.8 million (13.1 per cent) due to higher newsprint prices but partially cushioned by a favourable exchange rate. The increase in staff costs of $8 million (2.3 per cent) was attributable to salary increments and increased headcount, partially offset by a reduced variable bonus provision. Staff costs for FY2010 also included government jobs credit.

Other operating expenses rose $30 million (14.9 per cent), with factors including the commencement of Clementi Mall operations and costs incurred for newspaper subscription drives.

Investment income went up $11.1 million (28.3 per cent) to $50.4 million.

On the outlook for FY2012, CEO Alan Chan said: ‘The outlook remains uncertain amidst global economic woes. The group will continue to leverage on its key strengths and synergies to deliver shareholder value. Print advertisement revenue will continue to move in tandem with the performance of the Singapore domestic economy.’

SPH has proposed a final dividend of 17 cents per share, comprising a normal dividend of nine cents and a special dividend of eight cents. Together with the interim dividend paid, total dividend payout for FY2011 will be 24 cents.

SPH shares closed four cents higher at $3.78 yesterday, before its results announcement was made.

Slowdown in print-ad revenue

• In line; maintain Neutral. 3Q11 core net profit of S$114.8m is in line with our forecast and consensus, accounting for 30% of our FY11 estimate. 9M11 core net profit forms 77% of our full-year estimate. Though profit is in line, earnings quality is weaker with a decline in the print business propped up by stronger investment income. Though we had been expecting margin pressures for its print business, we were slightly surprised by the yoy weakening in ad revenue. We fine-tune our FY11-13 EPS estimates by 1%, with higher investment income assumptions offset by higher taxes and opex. Accordingly, our SOP target price falls to S$4.24 from S$4.29. Maintain Neutral with continued cost pressures, the low likelihood of accretive property acquisitions and a potential slowdown in ad-revenue growth amid weaker macro-economic sentiment. SPH should, however, be supported by dividend yields of about 6%.

• Ad revenue weakened yoy. Excluding revenue from Sky@eleven in 3Q10, operating revenue rose a smaller 4% yoy (2Q11: +8%) as higher rental and other revenue offset weaker print revenue. Though a moderation had been expected, the 4% decline in ad revenue in 3Q11 took us by surprise. This was the result of an 8% fall in classified revenue, stemming from reduced ad demand from the property and auto sectors. With companies potentially turning more cautious in the midst of weak macro-economic sentiment, any growth in ad revenue could be muted.

• Print cost pressures persisted. Margins remained hit by higher newsprint costs (+10% yoy) on a higher charge-out rate of US$666/MT. Staff costs, however, slid 8% yoy, though this was mainly due to lower provisions for variable bonuses (with a weaker print business) which offset increments and a bigger headcount.

• Stronger rentals for property but accretive acquisitions remain remote. Rental revenue grew 23% yoy and 9% qoq on a stronger performance from Paragon and with tenants progressively starting operations at Clementi Mall (which opened officially in May 11). Accretive retail property acquisitions remain remote, in our view, with continued aggressive bids by developers. SPH lost out on a bid to a CMT/CMA/Capland JV for the Jurong Gateway site in May 11.