SPH reports Q3 net profit of $114.8m

SINGAPORE Press Holdings’ (SPH) third-quarter net profit and operating revenue fell 30.2 per cent and 20.8 per cent respectively, due mainly to the absence of contributions from the Sky@eleven development which was completed in May 2010.

For the three months ended May 31, net profit attributable to shareholders dropped to $114.8 million from $164.6 million a year earlier while turnover fell to $328.8 million from $414.98 million.

Excluding the previous Q3’s figures from Sky@eleven, net profit rose 17.1 per cent and operating revenue improved 4.4 per cent year-on-year.

SPH said yesterday that ‘improved performance from the Internet and exhibition businesses cushioned a marginal reduction in profits from the newspaper and magazine segment’.

Earnings per share for the quarter were seven cents, down from 10 cents a year ago. Group net asset value per share of $1.33 as at May 31, was also down from $1.39 at the end of the last financial year.

The newspaper and magazine segment posted operating revenue of $263 million, a 1.1 per cent dip from a year ago. Print advertising revenue slipped 1.6 per cent to $201.1 million, ‘mainly due to lower Classifieds advertisements’. Circulation revenue kept stable year on year at $53.8 million, thanks to newspaper subscription drives.

Though the property segment’s revenue dropped 68.1 per cent with the completion of Sky@eleven, property rental income grew 22.8 per cent in the quarter to $43.2 million, thanks to Paragon’s higher rental rates and a $6 million rental income from Clementi Mall for Q3 FY11. The Clementi Mall is fully leased and tenants have progressively started operations since January this year.

The strongest revenue growth of 64.5 per cent came from the group’s ‘other businesses’. Exhibitions held in Q3 – newly acquired IT Show and Food & Beverage Fair and the maiden trade show BuildTechAsia – contributed the most.

Costs associated with this exhibition business, as well as higher newsprint costs, pushed materials, consummables and broadcasting costs up by 14.9 per cent, or $5.8 million. Despite salary increments and a higher headcount, staff costs fell 8.6 per cent, or $8.3 million, due to a lower variable bonus provision.

Higher dividend income and fair value gains on investments led to a doubling of Q3 investment income year on year, to $23.7 million.

For the nine months ended May 31, the group’s recurring earnings of $305.4 million was 34.1 per cent lower than for the same period last year, which included Sky@eleven profits of $159.2 million. Investment income increased by $14.6 million (57.5 per cent). Net profit attributable to shareholders of $292.5 million was 30.8 per cent lower.

Chief executive Alan Chan said: ‘In the near term, prospects remain positive and the group’s print advertisement revenue is expected to move in tandem with the Singapore domestic economy. The Clementi Mall, which was officially opened in May, is poised to enjoy good catchment from the surrounding residential areas and tertiary institutions. We will continue to invest in new media and explore business adjacencies for growth.’

SPH closed four cents lower at $3.91 yesterday, on a day when Asian markets were hit by fears over European debt woes.

Upgrade to BUY; awaiting capital deployment

Almost got the Jurong Gateway site… A consortium, made up of Singapore Press Holdings (SPH) and United Engineers Limited, recently bid S$917m for a site beside Jurong East MRT station, and only 5.4% below the winning bid. This outcome was similar to a Bedok site auction in Sep 10. We think these strong tenders from SPH underline its desire to expand their retail landlord business. As of 2Q11, we estimate SPH to have a sizeable acquisition war-chest of S$1,265m, assuming a net gearing ceiling of 70%.

…but more GLS auctions to come. We think there are three sites in the 2H11 GLS supply that could be of interest to SPH. The commercial site beside Paya Lebar MRT, with a large GFA of 86,940 sqm, could have a significant retail component after setting aside the minimum office and hotel requirements. In addition, the commercial site beside Fernvale LRT could house a retail development with 26,400 sqm GFA – around the size of Clementi Mall. There is also a white site on the reserve list beside Novena MRT with potentially 19,400 sqm retail GFA after taking out the estimated minimum hotel requirement.

TripleOne and 313@Somerset potential targets? Market talk is that TripleOne Somerset is on the market for about S$1.2b ($2,132 psf NLA) and that 313@Somerset could be for sale as well. These may be interesting targets for SPH who could derive operational synergies between managing Paragon and any one of these assets, particularly 313@Somerset. Given the sizes of these assets, however, it is more likely for SPH to consider acquiring a stake or participating in a joint venture instead of acquiring these assets wholly.

Successful execution at Clementi Mall. Clementi Mall has opened for operations smoothly. The mall is fully leased with an average monthly rent of S$14 psf. Clementi Mall highlights SPH’s retail management capabilities in a suburban location and the market would likely view similar acquisitions favorably. We forecast annual revenue at around S$30m from Clementi Mall after 4Q11.

Upgrade to BUY on valuation. The current price of S$3.81 indicates an upside of 13.4% against our S$4.32 fair value. In addition, the downside is limited by an attractive dividend yield of 7.1%, which is underpinned by a core newspaper segment yielding solid recurrent cash. Look for accretive acquisitions to be positive catalysts in FY11-12. We are upgrading SPH to BUY with a fair value estimate of S$4.32.

Upgrade to BUY; awaiting capital deployment

Almost got the Jurong Gateway site… A consortium, made up of Singapore Press Holdings (SPH) and United Engineers Limited, recently bid S$917m for a site beside Jurong East MRT station, and only 5.4% below the winning bid. This outcome was similar to a Bedok site auction in Sep 10. We think these strong tenders from SPH underline its desire to expand their retail landlord business. As of 2Q11, we estimate SPH to have a sizeable acquisition war-chest of S$1,265m, assuming a net gearing ceiling of 70%.

…but more GLS auctions to come. We think there are three sites in the 2H11 GLS supply that could be of interest to SPH. The commercial site beside Paya Lebar MRT, with a large GFA of 86,940 sqm, could have a significant retail component after setting aside the minimum office and hotel requirements. In addition, the commercial site beside Fernvale LRT could house a retail development with 26,400 sqm GFA – around the size of Clementi Mall. There is also a white site on the reserve list beside Novena MRT with potentially 19,400 sqm retail GFA after taking out the estimated minimum hotel requirement.

TripleOne and 313@Somerset potential targets? Market talk is that TripleOne Somerset is on the market for about S$1.2b ($2,132 psf NLA) and that 313@Somerset could be for sale as well. These may be interesting targets for SPH who could derive operational synergies between managing Paragon and any one of these assets, particularly 313@Somerset. Given the sizes of these assets, however, it is more likely for SPH to consider acquiring a stake or participating in a joint venture instead of acquiring these assets wholly.

Successful execution at Clementi Mall. Clementi Mall has opened for operations smoothly. The mall is fully leased with an average monthly rent of S$14 psf. Clementi Mall highlights SPH’s retail management capabilities in a suburban location and the market would likely view similar acquisitions favorably. We forecast annual revenue at around S$30m from Clementi Mall after 4Q11.

Upgrade to BUY on valuation. The current price of S$3.81 indicates an upside of 13.4% against our S$4.32 fair value. In addition, the downside is limited by an attractive dividend yield of 7.1%, which is underpinned by a core newspaper segment yielding solid recurrent cash. Look for accretive acquisitions to be positive catalysts in FY11-12. We are upgrading SPH to BUY with a fair value estimate of S$4.32.

Be content with stability

Event

• Two failed bids at recent land tender exercises could prompt the Singapore Press Holdings (SPH) to become more aggressive in seeking future projects. Or, it could just put property acquisition plans on the back burner as there are fewer sites that meet its investment criteria. On our part, we prefer SPH to focus on boosting its digital media revenue stream and returning surplus cash to shareholders. We also identify a revaluation boost for Paragon as a potential catalyst, even though the chances of it occurring are still remote for now. At FY Aug12F PER of 15x and a sustainable dividend yield of 6.4%, the stock still warrants a BUY rating but at a lower target price of $4.60.

Our View

• In May this year and September last year, SPH failed to secure the White Site at Boon Lay Way and the mixed‐used site at Bedok Town Centre, respectively. Fewer commercial plots are now available with nearly all sites on the Confirmed List of the 2H11 Government Land Sales (GLS) Programme slated for residential use and a White Site on the Reserve List catering to Grade A office use. With neither segment the focus of SPH’s property development division, we rule out land acquisition as a near‐term catalyst.

• The group’s commercial properties appear to be doing well. We expect Clementi Mall, which became fully operational last month, to achieve gross rental revenue of $32.5m pa by FY Aug12. Paragon, on the other hand, is benefitting from positive rental reversions. If market buzz is true that Australian property group Lend Lease is seeking to divest its stake in the neighbouring retail mall, 313@Somerset, at $4,400‐4,800 psf net lettable area, Paragon’s valuation may get a boost. It currently is valued at around $3,200 psf compared to Ion Orchard whose valuation stands at $4,169 psf.

Action & Recommendation

SPH’s core media and retail mall rental businesses will continue to hinge on domestic consumption growth. The plan to use Apple’s and Google’s subscription platforms to boost its subscription base is positive for the longer term. The return of surplus cash as dividends is another potential catalyst. However, a key risk is that management might bid aggressively for property projects. Maintain BUY with target price lowered to $4.60 (previously $4.68).

Be content with stability

Event

• Two failed bids at recent land tender exercises could prompt the Singapore Press Holdings (SPH) to become more aggressive in seeking future projects. Or, it could just put property acquisition plans on the back burner as there are fewer sites that meet its investment criteria. On our part, we prefer SPH to focus on boosting its digital media revenue stream and returning surplus cash to shareholders. We also identify a revaluation boost for Paragon as a potential catalyst, even though the chances of it occurring are still remote for now. At FY Aug12F PER of 15x and a sustainable dividend yield of 6.4%, the stock still warrants a BUY rating but at a lower target price of $4.60.

Our View

• In May this year and September last year, SPH failed to secure the White Site at Boon Lay Way and the mixed‐used site at Bedok Town Centre, respectively. Fewer commercial plots are now available with nearly all sites on the Confirmed List of the 2H11 Government Land Sales (GLS) Programme slated for residential use and a White Site on the Reserve List catering to Grade A office use. With neither segment the focus of SPH’s property development division, we rule out land acquisition as a near‐term catalyst.

• The group’s commercial properties appear to be doing well. We expect Clementi Mall, which became fully operational last month, to achieve gross rental revenue of $32.5m pa by FY Aug12. Paragon, on the other hand, is benefitting from positive rental reversions. If market buzz is true that Australian property group Lend Lease is seeking to divest its stake in the neighbouring retail mall, 313@Somerset, at $4,400‐4,800 psf net lettable area, Paragon’s valuation may get a boost. It currently is valued at around $3,200 psf compared to Ion Orchard whose valuation stands at $4,169 psf.

Action & Recommendation

SPH’s core media and retail mall rental businesses will continue to hinge on domestic consumption growth. The plan to use Apple’s and Google’s subscription platforms to boost its subscription base is positive for the longer term. The return of surplus cash as dividends is another potential catalyst. However, a key risk is that management might bid aggressively for property projects. Maintain BUY with target price lowered to $4.60 (previously $4.68).