Ad to your portfolio

• Recent correction brings further value on the back of improving fundamentals

• Strong Apr AdEx growth of 31% yoy, even stronger than Mar’s 23% yoy growth

• Ad yields on the rise, with more creative ads

• Reiterate Buy; sum-of-parts TP: S$4.42.

AdEx for display and classifieds surged 31% yoy in Apr. With the recent price correction, we believe there is even better value as latest Apr data from Nielsen Media Research shows that AdEx for Display and Classifieds Ads surged 31% yoy, higher than the 23% for Mar. Although the strong growth in the past 2 months could partly be due to the low base effect last year, at the depth of the recession, we expect the growth trend to continue, albeit at a slower rate. Based on SPH’s financial year, YTD AdEx (Sep’09 – Apr’10) is up 11.5% yoy.

Ad yields are improving with more creative ads, World Cup, property launches. There have been more creative ads, for instance the ones carried in 3-D format (12 May ST edition) and an 8-page wrap-around full colour leaflet ad for the launch of a new car model (22 May). Such special colour ads improve yields for SPH. While these could be one-offs, it signifies that advertisers have been more receptive to creativity in terms of ad delivery in traditional newspapers. In addition, the late confirmation of the FIFA World Cup broadcasting rights for Singapore could also swing advertisers towards print, from TV, given the short lead-time. The large number of property sites for tender could also mean sustainability of property launch ads well into 2011.

Reiterate Buy recommendation, TP: S$4.42. 3Q results should be announced in the week commencing 12 July. We believe operating numbers should continue to show better growth from 2Q. We reiterate our Buy recommendation with our sum-of-parts TP at S$4.42. In our view, the recent sell-down looks overdone on the back of firm fundamentals. Dividend yield is also attractive at c.7%.

Core business doing well

• 30% increase in net profit YoY

Singapore Press (SPH) reported net profit of S$113m for Q2 FY10, 16% below our forecast. The difference was due to lower property and investment income. We are not overly concerned about the lower property income as we believe this is a timing issue. The core business did well and we think the momentum could continue given the strength of the economy. We reiterate our Buy rating with a price target of S$4.40.

• Room for upside in core business

Newspaper advertising was strong with display ads up 20% YoY and classified ads up 6.4%. On an annualised basis, the first half advertising revenue is still 11% below the high reached in FY08. We believe this gap will close, especially if the tourism industry picks up on the opening of the two integrated resorts.

• Sky@Eleven to be completed in a few months

The company has indicated that its Sky@Eleven project would be completed in the next few months. We had assumed it might finish towards the end of the year and as a result we have brought forward the Sky@Eleven revenue recognition. Our EPS forecasts for FY10, FY11 and FY12 are S$0.32, S$0.26 and S$0.27, respectively.

• Valuation: 13.5x one-year forward earnings, 20% below 10-year mean

We derive our price target from a DCF-based methodology, explicitly forecasting long-term valuation drivers using UBS’s VCAM tool. Our key assumptions include a WACC of 7.35% and long-term growth of 3%.

A proxy to GDP growth

• MTI raises Singapore’s GDP forecast to 7%-9%; our economist also raised his forecast to 9%, from 7%

• SPH looks poised to ride on stronger GDP growth given its proxy to the economy

• Raise earnings by 2% on higher ad growth assumption, offset partially by higher costs

• Maintain Buy, TP raised to S$4.42

Remain positive. We hosted a post 2Q10 results luncheon with SPH management and remain confident that SPH will see sequential improvement in operating results arising from better economic outlook, in conjunction with a higher GDP forecast by MTI. During the luncheon, there were wide-ranging questions from its operations, properties, costs and strategies, which we have summarized inside this report.

Proxy to the economy. MTI revised up Singapore’s GDP to 7%-9%, from 4.5%-6.5% previously. With ad revenue growth trend correlated to GDP growth, we believe there presents further upside to SPH’s ad revenue in ensuing quarters. We are now assuming a 10% growth in ad revenue for FY10, though the flow through effects to net profit is partially offset by higher staff costs. As such, we revised our FY10 earnings up by c.2%.

Maintain Buy, TP: S$4.42. Our sum-of-parts TP is raised to S$4.42. We believe SPH is well-poised to ride on Singapore’s economy, which is now projected to grow stronger. Its strong balance sheet also allows it to capitalize on any investment opportunities that may arise. We believe the dividend yield of 6.8% would provide support for share price.

Stellar 1HFY10 results

Key meeting takeaways

SPH’s 1HFY10 operating profit jumped by 29.4% yoy to $286.8m on strong performance by the Newspaper and Magazine segment, lower newsprint costs and higher revenue from Sky@Eleven. Net profit grew by 61.2% yoy to $258.0m, turning net loss from investments into a gain. Overall, the results were in line with our expectations. An interim dividend of 7 cents was declared. Maintain Buy with higher target price of $4.61.

Our View

Revenue from the Newspaper and Magazine segment grew by 2.6% to $465.9m in 1HFY10, in line with the positive trend in news ad revenue growth. In 2QFY10, display ad revenue grew by 20.2% yoy, led by demand from the property, telco and FMCG sectors. Classified ads grew by 6.4% yoy, dragged down by weakness in the auto sector.

Sky@Eleven will obtain TOP soon. A remaining $77m in revenue will be recognised in due course. As the project was on the deferred payment scheme, the bulk of the proceeds (about $423m) will be received upon TOP, replenishing SPH’s investible fund of $0.8b.

With one‐third of its $1b multicurrency bond program unutilized, SPH remains financially capable of exploring new opportunities. Apart from its four strategic growth thrusts, a separate strategy for the property division spelling out its aim to establish a presence in the retail mall sector for the long term and capitalizing on future opportunities in the residential segment supports our view of a potential spin‐off of its retail assets or a property arm.

Action & Recommendation

SPH now offers an attractive dividend yield of 6.4% (FY10F DPS 25.3 cents). Post‐Sky@Eleven, we believe a sustainable yield of 5% will be supported by its monopoly in the print media business and stable income from its retail investment properties. We raise our target price to $4.61, from $4.47, as we lower our cost‐of‐debt assumption and remove the Clementi Mall valuation estimate. Maintain Buy.

Fall in newsprint cost boosted earnings

Net earnings rose 30%. SPH reported better-than-expected 2QFY10 net profit of S$113.3m (+30.2% YoY; -21.7% QoQ), with higher profits from its Sky@Eleven residential project, investment gains and lower newsprint cost being the key drivers. 1HFY10 net income of S$258m represents 61% of our full year forecast. We raise our advertising growth forecast from 1% to 7% and lower our newsprint cost assumption by 18%. We consequently raise our FY10 PATMI forecast by 11% to S$469m and our SOTP target price to S$3.95 from S$3.86. Maintain NEUTRAL as valuations appear fair. An interim dividend of 7¢/share was declared.

Newsprint rates expected to increase at a moderate level. SPH’s strong 1HFY10 PATMI was largely attributed to the steep fall in charge-out rates for newsprint, which fell 37% YoY to US$521/MT from US$827/MT. Management, however, cautioned that newsprint rates are likely to increase at a moderate level, going forward. We have factored a 12% rise in newsprint rates for FY11. We estimate every 10% increase in newsprint rates over our base case will reduce FY11 PATMI by 3.6%.

More on Sky@Eleven and Clementi Mall. To date, SPH has already recognised about 85% of Sky@Eleven revenue. TOP is expected within the next few months and the remaining revenue (~S$80m) will be recognized progressively over the next 12 months. HDB will handover Clementi mall in August and mall operations are slated to begin operations in 1H2011. Management was confident of leasing the entire mall as over 300 prospective tenants have indicated leasing interests. Management cautioned that the S$18/sqft rental assumption for Clementi Mall is not tenable based on current leasing transactions, but could be achieved in its first lease renewal (i.e. by 2014). We have factored a rental assumption of S$15/sqft into our model.

Trading at the higher range of its 10-15x P/E trading band. SPH trades at 15x FY11 P/E, in line with its 2005-08 average. Maintain NEUTRAL rating with target price of S$3.95. We believe SPH’s attractive FY10 yield of 6.7% would provide support against significant downside risk. Await better entry level.