Across-the-board double-digit rise in ad demand

● According to the CS Page Monitor, newspaper ad demand accelerated further in 2Q FY10E.

● Estimated total classified volume jumped 12% YoY in the first two months of 2Q FY10 – a big improvement from the reported 6% decline in 1Q classified ad revenue. The strong showing is attributable to the 47% YoY surge in job ad volume during the period. While partly due to seasonal effects, the strong job ad demand is in line with the healthy pick-up in the Singapore economy.

● In addition, our page count indicates that display ad volume improved 10% so far in 2Q FY10, versus the reported +2% YoY growth in 1Q FY10 display ad revenues.

● We have raised our earnings forecast to reflect the sharp pick-up in ad demand and expect further consensus EPS upgrades – our FY10 earnings forecast is now 7% above street expectations.

● The stock continues to trade at a substantial P/E discount to the market. Our new target price of S$4.67 represents 24% potential upside from here. We maintain our OUTPERFORM rating.

Positioning for stronger pick-up

• 1Q10 net profit doubled to S$144.7m on property development, lower newsprint and investment
income; within expectations
• Ad revenues to gather momentum on activities ahead – IR, property launches, recruitment
• Overpayment for Clementi Mall is already priced in
• Upgrade to Buy, TP: S$4.33 (25% total return upside)

1Q10 earnings doubled, within expectations. SPH’s 1Q10 revenue grew by 4% yoy to S$354m driven by recognition of Sky@Eleven, but offset by a 2.5% drop from its Newspaper & Magazine operations. EBIT grew to S$164.7m (+24% yoy, +S$31.8m) contributed largely by property development’s EBIT at S$50.3m (+38% yoy, +S$14m) and lower newsprint chargeout costs at S$22.1m (-38% yoy, -S$13.6m). Net profit surged 98% yoy to S$144.7m largely due to the absence of a S$33.7m investment loss recorded in 1Q09, versus S$10.2m gain in 1Q10.

Ad revenue still down but expect improvement. Although total ad revenue dipped 3.1% yoy to S$182.4m in 1Q10, this was an improvement over 4Q09’s 18.4% yoy drop. Display ads growth turned positive at 2% yoy, not seen since 4Q08. We are now assuming a stronger growth for ad revenues (+8%, vs 4% previously) on expectations that ad revenues will be stronger sequentially on the opening of both IRs, pick up in property launches and employment market. As such, we revised our forecasts up by 3-6%.

Clementi Mall “hiccup” priced in. While we feel SPH has overpaid for Clementi Mall, the market has already priced that in after a knee-jerk reaction to its share price. A write-down in future is possible but impact should be minimal at c.6 Scents per share based on our estimates.

Upgrade to Buy, TP revised to S$4.33. We revised up our TP to S$4.33 (from S$4.00) factoring in higher earnings assumption and as we adjust our sum-of-parts valuation to factor in a potential write-down of Clementi Mall (S$95.9m or S$0.06/share) instead of a 5% discount. Dividend yield at an attractive 6.8% (based on our DPS forecast of 25 Scents) should provide a good support to share price.

SPH Q1 profit almost doubles to $144.7m

Higher earnings lifted by swing in net income from investments

MEDIA group Singapore Press Holdings’ net profit for the first quarter to Nov 30, 2009, almost doubled to $144.7 million, from just over $73 million in the same period last year.

That was despite operating revenue for its core newspaper and magazine publishing business falling 2.5 per cent to $243.2 million. The group’s total operating revenue rose 4 per cent to about $354 million.

The increase in profitability was helped by a swing in net income from investments – from a net loss of $33.7 million for the previous year’s Q1 to a net income of $10.2 million this Q1. Earnings per share for the quarter was nine cents, compared with five cents in the previous Q1.

Recurring profits before tax rose 24.7 per cent to $159.4 million, from $127.8 million the previous year. These profits represent recurring earnings from the media and property businesses, including profits from the group’s Sky@eleven development.

SPH’s property arm contributed almost $100 million in sales this year, up 22.7 per cent from the previous year.

SPH said advertisement revenue dipped slightly due to fewer classifieds while circulation receipts fell marginally. However, operating revenue ‘has shown improvement in recent months’, the company said. ‘Our advertisement revenue has improved in recent months and is expected to move in tandem with the economy,’ said chief executive Alan Chan.

Profits were also boosted by lower costs, primarily due to lower newsprint costs. Staff costs fell 2.2 per cent or $1.7 million due to wage cuts and the government’s Jobs Credits grants, while headcount remained flat at 3,945.

SPH announced a partial restoration of pay cuts and Mr Chan said that the company ‘will continue to monitor our cost levels closely while at the same time devote resources and explore opportunities to grow beyond print and Singapore’. The directors are pleased with the company’s performance in the quarter, he said, and they expect overall performance for FY2010 to be satisfactory.

Profits from the property segment – primarily contributions from the group’s Paragon shopping mall and Sky@eleven residential development – are expected to ‘contribute significantly to recurring earnings’ this financial year, SPH said. Its recent acquisition, a mall in Clementi, is targeted to begin operations in the first half of 2011.

SPH stock closed trading yesterday at $3.66, down 2 cents or half a per cent. SPH owns The Business Times and publishes 16 other newspapers in four languages as well as over 100 magazine titles.

1QFY10 results — better margins and investment gains