1Q10 exceeds expectations; reiterate Buy

Strong 1Q10 ahead of expectations; reiterate Buy
SPH reported S$145m 1Q10 net profit, significantly ahead of DBe (S$120-125m) and consensus. While 1Q10 revs were generally in-line with DB estimates, the 51.3% 1Q10 EBITDA margin exceeded our expectations largely on lower-thanexpected newsprint costs. Elsewhere, Sky@eleven is on track for 2010 completion while Clementi Mall is expected to be operational in 1H11. We remain positive on SPH given the expected sharp 2010 adex market rebound. In addition, given the strong 1Q10 results and 17% potential upside to our S$4.30 TP, maintain Buy.

Robust performance underpinned by adex recovery and opex savings
SPH’s 1Q10 revs +4% YoY to S$354m and represented 26% of DB10e. Although ad revs were down 3% YoY, they surged 19% QoQ on strong adex market recovery and the S$182m 1Q10 ad revs were in-line with our expectations. Rental income -3% YoY to S$29m, but SPH expects to maintain near 100% Paragon occupancy going forward. Sky@eleven revs recognized-to-date reached S$522m. 1Q10 EBITDA +21% YoY to a S$182m 6-year high as materials, consumables and broadcasting costs -29% YoY (1Q10 newsprint charge-out price -31% YoY to US$531), and core print EBITDA margin reached a 38.9% recent high.

Net profit +98% YoY on margin improvement and higher investment income
SPH booked S$10m 1Q10 investment income vs 1Q09’s S$34m investment loss. This, along with the margin improvement, drove a 98% increase in 1Q10 net profit to S$145m. Cash and deposit’s share of investible funds grew to 37% (vs 4Q09’s 30%) as SPH continued to adopt a “conservative stance” in asset allocation.

Maintain Buy with SOTP-derived S$4.30 target price; risks include adex
Our SOTP TP for SPH is S$4.30. We value the core media business using DCF (6.6% WACC & 1% g), Paragon at discount to book value, M1 at DB TP and investments as at end 4Q09. Key downside risks include adex volatility, economic growth, Sky@eleven construction progress and SPH’s investment income.

SPH explains property move; shareholders praise FY2009 results

SINGAPORE Press Holdings (SPH) shareholders yesterday praised the media group for the creditable FY2009 financial results and the 25-cents-a-share dividend payment. They also sought further assurance from the company on its property foray.

At the SPH annual general meeting, shareholder Vincent Chen was concerned that the company’s share price could be hurt should the market view it as a conglomerate with interests in many areas beyond its core newspaper business. He suggested that SPH focus on its core business and return cash to shareholders to invest in pure-play property counters.

SPH publishes 17 newspapers, including The Business Times, and more than 100 magazine titles. Beyond its media business, it also owns Paragon shopping mall in Orchard Road. A condominium project at Thomson Road is due to be completed in the middle of next year. And an SPH-led consortium recently won a bid for a prime mall building in Clementi.

Chief executive officer Alan Chan said that the mall project will buffer the company from the ups and downs of the media business. And chairman Tony Tan said that the bid is ‘testament to SPH’s willingness to seek new opportunities to increase shareholder value’.

In the fiscal year ended August 2009, SPH’s newspaper and magazine sales dropped 12 per cent, but net profit of $422 million was just 3 per cent down, helped by higher contributions from property and pre-emptive measures to cut costs.

Mr Chan said that 50 cents of every dollar spent on advertising in Singapore goes to SPH, but the industry – especially in developed countries – is under great stress.

‘Print (media) is something very close to our hearts and we will invest as much as possible to maintain that,’ he said. But it is a ‘very challenging’ industry now, and the company will have to prepare for a time when the media business will no longer be as profitable. New property ventures give the company an opportunity to expand its areas of expertise, Mr Chan said.

Shareholders praised SPH management for guiding the company through a difficult year with profit more or less intact.

Dr Tan acknowledged the contributions of management and staff, who took pay cuts and stayed loyal to the company through the past year.

One shareholder asked the board on the absence of women in its ranks. ‘Women bring a fresh perspective to things,’ she said, noting that a woman on the board would not have supported the running of sexist advertisements. Dr Tan said that the board will consider the issue at its next meeting.

Ad spend recovery is well ahead of expectation

SPH remains a BUY with a target price of S$4.40. November page-counts suggest ad spend recovery is well ahead of expectation. Ex-div share price of S$3.59 offers 23% upside to target price.

Corporate Event

Faster recovery pace in the last two months. The Straits Times’ Saturday papers suggest ad spend recovery is well ahead of our expectation. Apart from the last Saturday of November (advertising was trimmed during the Pilgrimage Festival long weekend), the Saturday papers in November surpassed 240 pages, above the average 230 pages in October (Aug-Sep: 214). Singapore Press Holdings (SPH) maintains the ratio of editorial to advertisements at 50:50. It would appear that ad spend grew at a faster pace in the last two months.

Ad spend growth has finally turned positive. Ad spend is seeing the first yoy growth in the current economic upcycle. Based on the trend of the pagecounts of Saturday papers, we estimate ad spend growth has improved from a contraction of 16% in September and 7% in October to a positive growth of 9% in November. At the height of the crisis in late-08 and early-09, the average page-counts of the Saturday papers fell below 200 pages. At today’s page-count of 240 pages, going forward the Saturday papers in some months could see high yoy double-digit growth rates in page-counts. The page-counts of The Straits Times are a leading barometer of SPH’s advertising revenue (AR) growth.

Stock Impact

AR will likely surpass our expectation. In our earnings forecasts, we have assumed flat AR growth in FY10 and a growth of 10% and 8% in FY11 and FY12 respectively. If Saturday papers can maintain above 240 pages (indeed, we believe page-counts will continue to grow), we see potential upgrade in our earnings forecasts. For every additional 5ppt in AR growth rate, SPH’s net profit would be enhanced by 6-8%. The extra revenue would more or less go straight to the bottom line.

We anticipate the opening of Singapore’s integrated resorts, Marina Bay Sands and Resorts World@Sentosa in 1Q10, to boost ad spend further as the hospitality and retail sectors ramp up advertising to capture more consumer spending. Thus, share price has a close relationship with UOB Kay Hian page-counts.

Pay cut restoration signals a recovery is underway. SPH will restore half of the pay cuts (2-10%) introduced in April this year. In FY09, total staff cost of S$286.9m was 35% of total cost. We understand from management the pay restoration would have a marginal impact on FY10 net profit (our est.: < 3%).

However, this does not include potentially higher bonuses which are tied to the performance of the media business. We have assumed in our earnings forecasts staff cost increases of 6% and 8% for FY10 and FY11 respectively. We estimate for every 5% extra cost above our projections, net profit would be trimmed by 3%.

Recommendation

The big picture of an AR recovery remains intact. SPH’s share price, cum FY09’s final dividend of 18 cents, will go ex-dividend on 9 December. Our target price of S$4.40 implies a 23% upside on the ex-dividend share price of S$3.59. Annual yield is forecast at 6-7%.

SPH to restore half of pay cuts for staff

SINGAPORE Press Holdings (SPH) is restoring half of the pay cuts it introduced in April.

The cost-cutting measure, which came amid adverse business conditions resulting from the global economic crisis, saw the basic monthly salaries of staff earning more than $2,000 cut by 2-10 per cent. But from January next year, half the cuts will be restored. The media group is also giving special one-off amounts to staff to thank them for the sacrifice and contributions they made.

‘SPH had to take quick pre-emptive measures by cutting wages, operating costs and budgets. These helped us weather the financial storm,’ said SPH chief executive officer Alan Chan.

‘Singapore’s GDP has since seen a strong rebound in the third quarter of 2009 with 14.9 per cent quarter-on-quarter growth,’ said Mr Chan.

Citing the net profit of $421.9 million which the group delivered, despite the challenging conditions, for the financial year ended Aug 31, 2009, Mr Chan said: ‘Given the circumstances, SPH has done well in the financial year 2009.’

The full-year earnings were augmented by profits from the group’s Sky@eleven condo project.

Mr Chan said that the business outlook remained uncertain despite signs of gradual recovery. ‘Our advertisement revenues, which saw some improvement in recent months, are expected to move in tandem with the economy. We will have to monitor our cost levels closely while at the same time continuing to exploit opportunities to grow beyond print and beyond Singapore.’

One for the future

More light on Clementi bid

Maintain Neutral and S$4.38 target price; further underperformance could provide buying opportunity. We earlier believed that SPH’s bid price of S$2,797psf for a Clementi mall site represented a hefty premium over comparable malls. Since then, SPH’s share price has weakened. The large premium it put in over the secondhighest bid (42% premium) meant that SPH was unlikely to lose the tender. Thus, it was not much of a surprise when SPH announced that it has won the tender. Given its recent share-price underperformance, we believe further downside is limited. In an analysts’ briefing yesterday, SPH took great pains to explain the rationale for its bid, conveying its optimism on the Singapore property market and making it clear that it intends to own attractive infrastructure to ride on Singapore’s population growth and/or undertake future residential development projects. No change to our earnings estimates for now as contributions from the mall are expected only further out. Our sum-of-the-parts target price remains S$4.38.

The details. SPH teamed up with NTUC for a joint bid for a Clementi mall site. SPH will own 60% of the venture, NTUC 40%. The bid price of S$542m is for a site with 269,100sf of retail/commercial GFA and NLA of 193,750sf. Part of the difference is accounted by the space occupied by a library (21,250sf) paying concessionary rents. The Housing Development Board will build the core structure and facade, and hand it
over to the SPH consortium in Aug 2010. SPH estimates fit-out costs at less than S$40m and expects the mall to start contribution in the first half of 2011. Adjusting for lower fit-out costs, the total consideration could be S$3,003 psf. The pricing still looks steep when compared with Ion Orchard (S$3,800 psf), Bishan Junction 8 (S$2,306 psf), Serangoon Nex (S$2,167 psf), Northpoint (S$2,129 psf) and Causeway Point (S$1,706 psf). Assuming gross rents of S$15psf, net property yield is only 4.8%. In contrast, mainstream landlords were bidding at closer to 6% yields.

SPH explained the bid differential. SPH gave three reasons for its aggressive bid. First, it had wrong intelligence that there was going to be an aggressive bid from a private equity firm. Second, its bid was based on expected rental rates in the future. SPH pointed to the neighbouring mall, CityVibe, where rents topping S$18psf had been achieved. Last but not least, SPH alluded to its ability to secure cheap financing, which can help push up the mall’s overall returns. No details on optimal gearing or cost of debt have been disclosed yet.

How good can it be? The wild card in this whole deal is really financing rates. Assuming SPH does achieve S$18psf rents and full occupancy in 2011, net property yields (un-geared) can rise up to 5.75%. If financing rates are low, effective property returns would look even better. Earlier in the year, REITs were refinancing at spreads of 200-300bp above cost of funds. By August, A-REIT had secured its refinancing at spreads of below 150bp. One could imagine banks pricing spreads for a retail asset with stable cash flow at below 150bp. The 5-year SGS is now about 1.36%. Taken together, the all-in cost of debt could end up at 2.5%-3.0%. Assuming the SPH consortium takes 60% debt for the project and borrows at 3%, the effective rate of returns (on a geared basis) goes up to 9.9%.

The quest for stable yields for ‘excess capital’. SPH’s declared dividends in FY09 amounted to about S$420m. FY10 dividends do not appear to be under threat from this property foray since there will be a similar amount of proceeds coming from Sky@Eleven in FY10. As at end-FY09, SPH had about S$993m worth of investible assets comprising S$299m cash, S$245m long-term investments (bonds) and S$449m short-term investments (equities, including stakes in Starhub and M1). SPH’s 60% share of the Clementi mall implies a share of project costs at about S$350m. Assuming the consortium does borrow up to 60% LTV, SPH would need to set aside S$140m for its equity portion, equivalent to half its idle cash hoard. Cash does not earn much these days, so the move to mobilise cash into retail malls can be viewed positively. We asked management if its dwindling cash hoard would imply an end to SPH’s property investments for now. Management’s answer: its potential property investments are not limited by current cash levels, but are assessed on each project’s expected returns vs. other investments within its S$1bn pool of investible assets. This is all done to provide adequate returns for its excess capital, outside its core media operations. We retain our view that the bid price was not low, but for a company in SPH’s position and given the current environment of population growth and low interest rates, one can understand the move.