Property boost helps SPH weather tough year

Profit slips just 3.6% to $422m; recurring earnings also sturdy at $497m

In spite of challenging conditions, media group Singapore Press Holdings yesterday reported a net profit of $421.9 million for the year ended Aug 31, 2009, 3.6 per cent lower than the preceding year’s $437.4 million.

Revenue held steady at $1.3 billion as a surge in property revenue compensated for a 12 per cent fall in the core newspaper and magazine segment.

SPH publishes 17 newspapers, including The Business Times, and more than 100 magazine titles.

The company announced a final dividend of 18 cents a share, comprising a normal dividend of 9 cents and a special dividend of 9 cents, to be paid on Dec 23.

Total payout for FY2009 is 25 cents, or 6.4 per cent based on yesterday’s closing price of $3.88 a share. Earnings per share was 26 cents, compared with 27 cents for the preceding year.

SPH chairman Tony Tan said it had been a difficult year with many companies suffering large losses. ‘Given the circumstances, SPH did well with FY2009 profits just a shade below that of FY2008,’ Dr Tan said.

Operating profit or recurring earnings fell slightly to $497 million, from FY2008’s $501.7 million. Net income from investments fell from a gain of $47.7 million the year before to a loss of $6.2 million for FY2009.

The core newspaper and magazine division had sales of $892.4 million, down 12 per cent from just over $1 billion the year before, and before-tax profits of $286 million, down from $370.6 million the year before.

However, the property segment turned in a robust performance with revenue up 43.2 per cent at $365.6 million. Revenue from its condominium development Sky@eleven and the Paragon shopping mall rose $104.3 million and $5.3 million respectively. The property segment’s before-tax profits jumped to $242 million, from the preceding year’s $162.8 million.

While higher property expenses contributed to slightly raised total operating expenses, the rise was offset by a $46.2 million or 14 per cent drop in staff costs resulting from lower bonus provision, the Jobs Credit grant and wage cuts implemented in April this year.

Dr Tan said the company will continue to explore opportunities to expand its property arm.

‘SPH has been very encouraged by the success of our present interest in property,’ said Dr Tan. ‘We’ve derived considerable experience in the property field now and we’re always looking for new avenues to augment our profits. We will look at opportunities again as they arise.’

On the outlook for FY2010, SPH CEO Alan Chan said: ‘Business outlook remains uncertain although there are signs of a gradual recovery. Our advertisement revenue, which saw some improvements in recent months, is expected to move in tandem with the economy.’

SPH will continue to monitor costs.

‘Barring unforeseen circumstances, the directors expect performance for the current financial year to be satisfactory,’ said Mr Chan.

SPH shares closed up six cents at $3.88 yesterday, its highest in 12 months. It is almost 70 per cent up from its March low of $2.32.

Go for the cash

• Final dividend (DBSV forecast 13 Scts) could have upside surprise (to 17 Scts) in FY09 results expected to release on 12 Oct.
• Raise FY10F earnings by 10% on higher AdEx growth assumptions, along with revised GDP (+5.2% in 2010)
• Ad revenues to ride on media-worthy activities in 2010.
• Buy, sum-of-parts TP at S$4.21

Upside surprise on cash dividends. Our conservative expectations of a final + special dividend of 13 cents per share could surprise on the upside when the company announces its FY09 results on 12 Oct. Assuming a payout of 76% of operating profits, the final dividend could be 17cents, bringing full year to 24cents vs DBSV current forecast of 20 cents, as SPH has historically paid out around and above 80% of operating profits since FY02. This equates to an immediate yield of 3.5% – 4.5% before the year’s end.

Raise FY10F by 10% on better GDP. Historically, ad revenues track closely to GDP growth. We revised our FY10F earnings up by 10% on a better ad revenues growth rate (+4%, vs +2% previously) along with our economist’s revision of 2010 GDP to 5.2%, as well as adjustment of profit recognition to its property development project, Sky@Eleven, towards FY10F.

Expect more media-worthy events. We expect ad revenues to pick up along with more media-worthy events next year and the lead up to it. The opening of the two Integrated Resorts and Youth Olympics Games (YOG) are just two examples. Furthermore, we saw a slump in ad revenues in early 09 (c. -20% yoy) following the global crisis and this should magnify any reasonable growth next year.

Go for the cash; Buy, TP: S$4.21. Our sum-of-parts TP is raised to S$4.21 as we revised up our FY10F earnings. We believe the prospect of a higher than expected final-cumspecial dividend is an attractive investment thesis, along with improving operational prospect in the near term.

4QFY09 Results Preview: Advertising Revenue Has Turned The Corner

Improving advertising spending. Singapore Press Holdings (SPH) will most likely be releasing its 4QFY09 (June – August) results on 12 October. We are expecting a newspaper advertising revenue (AR) contraction of 15% for 4QFY09, an improvement on 3QFY09’s 23% contraction. While AR is still below the level a year ago, it has been making a comeback since April, boosted by Singapore’s residential property boom.

Investment income could surprise on the upside, in view of better financial market conditions. As of end-May 09, SPH had an investible fund of S$0.9b comprising 44.4% cash, 28.7% equities, 14.2% bonds and 12.7% investment funds.

We estimate final DPS of 13-16 cents. A DPS of 13 cents being our worst-case scenario premised on a full-year payout ratio of 86% of earnings and 16 cents is our best-case scenario premised on a payout ratio of 98%. Including the interim DPS of 7 cents that has already been paid, full-year FY09 DPS would be 20 cents and 23 cents respectively (FY08 DPS: 27 cents).

IRs to have a multiplier effect on advertising spending. We believe Singapore’s integrated resorts (IR) will have a positive multiplier impact on consumer spending and hence, advertising spending. At current share price, SPH offers attractive FY10 and FY11 annual dividend yields of 6.5%. Maintain BUY with a target price of S$4.40.

Reasons to remain positive

• Domestic proxy. As our house is expecting a stock-market pullback in the near term, we recommend a return to defensive stocks like SPH. We recommend SPH as a domestic proxy for a recovery in consumption spending and beneficiary of Singapore’s upcoming two integrated resorts, once the resorts start organising events/conferences in 2010.

• Ad demand is gradually coming back. We note that the Saturday edition of the Straits Times averaged 215 pages in August, 46 pages above its low in January. While this was still far below 2008’s peak of 293 pages, we believe the uptrend is sustainable, backed by a booming property market and an improving retail outlook.

• Well-positioned. We believe SPH has competitive advantages over its US peers, which have been badly hurt by falling ad revenues, as SPH has a near monopoly of newspaper advertising in Singapore and is less threatened by Internet advertising.

• Reiterate Outperform. Our FY10-11 earnings estimates have been raised by 1-2% on slightly higher media earnings assumptions. Our sum-of-the-parts target price has been raised from S$3.99 to S$4.05 following our earnings upgrade and a lower risk free rate used, in line with declining house forecasts in recent months. We now value the media business using a WACC of 8.1% instead of 8.3%.

Singapore July 09 adex continued to decline

According to latest data from The Nielsen Company (“Nielsen”), Singapore advertising expenditures (adex) in July 09 fell 6.8% YoY to S$168.2m, representing the highest monthly adex year-to-date. Radio, Cinema and Internet adex showed YoY improvements and in particular, the July Internet adex grew a record 54.9% YoY (albeit from a low base). But performance across all other adex platforms continued to be weak, with Bus & Taxi adex registering the largest YoY decline (-24% YoY). Newspaper adex (excluding Today) decline decelerated to 8.7% YoY, but newspaper’s (excluding Today) 32.9% share of total adex was only marginally above June 09’s three-year low. Total print (newspaper and magazine) adex in July reached S$74.5m, 7% lower than a year ago.

Although adex decline appears to be decelerating, it is difficult to get too excited about the July 09 adex data. Our channel checks reveal that advertisers remain generally cautious. And although sentiment is strengthening, this has not translated into an increase in advertising orders and marketing budgets remain restrained. As we have previously highlighted, there is a typical lead-time for planning of and adjustments to marketing budgets and as such, we continue to expect any substantial adex recovery to happen towards mid-2010.

Maintain neutral stance towards SPH
We estimate SPH booked approximately S$109m advertising revenues in the first two months of 4Q09, in-line with our estimates for the quarter (S $166m). Given lack of evidence of any strong recovery in the adex market, we maintain our forecasts and Hold recommendation.