Property Boom Fuels Advertising Spending Recovery

Diminishing contraction. UOB Kay Hian page-count monitor of The Straits Times indicates further improvement in advertising spending in July with a smaller yoy contraction of 10% (June: -16%, May: -14%, April: -16%, March: -22%). Anecdotal evidence points to a rise in property ads on the back of Singapore’s residential property boom.

With greater business confidence, hiring is back. The total number of recruitment ad pages has improved from 230 in March to 279 in July. The job market remains healthy with the seasonally-adjusted unemployment rate for 2Q09 remaining unchanged at 3.3%, the same as in 1Q09. Resident unemployment even declined to 4.6% in 2Q09, from 4.8% in 1Q09.

The worst is over. While Singapore Press Holdings (SPH) is usually a latecycle recovery play, we believe its advertising revenue (AR) growth will stage an early comeback this time round, with advertising spending recovery aided by the opening of Singapore’s two mega integrated resorts (IRs) – Marina Bay Sands and Resorts World@Sentosa by end-09/1Q10.

Proxy to an improving domestic economy as well as a yield play. In view of increasing evidence of an advertising spending recovery, we raise our target price for SPH by 13% to S$4.40, in line with our sum-of-the-parts (SOTP) valuation of S$4.38/share. Our previous target price of S$3.90 was pegged at a 10% discount to our SOTP valuation, which has factored in Paragon’s recent
revaluation of S$1.98b in June. SPH offers an attractive annual dividend yield of 6-7%.

Holding steady

• Post-luncheon takeaways. We hosted a post-results luncheon for 17 institutional clients last Friday. SPH’s CFO, Mr Tony Mallek, addressed several issues which were of interest to clients: 1) ad demand recovery; 2) newsprint prices; 3) revenue recognition of Sky@eleven; 4) investment portfolio, and 5) the potential sale of SPH’s Paragon and M1 stakes.

• Media earnings will take time to bounce back. From discussions with management, we believe that ad demand may have bottomed out. However, a recovery is still months away. Although overall demand visibility is unchanged, SPH feels that advertisers, including property developers, are more ready to advertise.

• Positives from pick-up in property market. The latest revaluation of Paragon by Knight Frank was S$1.98bn, slightly below 2008’s value of S$2.00bn, vs. our valuation of S$1.43bn. As major risks related to its properties have eased, we believe SPH’s share price should do well.

• Outperform. Our earnings estimates have been adjusted by -1.8% to +6.3% for FY09-11, to factor in a shift in revenue recognition for Sky@eleven from FY09 to FY10, and lower staff costs. Our media earnings assumptions are intact. Our sum-ofthe- parts target price has been raised to S$3.99 from S$3.52, boosted by the revaluation of Paragon at S$1.98bn vs. our previous estimate of S$1.43bn.

Yield The Only Attraction

Stabilisation Not Equal Recovery

Remains sluggish overall. Singapore Press Holdings (SPH) reported its 3Q09 results with a topline of S$331.2m (-4.8% YoY) while bottomline came in at S$126.7m (-5% YoY). The group experienced an 18.9% reduction in staff costs as the effects of its recently announced pay cuts flowed through the system. However, its core operations dived 13.5%, signalling that the group might still be in for a bumpy ride in the next few quarters.

Key swing factors: Property & Investment. Its property division continued to chalk up a 40% YoY rise in revenue due to stronger-than-expected progress recognition from its Sky@Eleven condo project. However, rental growth from Paragon has started to flatten out and we are pensive on its ability to continue upward rent revisions. SPH’s investment income was another swing factor. While it incurred a 31% YoY fall, it managed to register a S$17.6m absolute gain (mostly due to stronger portfolio valuation) compared to a loss of S$104k in the previous quarter. In view of the volatile market, we opt to retain our conservative estimates for SPH’s investment income.

Display and Classifieds still at rock bottom. SPH continues to have a short runway of visibility for its core business, indicating that businesses are still keeping their advertising belts tightened. SPH’s Display and Classifieds adverts are still experiencing short printing notice periods of 1- 3 weeks and 5-7 days respectively. Businesses are also choosing to utilise black & white or single colour adverts vs. full colour adverts. As such, despite seeing a positive uptick in advert pages printed, profitability remains suppressed. We were updated that all advertising segments are still declining/flat, with the telecoms and finance segments experiencing the most sluggish performance. The only silver lining for advertising lies in the recent acceleration in property launches.

Final quarter will not see recovery. The Great Singapore Sale (GSS) may be able to buffer declines on a QoQ basis but we opine that it would still pale to the comparable GSS quarter in the previous year. We are maintaining our earnings estimates but have bumped up our SOTP valuation in view of a better-than-expected valuation for Paragon at S$1.98b (prev: S$2b valuation). We had estimated S$1.8b. We are retaining our HOLD rating with a SOTP fair value of S$3.31 (prev. S$3.18). Our forecast of 14.5 S cents for SPH’s final dividend can yield 4.7% if investors accumulate around S$3.05.

Riding on economic recovery

• 9M09 advertising revenues fell YoY (-17%) but expect sequential improvement
• Latest Paragon valuation at $1.98bn, wide margin vs the $1.5bn we imputed in our sum-of-parts TP
• Expect performance to ride on economic recovery
• Reiterate Buy, SOP TP: S$$3.68

3Q09 ad revenues – no surprises. Headline revenue ($327m, -5% yoy) and operating profit ($137m, -2% yoy) were within expectations. At its newspaper division, classifieds revenue dropped slightly more than expected on lower job ads ($55.9m, -30% yoy), but display ads revenue ($90.3m, -17% yoy) was within expectations. Newsprint charge-out rate remains high at US$779/mt (+32% yoy), but down -6% from 2Q’s US$827/mt. We expect newsprint
charge-out rate to trend down further in 4Q.

Property the star. Property division helped prop up operating revenue, with revenue recognition from Sky@Eleven ($64m, +69% yoy) and Paragon’s rental ($30m, +3% yoy). Occupancy at Paragon remains at 98%, while Sky@Eleven is on track for TOP by 2010.

Paragon latest valuation at $1.98bn. This is 4% below the last valuation of $2.07bn done in Jul 08. However, it is still more than 30% higher than the $1.5bn estimate we have imputed in our sum-of-parts target price, implying a huge margin of safety.

Riding on economic recovery. DBS Group economist recently revised up his Singapore GDP forecasts for ’09 to -5.5%, from -6.6% previously. We maintain our view that we should see sequential improvement in the Group’s advertising revenues on the back of the economic recovery.

Buy, TP at S$3.68. Our operating profit forecasts remain intact, but we trimmed FY09F earnings down by 8% as we adjust for a lower return on its investment. We reiterate our Buy recommendation and SOP TP at S$3.68, on our view that the worst is over. Dividend yield at 6.2% also looks reasonable on our conservative DPS assumption of 20cents. Our TP would have been S$3.97, if we peg our TP to Paragon’s latest valuation of $1.98bn.