Impacted by absence of fair value gains

• PATMI
  hit by absence of fair value gains
  
  
• Ad outlook remains difficult
  
• Stable performances from malls
  

PATMI decline due to absence of fair value gains

3QFY14 PATMI declined a dramatic 52.2% YoY mostly due to the absence of fair value gains recognized last year from the REIT spin-off. Operating profit for the quarter, however, increased 7.5% YoY as the group contained operating costs effectively and also benefited from the absence of an S$15.6m impairment charge taken in the corresponding period last year. Overall, we judge the latest quarter to be mostly within expectations and YTD operating profit now cumulates to S$268.8m, which constitutes 83.3% of our forecast for the year. We opt to tweak our operating profit forecast for FY14 up by 4.0% to S$335.6m to account for the marginally lower “other operating expenses‟ item year-to-date.

Ad revenues outlook remains challenging

In terms of the topline, 3QFY14 revenues dipped 4.9% YoY to S$309.7m as core newspaper and magazine revenues decreased S$19.7m. We continue to see a difficult outlook for print ads, with display and classified revenues in 3QFY14 falling 9.8% and 7.8% YoY, respectively. Given headwinds in the domestic residential sector (a key contributor to ad revenues) and persistent competition from a structural shift to new media channels, we believe this print ad downtrend is unlikely to be reversed over the nearer term. Newsprint prices remained stable at S$607/mt in 3QF14, versus S$611/mt in 2QFY14, while YTD staff costs increased 7.1% YoY to S$285.6m. Staff headcount as at end May-14 remained mostly stable at 4,242 versus 4,274 as at end May-13.

Stable performance from the property segment

Performance from the group‟s property segment remained firm, with revenues inching up 1.6% YoY to S$51.0m in 3QFY14 as higher rental income was derived from both Paragon and The Clementi Mall. YTD operating profit for the property segment, before finance costs and fair value gains, is

Stable performance from the property segment

Performance from the group‟s property segment remained firm, with revenues inching up 1.6% YoY to S$51.0m in 3QFY14 as higher rental income was derived from both Paragon and The Clementi Mall. YTD operating profit for the property segment, before finance costs and fair value gains, is mostly flat YoY at S$110.7m. We also understand the Seletar Mall is on target to complete by Dec-14. Maintain HOLD on SPH with an unchanged fair value estimate of S$4.13.

Impacted by absence of fair value gains

• PATMI
  hit by absence of fair value gains
  
  
• Ad outlook remains difficult
  
• Stable performances from malls
  

PATMI decline due to absence of fair value gains

3QFY14 PATMI declined a dramatic 52.2% YoY mostly due to the absence of fair value gains recognized last year from the REIT spin-off. Operating profit for the quarter, however, increased 7.5% YoY as the group contained operating costs effectively and also benefited from the absence of an S$15.6m impairment charge taken in the corresponding period last year. Overall, we judge the latest quarter to be mostly within expectations and YTD operating profit now cumulates to S$268.8m, which constitutes 83.3% of our forecast for the year. We opt to tweak our operating profit forecast for FY14 up by 4.0% to S$335.6m to account for the marginally lower “other operating expenses‟ item year-to-date.

Ad revenues outlook remains challenging

In terms of the topline, 3QFY14 revenues dipped 4.9% YoY to S$309.7m as core newspaper and magazine revenues decreased S$19.7m. We continue to see a difficult outlook for print ads, with display and classified revenues in 3QFY14 falling 9.8% and 7.8% YoY, respectively. Given headwinds in the domestic residential sector (a key contributor to ad revenues) and persistent competition from a structural shift to new media channels, we believe this print ad downtrend is unlikely to be reversed over the nearer term. Newsprint prices remained stable at S$607/mt in 3QF14, versus S$611/mt in 2QFY14, while YTD staff costs increased 7.1% YoY to S$285.6m. Staff headcount as at end May-14 remained mostly stable at 4,242 versus 4,274 as at end May-13.

Stable performance from the property segment

Performance from the group‟s property segment remained firm, with revenues inching up 1.6% YoY to S$51.0m in 3QFY14 as higher rental income was derived from both Paragon and The Clementi Mall. YTD operating profit for the property segment, before finance costs and fair value gains, is

Stable performance from the property segment

Performance from the group‟s property segment remained firm, with revenues inching up 1.6% YoY to S$51.0m in 3QFY14 as higher rental income was derived from both Paragon and The Clementi Mall. YTD operating profit for the property segment, before finance costs and fair value gains, is mostly flat YoY at S$110.7m. We also understand the Seletar Mall is on target to complete by Dec-14. Maintain HOLD on SPH with an unchanged fair value estimate of S$4.13.

Gains today, falling ads everyday

SPH’s 3QFY14 core net profit of S$89.6m beat expectations, forming 32% of our and 28% consensus FY14 forecasts, due to higher investment income. The key positive was operating margin expansion as expenses contracted faster than revenue. However, we believe that such margins are not sustainable without revenue growth. We raise our FY14 EPS by 2% to factor in the higher investment income, but cut FY15-16 EPS by 4% to adjust for more rapid decline in newspaper revenue. Our SOP-based target price rises to S$4.09 on better share price performance of SPH REIT. We keep Reduce, with declining advertisement and circulation volumes as potential de-rating catalysts.

Key positives

SPH’s diversification into new growth areas is bearing fruit – other revenue rose 23.8% yoy on the back of strong contributions from the online classifieds and radio businesses. This was driven in part by sgCarMart, which was acquired in Apr 13. The property segment’s revenue growth was steady at 1.6% yoy on higher rental income from Paragon and Clementi Mall. Operating expenses were kept in check (-9.7% yoy), resulting in the expansion of operating margin from 28.2% in 3QFY13 to 31.8% in 3QFY14. The key surprise in the quarter was the net investment income of S$24.5m (3QFY13: S$3.2m), derived from higher dividend income and lower impairment charges.

Key negatives

Newspaper and magazine revenue fell 7.6% yoy as newspaper advertisement revenue declined sharply (3QFY14: -9.1%; 9MFY14: -6.4%). The decline in circulation revenue also picked up pace (3QFY14: -5.4%; 9MFY14: -4.4%).

Maintain Reduce

SPH is showing improvements in keeping its operations lean (implementing cost cutting measures, reducing redundancies, exiting loss-making businesses) and diversifying into new growth areas, which contributed to the margin expansion in the third quarter. However, we believe that the higher margin is not sustainable without revenue growth. There are few cost cutting measures left to implement, and the rate of decline in revenue is likely to outpace the decline in expenses going forward. Advertisements, which contributed 58.7% of 9MFY14 revenue, are declining at an increasingly rapid pace and will continue to be a drag until a new key earnings driver emerges.

Hit by one-off payments

• 2Q14 results were below expectations, hit by lower ad revenues and higher staff bonus payments
  
• Declared 7 Scts interim DPS, similar to 1H13
  
• Revised FY14F/15F earnings by +4%/-12%; cut TP to S$4.14, downgrade to HOLD on muted outlook
  

Results miss expectations. This was on the back of lower revenues and higher staff costs. Headline net profit grew 8% y-o-y to S$81.3m but this was helped by S$52.9m one-off gain from the sale of partial stake in the regional online classified business. Excluding this, net profit was only S$28.4m largely due to higher staff costs (+$17.8m), a one-off impairment charge for the removal of a press line (S$9.9m), and impairment charge for investments (S$6m). On the positive side, SPH declared 7 Scts interim DPS, similar to 1H13.

Newspaper ad revenue remained weak. Group revenue dipped 1.2% to S$278.8m due to weaker contribution from newspaper and magazines (-5.7%), partly offset by higher property contribution (+3%) and ‘Other’ segment. Newspaper ad revenue fell 7% y-o-y following a 7% and 7.9% drop in display and classifieds ads, respectively, on weaker contribution from property and auto segments.

Higher staff costs (+18%) a surprise. Staff costs surged 18% y-o-y to S$101.1m in the quarter because of a one-off special bonus payments for prior year (S$10.4m) arising from REIT profits and revised bonus computation as incentive to drive growth. We expect the bonus payments to largely negate cost savings initiatives that are projected to reap S$19m in annual savings.

Downgrade to HOLD; cut TP to S$4.14. We revised FY14F/15F earnings by +4%/-12% after factoring in weaker than-expected ad revenues and higher costs, and the S$52.9m extra gain in FY14F. This reduced our sum-of-parts TP to S$4.14. The Group’s core ad revenues will remain muted, which suggest limited earnings upside. But the share price is supported by a strong balance sheet with S$1.7bn cash and investments and 5.2% yield.

Hit by one-off payments

• 2Q14 results were below expectations, hit by lower ad revenues and higher staff bonus payments
  
• Declared 7 Scts interim DPS, similar to 1H13
  
• Revised FY14F/15F earnings by +4%/-12%; cut TP to S$4.14, downgrade to HOLD on muted outlook
  

Results miss expectations. This was on the back of lower revenues and higher staff costs. Headline net profit grew 8% y-o-y to S$81.3m but this was helped by S$52.9m one-off gain from the sale of partial stake in the regional online classified business. Excluding this, net profit was only S$28.4m largely due to higher staff costs (+$17.8m), a one-off impairment charge for the removal of a press line (S$9.9m), and impairment charge for investments (S$6m). On the positive side, SPH declared 7 Scts interim DPS, similar to 1H13.

Newspaper ad revenue remained weak. Group revenue dipped 1.2% to S$278.8m due to weaker contribution from newspaper and magazines (-5.7%), partly offset by higher property contribution (+3%) and ‘Other’ segment. Newspaper ad revenue fell 7% y-o-y following a 7% and 7.9% drop in display and classifieds ads, respectively, on weaker contribution from property and auto segments.

Higher staff costs (+18%) a surprise. Staff costs surged 18% y-o-y to S$101.1m in the quarter because of a one-off special bonus payments for prior year (S$10.4m) arising from REIT profits and revised bonus computation as incentive to drive growth. We expect the bonus payments to largely negate cost savings initiatives that are projected to reap S$19m in annual savings.

Downgrade to HOLD; cut TP to S$4.14. We revised FY14F/15F earnings by +4%/-12% after factoring in weaker than-expected ad revenues and higher costs, and the S$52.9m extra gain in FY14F. This reduced our sum-of-parts TP to S$4.14. The Group’s core ad revenues will remain muted, which suggest limited earnings upside. But the share price is supported by a strong balance sheet with S$1.7bn cash and investments and 5.2% yield.