Unexpected investment losses, downgrade to HOLD

Sep-Nov stock market carnage hits SPH. Singapore Press Holdings (SPH) announced its 1Q09 results yesterday with topline growing by 9% YoY to S$343m while PATMI took a 35% YoY nose dive to S$73m. The poor bottomline showing was primarily due to a S$33.7m investment loss (first since 1Q03) as SPH suffered significant Mark-to-Market (MTM) losses on its investment portfolio. While this is non cash in nature, our initial assumption of positive contribution from its investments have been significantly negated. Stripping out the effects of investments, SPH managed a credible flat pre-tax performance of S$127.8m despite rising costs and slowing core print revenue.

External funds under management were hit. While we do not have granularity of its 1Q09 investments, details from its FY08 Annual Report indicated that 35% of its short-term investments were subjected to MTM gains/losses on the income statement. These investments were externally managed funds that were invested in a broad spectrum of bonds and equities that suffered mark downs during the Sep-Nov 08 stock market crash.

Sentiments on print earnings getting heavier. SPH’s print advert revenue has declined but at a greater magnitude than we had expected. We now forecast a 2.5% (prev. 1.6%) fall in FY09F print revenue, as management notes that the Company’s advertising revenue will continue to be affected by the downturn. We remain hopeful that the traditionally stronger advertising efforts during the Dec 08 and Jun 09 sales season may mitigate a free fall in this segment’s revenue.

Earnings revision. While our topline estimates are buffered by Sky@Eleven’s recognition, we have to lower our FY09F bottomline by 14% due to the MTM losses incurred. Dividends are expected to hold at S$0.215/ share (7.1% yield) for FY09F.

Valuation metric change. We have swapped the use of DCF valuation for its core operations with a PER-based one as we think that sentiments of its core print earnings will drive its valuation as compared to a DCFbased approach. As such, we peg its FY09F core ops EBIT at 16x FY09F, a premium when compared to its peers in view of its stronger margins. Our SOTP fair value is moderated to S$3.13 (prev. S$4.86) and we downgrade to HOLD. With our revised forecasts, SPH is trading at 14x PER, above its trough valuation of 12x (12-28x between 2001 and 2008). We will turn buyers at S$2.60-S$2.65 when FY09F PER is ~12x.

Core earnings in line

• Below our expectations and consensus. 1Q09 net profit was S$73.0m (-34.8% yoy) vs. our forecast of S$100.1m, accounting for 16% of our full-year estimate. The shortfall was mainly caused by investment losses of S$33.7m (our full-year forecast was +S$27.0m), due to a loss in the value of SPH’s externally managed funds.

• Operating revenue grew 9% yoy to S$340.2m; costs rose less than expected. Led by a fall in recruitment advertisements, print revenue declined 7.3% yoy to S$188.2m. Circulation revenue rose marginally by S$2.2m despite a 2% decline in volume. Property revenue rose 86.3% yoy to S$81.1m, boosted by S$50.7m from Sky@eleven. Materials, consumables and broadcasting costs rose 15.4% yoy to S$51.2m mainly on a 21.3% rise in newsprint costs. Staff costs decreased 2% yoy to S$76.9m.

• Lower-than-expected adex, mainly on lower classifieds. In line with the weakening economy, classified ad revenue fell 17% yoy while display ad revenue fell 4% yoy. Print ad revenue accounted for 55.3% of 1Q09 revenue.

• Forecasts reduced by 9-15%. We believe SPH’s print ad revenue will decline further than expected. As such, we now project an adex decline of 14% for FY09, instead of 8%. However, the impact should be attenuated by cost savings as we expect newsprint costs to retreat in 2009. SPH will be meeting its vendor to negotiate prices this month. Cost savings from potentially lower prices will likely show up in 2H09. We have also cut our investment income estimates.

• Sum-of-the-parts target price lowered to S$3.77 from S$4.01, following reductions in our core media earnings forecasts. Maintain Outperform for its decent dividend yields of more than 6%. SPH is likely to continue paying out a large portion of its recurring earnings as dividends.

SPH’s Q1 net profit falls 34.8%

Results hit by $33.7m investment losses; recurring earnings up 1%

SINGAPORE Press Holdings’ net profit for the first quarter ended Nov 30, 2008, fell 34.8 per cent to $73 million from the previous corresponding period’s $111.9 million.

Profits were hit by $33.7 million in investment losses to its portfolio, compared with $9.84 million in gains a year ago.

‘This arose mainly from the $31.6 million loss in the value of the group’s externally-managed funds following the global financial market meltdown during the quarter,’ said SPH in a statement.

Group earnings per share for the quarter fell to 5 cents from 7 cents.

Recurring earnings from the company’s core media and property businesses were up one per cent at $127.8 million as profit recognised from its ongoing Sky@elevendevelopment cushioned reduced profit from the print media business.

Revenue rose 8.9 per cent year-on-year to $343 million, from $315 million.

Overall, its core newspaper and magazine segment posted sales of $249.4 million, down 4.6 per cent.

Print advertisement revenue fell 7.3 per cent to $188.2 million, but circulation revenue rose by $2.2 million.

Classifieds revenue fell 17 per cent, led by the fall in recruitment advertisements.

Revenue from property jumped 86.3 per cent or $37.6 million to $81.1 million, with Sky@elevenand the Paragon shopping mall contributing $34.6 million and $2.7 million respectively to the increase.

Total operating expenses rose 14.1 per cent to $215.2 million.

Materials, consumables and broadcasting costs rose 15.4 per cent.

Total headcount as at November 2008 was 3,944 compared with 3,771 a year ago as a result of expansion of the group’s magazine business and continued investments in new media businesses.

But staff costs fell 2.1 per cent as the increase in costs brought about the higher headcount and annual salary increment was more than offset by the decrease in variable bonus provision.

The group said advertising revenue will continue to be affected by the economic downturn.

It added that ‘while newsprint prices have started to slide behind recent market corrections, charge-out rates remain high and continue to add pressure to the group’s production costs’.

SPH also cautioned that higher start-up losses are expected in new media businesses ‘in the near term as the group invests resources and builds up capabilities to position for future growth’.

The group said it has taken measures to enhance revenue and contain costs and will proactively implement further cost and efficiency initiatives to help mitigate the challenges from current market conditions.

Recurring earnings for the current financial year are expected to be satisfactory, SPH said.

Yesterday, SPH fell 3 cents or one per cent to close at $3.02.

Get worse before getting better

1Q net profit dropped 32% to $73m due to loss in value of investment. Ad revenues dipped -7% in 1Q09, faster than our expectations. We cut FY09F earnings by -7% as we now assume a -15% drop in ad revenues for FY09F. We expect things to get worse before getting better. Downgrade to Hold, TP: S$3.25.

1Q net profit affected by investment income. SPH’s recurring profit of S$127.8m was within our expectations, which was helped by Sky@Eleven recognition and rental revenue. However, net profit fell to S$73m (-32% y-o-y) largely due to a S$33.7m loss on its investments.

Print ad revenues dropped faster than expected. Newspaper and Magazine division’s revenue dipped by – 4.6% due to lower print advertisement (-7.3% y-o-y), offset by higher circulation revenue (+4.3%). The drop in print advertisement was due to lower display (-3.8%) and classifieds revenue (-17.2%). Higher newsprint costs (+21%) put further pressure on the division. Average charge-out rate rose 31.5% to US$772/mt (vs. US$587/mt in 1Q08).

Cut EPS by -7% (FY09F) and -3% (FY10F). With the deteriorating outlook, the drop in ad revenues looks likely to accelerate in subsequent quarters. We now assume ad revenues to drop 15% in FY09F. This should be offset by lower newsprint, staff and operating costs as the fiscal year progresses. We cut our EPS by -7% and -3% for FY09F and FY10F respectively. We also expect lower dividends of 24 cents versus 27 cents previously in view of the weaker outlook.

Downgrade to Hold; things could get worse before getting better. 1Q is traditionally a strong quarter for print ad revenues. With a slow start and expectations that things could get worse, we downgrade to Hold. Our sumof- parts derived TP is now S$3.25, based on 12x FY09F EPS (from 16x) for its newspaper operations, in line with peers and on more challenging outlook. We believe share price should be supported by its relatively attractive net dividend yield of c.8%.