A trading opportunity that’s worth a bet

Share price weakened following 2QFY08 results announcement. Singapore Press Holdings’ (SPH) has fallen to S$4.07, a 12-month low, following its recently released disappointing results that showed SPH’s newspaper advertising revenue growth slowed significantly from 10.5% yoy in 2QFY08 to 4.2% yoy in 3QFY08. While SPH’s newspaper business is seeing slowing growth, earnings contributions from its Sky@eleven residential property development and expansion of the Paragon shopping mall at Orchard road should buffer SPH’s earnings in FY08 to FY10.

A trading opportunity that’s worth a bet. With dividend yield at close to 7%, we reckon there is limited downside in share price. We advise investors to look forward to the final dividend that will be announced in 4QFY08 results (to be released in mid-October). We are forecasting a final tax-exempt DPS of 20 S cts (an interim DPS of 8.0 S cts was paid following 2QFY08 results), which translates into a net yield of 4.9%, an attractive return for an investment period of three months. Traditionally, SPH’s share price sees a rally in the one month leading up to the announcement of the company’s final results. With the current share price at 12-month low, we reckon it is timely to accumulate the stock for a play on the final dividend payout. Our earnings forecasts and target price (based on sum-ofthe- parts valuation) of S$4.70 remains unchanged.

A safe haven in uncertain times

Story: 3Q08 earnings were in line with expectations, as EBIT rose by 25% yoy to S$140m on revenue growth of 20% yoy to S$344m. YTD, EBIT is up by 25% yoy to S$388m on top line growth of 18% yoy to S$955m. PBT contribution from the Group’s publishing business was flat in 3Q08 due to higher staff costs but for 9M08, is up by 11% yoy, driven by an 8% increase in display and classified revenues. PBT contribution from the property segment grew by 155% yoy to S$103m as at 9M08, as the development of Sky@Eleven progressed. Meanwhile, treasury and investments saw a substantial decline of 71% yoy but is still ahead of our conservative forecasts.

Point: The Group is on track to meet our full year EBIT growth projection of 23% and whilst we are expecting a slow down in the next 1 or 2 quarters, we remain positive on Singapore’s longer-term growth (DBS Economics is forecasting 6.8% GDP growth in 2009). Even in the event that we are overly optimistic, SPH’s earnings are highly defensive given its monopoly on the publishing sector in Singapore and ownership of a premium retail asset like Paragon. The additional contribution from Sky@Eleven over the next 2 years will also help buffer any earnings downside risk for the Group.

Relevance: We continue to like SPH for its attractive valuation and as a defensive stock, backed by a net yield of >7.5% (premised on 90% payout of EBIT; in line with last 6 years), and re-iterate our BUY call. We have adjusted our sum-of-the-parts target price to S$5.75, as we have raised our forward valuation for Paragon to S$2.1bn (cap rate of 4.5%). The latest valuation for Paragon is S$2bn.

SPH net profit dips 15.6% in Q3; recurring earnings up 26%

Net investment income falls 66% amid volatility in financial markets

SINGAPORE Press Holdings (SPH) turned in a 26.2 per cent year-on-year jump in recurring earnings to $135.1 million for the third quarter ended May 31, but a drop in investment income resulted in a 15.6 per cent fall in net profit to $133.4 million.

The rise in profit before investment – which represents recurring earnings from the media and property businesses, including profits from the Sky@eleven development – came on the back of higher revenue contribution from the newspaper and magazine segment and the Sky@eleven project.

Volatility in the financial markets continued to exact its toll on investments, resulting in a 65.9 per cent decline in net investment income to $25.7 million. The drop in investment income was due mainly to higher profit on sale of investments last year. In addition, last year included income from the capital reduction exercise undertaken by an investee company, Mobile One.

The media group’s operating revenue rose 19.5 per cent to $344.4 million for the quarter. Revenue from its core newspaper and magazine operations rose 5.1 per cent to $268.9 million, with print advertisement revenue remaining the growth driver, jumping 6.3 per cent to $207.9 million.

In the property segment, revenue more than doubled to $67.3 million from $26 million a year earlier – with a $38.1 million contribution from Sky@eleven and a $3.1 million increase in income from rental and related services from Paragon. Property yield from Paragon is expected to be maintained at above 4 per cent based on an upward revaluation of the shopping centre, at $2 billion.

Total operating expenses went up by 15.6 per cent to $212.7 million. Property development costs for Sky@eleven accounted for $10.8 million, while staff costs were up $10.6 million or 13.8 per cent mainly due to increased headcount, annual salary increment and higher variable bonus provision. Headcount at end-May reached 3,874, up from 3,684 a year ago, as the group intensified its efforts to expand into new media and magazine businesses.

Other operating expenses increased $6.4 million or 15 per cent in tandem with the increase in business activity and inflationary pressures.

On a nine-month basis, net profit came to $344.9 million, a drop of 8 per cent from a year ago, while operating revenue was 17.7 per cent higher at $954.5 million. Profit before investment income, or recurring earnings, climbed 26.6 per cent to $373.4 million.

Q3 earnings per share (EPS) came in at eight cents, down from 10 cents, while EPS for the nine months fell to 22 cents from 24 cents.

Commenting on the outlook for the next 12 months, chief executive officer Alan Chan said: ‘The Singapore economy is forecast to grow at a more moderate pace in 2008. Advertising revenue, which has registered commendable growth and remained resilient so far, is expected to perform in tandem with the economy. Newsprint prices, which have seen sharp increases, are poised to rise further due to escalating production costs as well as supply and demand imbalances.’

He also said that the performance of the property segment continues to be underpinned by profit contribution from Sky@eleven and strong rental income growth from Paragon.

‘Barring unforeseen circumstances, the directors expect the recurring earnings for the current financial year to be better than the previous financial year.’

Shares of SPH ended one cent lower at $4.18 yesterday.

SPH ($4.28) – Falls to low end of $4.20-60 trading band seen as opportunity to accumulate as long term 10-year support around $4-$4.20 signals a buy

Target price $4.50-60
Support $4.10-20

It is a marvel to know how under-performing SPH when we consider that its 1998 high was $3.93 and 10 years later it is hardly above water if we compare with this year’s $4.09 low.

Thus it is not surprising that patient traders would accumulate the stock whenever it drops to near $4.20 which is at the low end of its past 4 years’ trading range.

It may be hard to believe that when STI bottomed out at 1205 in March 2003, SPH had reached a high of $3.82 that month and when the new STI peaked at 3831 last Oct, SPH’s high was only $4.64, a gain of a mere 21% compared to 218% for the index.

It is thus hardly surprising that the counter has fallen out of traders’ radar screens but there are still some trading chances especially after a prolonged downtrend which has just been seen.

The price has fallen to its lowest level last week ($4.21) since its early April year’s high of $4.64 which matched the Jan 22 close of $4.21 when SPH hit intra-day low of $4.09 (STI also hit first support around 2860-70 that day). Underpinning this low is the 2007 low of $4.06.

With so obvious historical support around $4-$4.20, traders who have remembered this stock stuck around $4.40-60 for much of the time since late2006, would have the courage to accumulate around current levels as the chances of a return to this higher band are good.

After all SPH is still an index heavyweight with a market cap of $6.8b and attractive dividend yield of about 6% and trading around market PE of 13-14x with lots of loyal long term shareholders.

It should be relatively resilient to a market selldown based on its sluggish 10-year track record, which suggests the absence of stale bull positions.

The short term technical picture shows the daily MACD beginning to improve and the Bollinger bands suggest it is unlikely to break $4.20 support. In fact the 2-month sideways pattern should have ended and SPH moves back to its traditional $4.40-60 range.

SPH’s Paragon valued at $2b

SINGAPORE Press Holdings’ Paragon shopping centre in Orchard Road is now worth $2 billion, about 10 per cent up from its valuation of $1.82 billion a year ago.

The higher valuation came amid higher rents and continued strong demand.

‘Rents are firm, increasing as of last June. Occupancy is at 100 per cent,’ said Lydia Sng, executive director of valuations for property consultancy Knight Frank, which carried out the latest valuation yesterday. The earlier valuation of $1.82 billion on June 28, 2007, was also done by Knight Frank.

The Paragon is undergoing a $45 million makeover to update its facade and increase retail space. The renovation is slated for completion in October.

SPH said earlier that the makeover was part of a continuous effort to enhance the retail environment and shopping experience for Paragon customers.

In addition, the commercial space above its retail podium will be expanded – at a cost of $37 million, including the payment of land premium. This is scheduled to be completed by end-2008.

The total cost of the facade makeover and the addition of commercial space is $82 million.

Paragon remains open and operates as it normally does during the renovation period.

SPH will be releasing its financial results for the third quarter ended May 31, 2008, on July 11.