Inefficient Use Of Capital

Taking off the one-off items, SPH’s 2QFY14 results came in below expectation with SGD51.2m PATAMI (-32.3% y-o-y) on the back of SGD211.6m revenue (-5.7% y-o-y). This was largely on its poor print business and investment performance. While the business generates strong cash flow, we downgrade to SELL as we consider the company’s use of capital is not efficient.

Traditional print business a concern. Revenue from Singapore Press (SPH)’s newspaper and magazine (N&M) segment fell badly by 5.7% y-o-y as both advertisement and circulation revenue declined 6.6% and 3.8% respectively. The steep decline in advertisement topline was attributable to the Government’s cooling measures on the property and automotive markets. Going forward, management also shared its concerns over recent tragedies, ie the missing flight MH370 and the kidnapping of a Chinese tourist in Sabah, which may affect the local tourism industry and, in turn, hurt SPH’s advertisement business.

Costs will continue to go up. SPH announced initiatives to eventually achieve opex savings by SGD19m. However, we expect such savings to be offset by growing business costs like rising wages and utilities bills. Furthermore, the group recently adopted a new profit-driven remuneration system that will see costs go up by about SGD10m annually, albeit aimed at driving profit growth.

Lacklustre investment performance. Notably, SPH took an impairment on investments of SGD6.0m in the quarter under review, citing prolonged decline in value. Taking off this impairment, the group generated SGD5.9m in income from investments in 1HFY14 (-19.2% y-o-y). In our view, with SGD1.2bn book value of investments as at end 2QFY14, and SGD660.3m in cash, its use of capital is not efficient, in our view.

Downgrade to SELL. We believe that SPH should increase its payout or even carry out a capital reduction. We lower our TP to SGD3.57 (from SGD3.70), which is based on SOP valuation. This implies a 16.7x FY14 PE and 6.2% FY14 yield.

Inefficient Use Of Capital

Taking off the one-off items, SPH’s 2QFY14 results came in below expectation with SGD51.2m PATAMI (-32.3% y-o-y) on the back of SGD211.6m revenue (-5.7% y-o-y). This was largely on its poor print business and investment performance. While the business generates strong cash flow, we downgrade to SELL as we consider the company’s use of capital is not efficient.

Traditional print business a concern. Revenue from Singapore Press (SPH)’s newspaper and magazine (N&M) segment fell badly by 5.7% y-o-y as both advertisement and circulation revenue declined 6.6% and 3.8% respectively. The steep decline in advertisement topline was attributable to the Government’s cooling measures on the property and automotive markets. Going forward, management also shared its concerns over recent tragedies, ie the missing flight MH370 and the kidnapping of a Chinese tourist in Sabah, which may affect the local tourism industry and, in turn, hurt SPH’s advertisement business.

Costs will continue to go up. SPH announced initiatives to eventually achieve opex savings by SGD19m. However, we expect such savings to be offset by growing business costs like rising wages and utilities bills. Furthermore, the group recently adopted a new profit-driven remuneration system that will see costs go up by about SGD10m annually, albeit aimed at driving profit growth.

Lacklustre investment performance. Notably, SPH took an impairment on investments of SGD6.0m in the quarter under review, citing prolonged decline in value. Taking off this impairment, the group generated SGD5.9m in income from investments in 1HFY14 (-19.2% y-o-y). In our view, with SGD1.2bn book value of investments as at end 2QFY14, and SGD660.3m in cash, its use of capital is not efficient, in our view.

Downgrade to SELL. We believe that SPH should increase its payout or even carry out a capital reduction. We lower our TP to SGD3.57 (from SGD3.70), which is based on SOP valuation. This implies a 16.7x FY14 PE and 6.2% FY14 yield.

Singapore Press Holdings: A soft landing for ad revenues

• FY13 figures mostly in line
  
• Cost savings of S$19m p.a. ahead
  
• S$100m New Media Fund
  

1QFY14 results within expectations

1QFY14 PATMI dipped 6.6% YoY to S$88.8m mostly due to lower contributions from the property segment after the SPH REIT spin-off and softer numbers from the core print business. We judge this set of results to be mostly in line with expectations as 1Q PATMI now makes up 26.8% of our full year estimates. In terms of the topline, 1QFY14 revenue came in at S$328.5m, up 2.0% YoY due to positive rental reversions from key property assets, The Paragon and The Clementi Mall, and partially offset by an anticipated decline in print revenue. Through we continue to see, in our view, a secular component in SPH’s advertisement and circulation revenues downtrend, which dipped by 2.8% and 4.7% YoY respectively over 1QFY14, the magnitude of the declines has largely been contained by management’s initiations to increase circulation and readership.

A soft landing for ad revenues

Given the dual challenges currently faced by the group in its traditional ad business – evolving industry dynamics driven by online media and weakening ad demand from the property sector which has peaked, newspaper ad and circulation revenues continued to dip over the quarter as anticipated. However, we see the overall ad revenue dip of 2.9% YoY (display ads down 1.7% and classified ads down 5.9%) to be fairly benign and leads us to establish a base-case of a long-drawn soft-landing scenario for SPH’s traditional print businesses. Cost-side items were mostly held in check over the quarter: staff costs increased 2.5% YoY while newsprints charge-out costs fell marginally to S$611/mt versus S$607/mt last quarter.

Maintain HOLD with unchanged S$4.14 fair value

Recall that management has set up a S$100m New Media Fund to invest in media-related businesses and has also began cost-saving initiatives to generate savings of S$19m per annum and we would expect updates from the group going into 2QFY14. Maintain HOLD with a fair value estimate of S$4.14.

Singapore Press Holdings: A soft landing for ad revenues

• FY13 figures mostly in line
  
• Cost savings of S$19m p.a. ahead
  
• S$100m New Media Fund
  

1QFY14 results within expectations

1QFY14 PATMI dipped 6.6% YoY to S$88.8m mostly due to lower contributions from the property segment after the SPH REIT spin-off and softer numbers from the core print business. We judge this set of results to be mostly in line with expectations as 1Q PATMI now makes up 26.8% of our full year estimates. In terms of the topline, 1QFY14 revenue came in at S$328.5m, up 2.0% YoY due to positive rental reversions from key property assets, The Paragon and The Clementi Mall, and partially offset by an anticipated decline in print revenue. Through we continue to see, in our view, a secular component in SPH’s advertisement and circulation revenues downtrend, which dipped by 2.8% and 4.7% YoY respectively over 1QFY14, the magnitude of the declines has largely been contained by management’s initiations to increase circulation and readership.

A soft landing for ad revenues

Given the dual challenges currently faced by the group in its traditional ad business – evolving industry dynamics driven by online media and weakening ad demand from the property sector which has peaked, newspaper ad and circulation revenues continued to dip over the quarter as anticipated. However, we see the overall ad revenue dip of 2.9% YoY (display ads down 1.7% and classified ads down 5.9%) to be fairly benign and leads us to establish a base-case of a long-drawn soft-landing scenario for SPH’s traditional print businesses. Cost-side items were mostly held in check over the quarter: staff costs increased 2.5% YoY while newsprints charge-out costs fell marginally to S$611/mt versus S$607/mt last quarter.

Maintain HOLD with unchanged S$4.14 fair value

Recall that management has set up a S$100m New Media Fund to invest in media-related businesses and has also began cost-saving initiatives to generate savings of S$19m per annum and we would expect updates from the group going into 2QFY14. Maintain HOLD with a fair value estimate of S$4.14.

Lack of catalysts; maintain HOLD

• SPH’s 1QFY8/14 results were in line with market expectations.
  
• The property division will likely be its growth driver in the short term as the core media business continues to languish.
  
• In our view, the risk is that SPH might have to cut its FY8/14E dividend if it does not raise payout ratio to above 100%. Maintain HOLD.
  

What’s New

SPH’s 1QFY8/14 results were in line with market expectations. Revenue grew 1.7% YoY but net profit fell 6.6% YoY, mainly due to the dilution effect from last year’s spin-off of SPH REIT. 1Q net profit of SGD88.8m accounted for 27.5% of our full-year forecast. Given the modest outlook for Singapore’s GDP growth and our bearish view on the property market, we do not see any clear catalysts for its core media business in the short term.

What’s Our View

SPH’s media business continued to languish in 1QFY8/14 and we think a recovery is unlikely any time soon. Advertisement and circulation revenue declined by 2.8% and 4.7% YoY respectively. The property division was the only growth driver for the group. Paragon and The Clementi Mall remain fully occupied and their revenue contribution grew 5.4% YoY in the first quarter.

We only expect 1.1% core EPS growth (excluding revaluation gains on properties) for FY8/14E and 1.6% growth for FY8/15E. In our view, the key risk is that SPH might have to cut its FY8/14E dividend if it does not raise payout ratio to above 100%.

Maintain HOLD with the target price unchanged at SGD4.18.