In an enviable position

• Positive momentum on newspaper adex set to continue. Newspaper adex grew by 14.6% yoy in November 2007 which should support a full year growth of 10%, the fastest growth since 2004. We expect newspaper adex to enjoy multiyear growth stemming from a buoyant domestic economy as Singapore transforms itself into a key global destination.

• Raising ad rates. In view of the positive outlook, SPH has raised its display and classifieds ad rates by 2.2-7.5% for the Straits Times, the Sunday Times and Business Times with effect from 1 January 2008.

• Revising earnings and dividend estimates. We have raised our earnings estimates for core media operations but this is offset by a cut in investment income estimates, resulting in an earnings reduction of 1-4% for FY08-09. However, dividend estimates have been raised by 6-8% on the back of higher payout ratio assumption given robust prospects from recurring operations.

• Maintaining Outperform with higher target price of S$5.20. Our sum-of-the-parts based target price is raised slightly from S$5.10 as we upgrade our earnings estimates for the core media operations. We believe that SPH’s defensive earnings as Singapore’s dominant print media player and a solid 7.6% prospective yield positions the stock to outperform the index, particularly in a riskaverse market environment.

A Bond

SPH posts 1.3% rise in Q1 net profit to $111.9m

Profit before investment income surges 19.8% to $126.5m

SINGAPORE Press Holdings (SPH) yesterday reported a 1.3 per cent year-on-year rise in net profit to $111.9 million for its first quarter ended Nov 30, 2007.

The profit rise was despite a 66.9 per cent fall in investment income from $29.7 million to $9.8 million. Earnings per share came to seven cents.

Profit before investment income – which reflects the recurring earnings of the media and property businesses – surged 19.8 per cent to $126.5 million from $105.6 million a year ago, boosted by its newspaper and magazine businesses and profit contribution from its Sky@eleven condominium project.

Group operating revenue grew 14.7 per cent to $312.1 million. Revenue from newspaper and magazine operations rose 8.2 per cent to $261.3 million, underpinned by strong print advertisement revenue growth of 10.5 per cent to $202.9 million. Revenue from property rose 69.9 per cent to $43.5 million, with a contribution of $16.1 million from Sky@eleven.

The drop in investment income was due partly to the fair valuation of investments being affected by recent volatility in financial markets. In addition, the previous year’s investment income was boosted by higher dividend income from telco MobileOne and profit from a capital reduction exercise by telco StarHub.

SPH’s investment portfolio comprises mainly equities and bonds. BT understands that the portfolio does not have direct exposure to US sub-prime mortgages.

In the latest quarter, total operating costs increased 11.8 per cent to $188.5 million.

Property development cost for Sky@eleven accounted for $4.6 million, while staff costs were 14.7 per cent higher due to higher variable bonus provision in line with continued improved profitability of the newspaper business, increased headcount and annual salary increment.

Total headcount in November last year was 3,771, up from 3,562 a year ago, mainly due to the inclusion of new subsidiaries and staffing for new media businesses. Other operating expenses of $41.3 million were up 12.8 per cent, with increased business activity and costs for new subsidiaries.

SPH said that recurring earnings this financial year are expected to be satisfactory. ‘Advertisement revenue will continue to be driven by the Singapore economy, which is expected to grow at a more moderate pace in 2008,’ said chief executive Alan Chan. ‘The group will continue to focus on sustaining its operating profit margin amid rising business costs. Profit from Sky@eleven will provide an added boost to earnings. Barring unforeseen circumstances, the directors expect the recurring earnings for the current financial year to be satisfactory.’

SPH shares closed unchanged yesterday at $4.60.

1QFY08: Robust 10.2% advertising revenue growth

SPH reported a net profit of S$111.9m (+1%) for 1QFY08. Net profit was flat due to lower income from investments.

Of SPH’s 1Q08 pre-tax profit of S$135.4m (+0.2% yoy), the Newspaper & Magazine and Property segments contributed S$107.0m (+13% yoy) and S$25.2m (+92%) respectively. The Newspaper & magazine segment has made a roaring comeback since 3QFY07. 1QFY08 registered a strong newspaper advertising growth of 10.2%, contributed by 7.9% and 14.3% growth in display and classified ads respectively. 2HFY07’s strong advertising growth momentum was sustained into FY08.

The Property segment benefited from higher contribution from Paragon Shopping Mall and a full-year impact of Sky@eleven in FY08. The former contributed an increase in revenue of S$1.8m whereas the latter S$16.1m. However, SPH’s group PBT was dragged down by lower investment income of S$9.8m compared with S$29.7m previously. This was due to the fair valuation of investments being affected by recent volatility in financial markets. In addition, the previous year’s investment income was boosted by higher dividend income from MobileOne Ltd and profit from a capital reduction
exercise by Starhub Ltd.

On the cost side, newsprint cost declined 3% to S$29.4m in 1QFY08 compared with S$30.3m a year ago. Average newsprint charge-out price was US$587/tonne compared with US$602/tonne previously. However, staff cost rose 15% to S$78.6m due to a higher variable bonus provision in line with continued improved profitability of the newspaper business, increased headcount and annual salary increment. Other operating expenses of S$41.3m were up 13% with increased business activity and inclusion of costs for new subsidiaries.

We raise our print revenue growth assumptions from 5% p.a. for FY08, FY09 and FY10 to 8% for FY08 and 6% each for FY09 and FY10. However, we reduce our FY08 and FY09 net profit forecasts by 8% and 5% to S$513m and S$547m on lower investment income. Our FY10 forecast is relatively unchanged. Despite our reduced FY08 and FY09 earnings forecasts, we raise our target price from S$5.40 to S$5.60, premised on a revised SOP valuation of S$5.58/share, which factors in a higher valuation for SPH’s newspaper & Magazine business.

SPH is a good defensive stock in times of uncertainty. Its core fundamentals are now supported by a healthy AR growth, Paragon’s rising rentals on the back of rising rentals in prime shopping locations in Singapore, a full-year earnings contribution from Sky@eleven and a high annual net dividend yield of 6-7% p.a. Maintain BUY.

Operating earnings firm as expected

Comment on Results

Results were in line with expectations as EBIT rose 20% yoy to S$127m on topline growth of 15% to S$315m. Top line growth was led by an 8% increase in newspaper and magazine revenue whilst a S$16m revenue recognition from Sky@Eleven helped property revenue rise 70% yoy.

Investment income dipped by 67% yoy due to a) a more volatile equities market and b) higher dividend income from M1 and capital reduction exercise by Starhub in 1Q07 last year.

Overall bottom line growth was just 1% to S$112m due to lower investment income.

Recommendation

SPH’s core newspaper operations continue to do well, with display and classified revenue posting a combined yoy growth of 10.2% (including magazines 10.5%), Revenue
contribution from Sky@Eleven of S$16.1m was slightly below expectations compared to S$71m contribution in 4Q07 but property development is inherently lumpy so we are comfortable with our full year forecasts at this time (of S$228.6m revenue).

Maintain BUY, TP S$5.80. We like SPH as a proxy for Singapore’s strong economy and also as a defensive play in this current volatile environment. Yield is attractive at 7% net.