Lower dividends as expected

Media continues to be impacted by a weak advertising climate, leading to a fall in regular dividends. However, the cash from SPH REIT provides management with a war chest for property development, the success of which will be key to growing shareholder's wealth.

FY13 core earnings forms 94% of our full-year estimates. We deem it in line as the slight miss was due to a fall in investment income. Recurring earnings formed 100% of our estimates. We tweak FY14-15 forecasts on housekeeping matters, and introduce FY16 numbers. Our SOP-based target price rises as we roll over to end CY14. We maintain our Neutral rating.

FY13 highlights

Full-year core earnings fell 15% yoy on 1) lower newspaper revenues (-3.9%) due to the decline in advertising (-4%) and circulation revenues (-3.6%), 2) higher interest expense from the debt taken on at SPH REIT and 3) lower investment income.

Operating expenses rose (+3% yoy) due to writedowns relating to an overseas magazine subsidiary, but this should decrease as cost savings to the tune of S$19m was unveiled for 2014. Though there are no signs of a pick up in advertising revenues yet, the slight positive was that 4Q advertising revenues decline appears to have moderated. Property continues to do well with 3% rental increases coming from Paragon. Seletar Mall has secured Shaw Theatres, NTUC Foodfare and FairPrice Finest as anchor tenants.

S$100m new media fund

SPH is targeting acquisitions of new media start-ups to enhance its online offerings to advertisers. This leaves S$657m of the cash raised for property development.

22 Scts regular dividends

This is lower than FY12's 24 Scts. Management has guided that future dividends will depend on recurring earnings and that it will not dip into its cash balance. This means that investors should not expect a return to the 24 Scts level anytime soon, considering the loss of 30% property income.

Lower dividends as expected

Media continues to be impacted by a weak advertising climate, leading to a fall in regular dividends. However, the cash from SPH REIT provides management with a war chest for property development, the success of which will be key to growing shareholder's wealth.

FY13 core earnings forms 94% of our full-year estimates. We deem it in line as the slight miss was due to a fall in investment income. Recurring earnings formed 100% of our estimates. We tweak FY14-15 forecasts on housekeeping matters, and introduce FY16 numbers. Our SOP-based target price rises as we roll over to end CY14. We maintain our Neutral rating.

FY13 highlights

Full-year core earnings fell 15% yoy on 1) lower newspaper revenues (-3.9%) due to the decline in advertising (-4%) and circulation revenues (-3.6%), 2) higher interest expense from the debt taken on at SPH REIT and 3) lower investment income.

Operating expenses rose (+3% yoy) due to writedowns relating to an overseas magazine subsidiary, but this should decrease as cost savings to the tune of S$19m was unveiled for 2014. Though there are no signs of a pick up in advertising revenues yet, the slight positive was that 4Q advertising revenues decline appears to have moderated. Property continues to do well with 3% rental increases coming from Paragon. Seletar Mall has secured Shaw Theatres, NTUC Foodfare and FairPrice Finest as anchor tenants.

S$100m new media fund

SPH is targeting acquisitions of new media start-ups to enhance its online offerings to advertisers. This leaves S$657m of the cash raised for property development.

22 Scts regular dividends

This is lower than FY12's 24 Scts. Management has guided that future dividends will depend on recurring earnings and that it will not dip into its cash balance. This means that investors should not expect a return to the 24 Scts level anytime soon, considering the loss of 30% property income.

Twin initiatives for growth and cost savings

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

Final dividend of 15.0 S-cents per share SPH reported FY13 (ending 31 Aug) PATMI of S$431.0m – down 25.0% – mainly due to a lower fair value gain on investment properties and a S$40.4m increase in the “other operating expenses” item. This increase comprises S$26.0m of non-recurring charges, including an impartment of an overseas magazine subsidiary, and a S$8.0m hike in promotion costs for its online businesses. Accounting for one-time items, core PATMI is estimated at S$348.9m, which constitutes 96.5% of our FY13 forecast and is judged to be mostly in line. In terms of the topline, newspaper and magazine revenue for FY13 was S$991.2m, decreasing 3.9% YoY due to declines in both advertisement and circulation. A final dividend of 15.0 S-cents per share was announced.

Initiatives to generate S$19m cost savings per annum

SPH’s traditional newspaper and magazines business continue to face headwinds in the form of declining advertisement (down 4.0%) and circulation revenues (down 3.6%). On the cost-side of the equation, however, we saw staff cost decreasing 2.9% as variable bonuses were reduced. Newsprint prices also held steady at US$607 over 4QFY13. In addition, management has began cost-saving intitatives that are expected to generate savings of S$19m per annum. Over FY13, property rental income increased 3.5% due to higher rental rates from Paragon while income from Clementi Mall remained stable. Seletar Mall remains on track and we expect completion by Dec 14.

Driving growth in new media businesses

To further drive growth, SPH will set up a S$100m New Media Fund to invest in mediarelated businesses. Currently, the group’s online classified businesses across SE Asia has an enterprise value of S$303m, and management expects its new media businesses, together with its retail property segment, to form two key pillars for growth ahead. Overall, we see management’s initiatives for growth and cost savings to be key positives and would look for execution and preliminary results over 1HFY14. Maintain HOLD with a fair value estimate of S$4.14.

Twin initiatives for growth and cost savings

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

Final dividend of 15.0 S-cents per share SPH reported FY13 (ending 31 Aug) PATMI of S$431.0m – down 25.0% – mainly due to a lower fair value gain on investment properties and a S$40.4m increase in the “other operating expenses” item. This increase comprises S$26.0m of non-recurring charges, including an impartment of an overseas magazine subsidiary, and a S$8.0m hike in promotion costs for its online businesses. Accounting for one-time items, core PATMI is estimated at S$348.9m, which constitutes 96.5% of our FY13 forecast and is judged to be mostly in line. In terms of the topline, newspaper and magazine revenue for FY13 was S$991.2m, decreasing 3.9% YoY due to declines in both advertisement and circulation. A final dividend of 15.0 S-cents per share was announced.

Initiatives to generate S$19m cost savings per annum

SPH’s traditional newspaper and magazines business continue to face headwinds in the form of declining advertisement (down 4.0%) and circulation revenues (down 3.6%). On the cost-side of the equation, however, we saw staff cost decreasing 2.9% as variable bonuses were reduced. Newsprint prices also held steady at US$607 over 4QFY13. In addition, management has began cost-saving intitatives that are expected to generate savings of S$19m per annum. Over FY13, property rental income increased 3.5% due to higher rental rates from Paragon while income from Clementi Mall remained stable. Seletar Mall remains on track and we expect completion by Dec 14.

Driving growth in new media businesses

To further drive growth, SPH will set up a S$100m New Media Fund to invest in mediarelated businesses. Currently, the group’s online classified businesses across SE Asia has an enterprise value of S$303m, and management expects its new media businesses, together with its retail property segment, to form two key pillars for growth ahead. Overall, we see management’s initiatives for growth and cost savings to be key positives and would look for execution and preliminary results over 1HFY14. Maintain HOLD with a fair value estimate of S$4.14.

Deflated dividend expectations

SPH’s FY13 dividends could fall short of FY12’s 24 cents due to weak ad revenue and the loss of 30% of its property earnings. But one should not be negative on SPH as the S$757m raised from SPH REIT should compensate if management successfully develops new retail malls.

We reduce FY13-15 EPS by 2-13% for weaker ad revenues and the 30% fall in property earnings following the injection of two assets into the REIT. SPH remains a Neutral as potential dividend headwinds are balanced by S$757m cash proceeds that management is looking to deploy. Our SOP target price falls due to the payout of the 18 ct special dividend and a lower value for the core media operations after the EPS cuts.

Regular dividends may be lower than FY12’s 24 cents

We think there is a strong possibility that FY13-14 dividends (excluding 18cts special dividend) could be cut if management does not raise the payout ratio. FY13 core earnings are likely to come in around 13% lower than FY12 because of weak advertising revenues. 9M13 is already 13% lower yoy and it is unlikely that the seasonally weak 4Q13 can make up for the shortfall.

Even if the climate for advertisers picks up in FY14, it may not be able to offset the fall in earnings from the loss of 30% property income to SPH REIT. Furthermore, interest expense is set to rise as the overall cost of borrowing increases after the REIT transaction. The debt taken on at SPH REIT costs 2.4% and is estimated to increase SPH’s overall funding cost from 2.1% to 2.3%.

S$757m war chest

Dividend headwinds are tempered by the large cash pile that management raised from SPH REIT. It will presumably use the cash to develop new retail malls, which management has a good track record in. Paragon achieved 7% rental CAGR in FY03-12. Furthermore, having a platform to recycle capital allows SPH to bid more aggressively for land sites, knowing that it has a ready buyer.

Staying Neutral

We are keeping our Neutral call. SPH still offers 5.1% yield even if dividends are cut to 21 cents. This compares favourably with FCT’s 6.1% and CMT’s 4.9%, with the added kicker of S$757m of net cash proceeds raised) for SPH compared
to 0.4x net gearing for FCT and CMT.