Continued headwinds for print

• REIT spin-off success
  
• Continued headwinds for print
  
• Downgrade to HOLD with S$4.14 FV
  

A REIT success but 18 S-cents bonus below view

As anticipated, SPH conducted a successful REIT spin-off for Paragon and Clementi Mall, yielding substantial cash proceeds and subsequently an 18 S-cents bonus dividend for shareholders. We see the establishment of a REIT subsidiary vehicle as a major positive for the group’s mall development business and believe management’s decision to hold a 70% majority stake makes significant sense – this enables accounting consolidation and for the bulk of property earnings to continue accreting to SPH. That said, the 18 S-cents bonus cash dividend was somewhat below view, particularly as the group was already sitting on an fairly hefty war-chest of ~S$0.9b investible funds as at end 3QFY13. We believe that investors could judge the degree in which management can expediently deploy excess capital for attractive returns as a key performance indicator for the group ahead.

Still seeing headwinds for the print business

In addition, the latest 3QFY13 figures presented a picture of continued headwinds for the group’s core print business. Over 3QFY13, operating revenue from the key Newspaper and Magazine segment fell 3.3% to S$259.3m. Given the cumulative impact from cooling measures and hawkish loan requirements on the property and automobile sectors, conditions for the print business remain challenging. We saw pressure on 3QFY13 ad revenues, which fell 4.5% YoY in 3QFY13, and circulation revenues also decreased S$4.9m YoY (down 3.2%) as the physical subscription base declined.

Downgrade to HOLD

Given current headwinds for the print business and limited visibility in terms of catalysts ahead, we believe the risk-reward proposition for the counter has turned fairly neutral. Downgrade to HOLD with a lowered fair value estimate of S$4.14, versus S$4.94 (before the REIT spin-off) previously. Our barometer for an upturn in outlook ahead consists of two key groups of operating metrics: for its print businesses – ad and circulation revenue growth; and for its retail property segment – expedient and accretive capital deployment.

Continued headwinds for print

• REIT spin-off success
  
• Continued headwinds for print
  
• Downgrade to HOLD with S$4.14 FV
  

A REIT success but 18 S-cents bonus below view

As anticipated, SPH conducted a successful REIT spin-off for Paragon and Clementi Mall, yielding substantial cash proceeds and subsequently an 18 S-cents bonus dividend for shareholders. We see the establishment of a REIT subsidiary vehicle as a major positive for the group’s mall development business and believe management’s decision to hold a 70% majority stake makes significant sense – this enables accounting consolidation and for the bulk of property earnings to continue accreting to SPH. That said, the 18 S-cents bonus cash dividend was somewhat below view, particularly as the group was already sitting on an fairly hefty war-chest of ~S$0.9b investible funds as at end 3QFY13. We believe that investors could judge the degree in which management can expediently deploy excess capital for attractive returns as a key performance indicator for the group ahead.

Still seeing headwinds for the print business

In addition, the latest 3QFY13 figures presented a picture of continued headwinds for the group’s core print business. Over 3QFY13, operating revenue from the key Newspaper and Magazine segment fell 3.3% to S$259.3m. Given the cumulative impact from cooling measures and hawkish loan requirements on the property and automobile sectors, conditions for the print business remain challenging. We saw pressure on 3QFY13 ad revenues, which fell 4.5% YoY in 3QFY13, and circulation revenues also decreased S$4.9m YoY (down 3.2%) as the physical subscription base declined.

Downgrade to HOLD

Given current headwinds for the print business and limited visibility in terms of catalysts ahead, we believe the risk-reward proposition for the counter has turned fairly neutral. Downgrade to HOLD with a lowered fair value estimate of S$4.14, versus S$4.94 (before the REIT spin-off) previously. Our barometer for an upturn in outlook ahead consists of two key groups of operating metrics: for its print businesses – ad and circulation revenue growth; and for its retail property segment – expedient and accretive capital deployment.

REIT expectations provide support

• 2Q13 lower than expectations, dragged by weak ad revenue
  
• 7 Scts interim DPS declared; maintaining our DPS estimate of 24 Scts for the full year
  
• Evaluation of a property REIT still in progress and is likely to underpin share price
  
• Maintain BUY, S$4.75 TP
  

Highlights

2Q13 down on weak ads revenue. 1Q13 Singapore advance GDP estimates released on the morning of 12 Apr was a good reflection of SPH 2Q results. SPH’s 2Q13 net profit dropped by 15% y-o-y to S$71.5m, while revenue slipped by 5.5% to S$282.2m, weaker than our expectations. Interim DPS of 7 Scts was declared, similar to 1H12. We continue to expect full year DPS of 24 Scts, equating to a yield of 5.2%.

Ads impacted by cooling measures, property rental remains robust. Newspaper & magazines’ revenue fell by 7.1% y-o-y to S$224.4m due to weaker advertising revenue. Display ads fell by 10.2% while classifieds fell 7.1%, which was attributed to the property and transport sectors arising from the various government cooling measures introduced. Property rental remained robust, up by 4.5% to S$50.2m.

Evaluation for the proposed REIT still in progress, mandate not signed. Contrary to media reports, management shared that no mandate has been signed yet. The assessment for a property REIT was still ongoing, and announcements would be made going forward when there are significant developments. We continue to believe current market conditions are conducive for SPH to spin its investment properties into a REIT.

Our View

Share price supported by asset realisation, yield. We are not particularly surprised by the weak 2Q results, given the uncertain economic outlook. That said, we believe share price in the near term may face resistance and some profit taking after appreciating about 10% in the past month. But, downside should be limited, and likely to be supported by the expectation of an eventual REIT listing.

Ad revenue may pick up slightly with the economy in 2H. Our economist expects to see a slower first half, followed by a pickup in the second half for the Singapore economy. With ad revenues historically tied to economic growth and consumer sentiment, this could point to a pick up for SPH ad revenues.

Recommendation

Maintain BUY, S$4.75 TP. Maintain BUY as we believe share price should continue to remain firm on expectations of the potential REIT and will re-rate once there are positive developments going forward. We trimmed our FY13F earnings slightly by 3.4%, on the back of weaker ad revenue in 2Q. Our sum-of-parts TP is adjusted marginally to S$4.75.

Tread carefully

We think it is still unclear if spinning off its prized property assets into a REIT creates shareholder value. This, coupled with the weak ad environment, suggests that the recent 10% run-up in the share price may be overly optimistic.

2QFY13’s earnings came in below expectations at 19% of our and consensus full-year estimates due to weaker-than-expected ad revenue. 1H13 formed 44%. We lower FY13-15 estimates by 5-9% but raise our SOP-based target price to reflect the appraised value of properties likely to be spun off into a REIT. Downgrade from Neutral to Underperform as we think the recent share price gains are unwarranted.

Weaker ad revenues drag down 2Q12

2Q’s ad revenues suffered as a consequence of the government’s cooling measure on both the car and property sectors. We think this situation is unlikely to change for the rest of the year. Property continued to do well, with Paragon registering a 5% increase in rentals. Both malls are 100% occupied.

REIT may not create value

We think it is unclear if there will be a special dividend. That depends on how much management decides to sell down. If management sells a large stake to the REIT, it will take away valuable property earnings when the media earnings are struggling. On the other hand, if SPH sells only a small stake, there might not be special dividends, and investors who bought in anticipation could be disappointed.

Optimistic share price

Our revised SOTP already capture Paragon (S$2.43bn) and Clementi Mall (S$598m) at SPH’s announced valuations. We estimate that these valuations are based on fairly aggressive cap rates of 4% when CMT and FCT’s retail malls are mostly valued at cap rates above 5%. A divestment into a REIT might not add more to our SOTP. Meanwhile, share price had re-rated well above our target price.

Tread carefully

We think it is still unclear if spinning off its prized property assets into a REIT creates shareholder value. This, coupled with the weak ad environment, suggests that the recent 10% run-up in the share price may be overly optimistic.

2QFY13’s earnings came in below expectations at 19% of our and consensus full-year estimates due to weaker-than-expected ad revenue. 1H13 formed 44%. We lower FY13-15 estimates by 5-9% but raise our SOP-based target price to reflect the appraised value of properties likely to be spun off into a REIT. Downgrade from Neutral to Underperform as we think the recent share price gains are unwarranted.

Weaker ad revenues drag down 2Q12

2Q’s ad revenues suffered as a consequence of the government’s cooling measure on both the car and property sectors. We think this situation is unlikely to change for the rest of the year. Property continued to do well, with Paragon registering a 5% increase in rentals. Both malls are 100% occupied.

REIT may not create value

We think it is unclear if there will be a special dividend. That depends on how much management decides to sell down. If management sells a large stake to the REIT, it will take away valuable property earnings when the media earnings are struggling. On the other hand, if SPH sells only a small stake, there might not be special dividends, and investors who bought in anticipation could be disappointed.

Optimistic share price

Our revised SOTP already capture Paragon (S$2.43bn) and Clementi Mall (S$598m) at SPH’s announced valuations. We estimate that these valuations are based on fairly aggressive cap rates of 4% when CMT and FCT’s retail malls are mostly valued at cap rates above 5%. A divestment into a REIT might not add more to our SOTP. Meanwhile, share price had re-rated well above our target price.