AD REVENUES IMPACTED BY COOLING MEASURES

• 2QFY13 numbers tracking below
  
• Ads hit by pty and automobile measures
  
• Still exploring REIT listing
  

2QFY13 PATMI of S$72m down 15% YoY

SPH reported 2QFY13 PATMI of S$71.6m – down 14.7% YoY mostly due to a lower contribution from the Newspaper and Magazines segment. 1HFY13 PATMI now forms 45% of our FY13 forecast; despite 2Q being a weaker quarter cyclically, we now judge earnings to be tracking marginally below expectations as SPH’s ad revenues suffered the impact of recent property and automobile cooling measures. Topline for the quarter came in at S$282.5m, which decreased 5.5% YoY mostly due to weaker newspapers numbers but partially offset by an increase in property rental income from Paragon’s positive rental reversions. An interim dividend of 7 S-cents per share is announced.

A challenging 2Q for newspapers

Overall, 2Q was challenging for SPH’s newspapers segment and we see the market likely showing a neutral/mildly negative reaction to this set of results. Ad revenues fell S$13.9m (down 7.6% YoY) to S$168.5m, as advertisers from the property and automobile segments pulled back in the aftermath of recent cooling measures. In addition, circulation revenue also dipped by S$2.4m (down 4.9% YoY) as the physical subscription base declined (including digital subscribers, however, total circulation volume remained steady). We see cost-side items mostly kept in check over 1HFY13: staff costs fell 2.1% YoY to S$174.6m while newsprints charge-out costs fell marginally to S$626-S$644/mt. SPH’s property segment continues to be the bright spot, with Paragon’s 1HFY13 rental income up by S$3.4m (up 4.5% YoY) from higher rental rates. Occupancies at Paragon and Clementi Mall were maintained at 100%. The Seletar Mall remains on track to be completed by end of 2014.

Still exploring REIT option

Management expressed that it is still in the midst of exploring a REIT listing and that one key variable being deliberated is the stake of its assets to be divested. A REIT listing continues to be a realistic event, in our view, given the size and quality of its retail malls and the potential for significant shareholder accretion. Maintain BUY with an unchanged fair value estimate of S$4.94.

Valuations Stretched; Downgrade To Sell

2QFY13 results came in slightly below our expectations with PATMI at SGD72m (-15% y-o-y, -22% q-o-q). A 7.6% y-o-y fall in N&M ad revenue was partially cushioned by a 4.5% y-o-y increase in property rental income. We lower our FY13/14 earnings by 5.8/6.0% on weaker domestic economic outlook, which impact ad revenue. Downgrade to SELL with lower SOTP TP of SGD4.00 (SGD4.30 previously).

• Share price enjoyed a great run up but valuations appear stretched. SPH’s share price ran up some 10% since it announced an exploration of a REIT listing on the SGX. Though we understand there are advantages of a REIT spin off, such as potential cash inflows, we think valuations appear stretched. With an unexciting core publishing segment, and FY13 dividend yields compressing to 5.2%, we are downgrading our call to SELL.
  
• Feasibility of a REIT listing would depend on how cash is deployed. SPH is still in the early stages of studying a REIT spin off possibility and we think visibility on any positive catalysts are lacking at this point in time. We think a key point that needs to be addressed would be whether SPH will be able to make yield accretive investments with the use of proceeds.
  
• Ad revenue weak but property segment held the fort. Property segment income continued to enjoy 4.5% y-o-y growth to SGD50.2m due to higher rental rates from Paragon but this was more than offset by a 7.1% y-o-y fall in Newspaper and Magazine segment revenue to SGD224.4m. Following weaker-than-expected 1Q13 Singapore GDP contraction (based on advanced estimates) of 0.6%, we have consequently lowered our FY13 earnings by 5.8% to reflect weaker ad spend going forward.
  
• Downgrade to SELL, yields looking less attractive. We value the core media segment based on 13.8x FY13 P/E, Paragon (SGD2.43bn) and Clementi Mall (SGD359m) at market value, M1 and Starhub at OSK TP and investments as at Feb 13. SPH has declared an interim dividend of SGD7¢ a share. We think SPH looks less attractive with FY13 yields at 5.2%.
  

Valuations Stretched; Downgrade To Sell

2QFY13 results came in slightly below our expectations with PATMI at SGD72m (-15% y-o-y, -22% q-o-q). A 7.6% y-o-y fall in N&M ad revenue was partially cushioned by a 4.5% y-o-y increase in property rental income. We lower our FY13/14 earnings by 5.8/6.0% on weaker domestic economic outlook, which impact ad revenue. Downgrade to SELL with lower SOTP TP of SGD4.00 (SGD4.30 previously).

• Share price enjoyed a great run up but valuations appear stretched. SPH’s share price ran up some 10% since it announced an exploration of a REIT listing on the SGX. Though we understand there are advantages of a REIT spin off, such as potential cash inflows, we think valuations appear stretched. With an unexciting core publishing segment, and FY13 dividend yields compressing to 5.2%, we are downgrading our call to SELL.
  
• Feasibility of a REIT listing would depend on how cash is deployed. SPH is still in the early stages of studying a REIT spin off possibility and we think visibility on any positive catalysts are lacking at this point in time. We think a key point that needs to be addressed would be whether SPH will be able to make yield accretive investments with the use of proceeds.
  
• Ad revenue weak but property segment held the fort. Property segment income continued to enjoy 4.5% y-o-y growth to SGD50.2m due to higher rental rates from Paragon but this was more than offset by a 7.1% y-o-y fall in Newspaper and Magazine segment revenue to SGD224.4m. Following weaker-than-expected 1Q13 Singapore GDP contraction (based on advanced estimates) of 0.6%, we have consequently lowered our FY13 earnings by 5.8% to reflect weaker ad spend going forward.
  
• Downgrade to SELL, yields looking less attractive. We value the core media segment based on 13.8x FY13 P/E, Paragon (SGD2.43bn) and Clementi Mall (SGD359m) at market value, M1 and Starhub at OSK TP and investments as at Feb 13. SPH has declared an interim dividend of SGD7¢ a share. We think SPH looks less attractive with FY13 yields at 5.2%.
  

Opening Up More Possibilities

Just the first step into property. We raise our target price to SGD4.95 after factoring in REIT benefits. BUY SPH. This is just the first step of what is likely to turn out to be a multi-year value unlocking process. SPH’s confirmation of a retail REIT spin-off in the future adds another, more exciting dimension to the stock. We have long speculated that it could become more aggressive on the property front, and this has materialised. The greatest concern right now is its limited supply of sponsor assets, which can be overcome by introducing new partners, more acquisitions or expanding overseas.

Immediate benefits from spinoff. We believe the proposed REIT can fetch a potential distribution yield of 5.6%, relatively attractive when compared to the average S-REIT yield of 5.3% at this end of the yield compression cycle and even lower returns from fixed income. The market now expects a special dividend from the spinoff, which we have estimated at SGD1b (SGD0.63 a share) assuming tax savings from a REIT structure and debt repayment.

Looking beyond. However, we believe that the market has not yet fully factored the upside from property in the long term. Options include (1) roping in asset owner partners to expand the asset pipeline, (2) directly acquiring suitable assets in Singapore, and/or (3) expanding outside Singapore to other countries. Partners are likely to be smaller asset owners that cannot form their own REIT and that may find it more convenient to work with a big player who can provide the financial heft and management muscle.

Thinking outside the box. BUY. We maintain BUY on SPH, with a raised target price of SGD4.95 based on SOTP. Dividend yield still looks attractive at 5.7% even after recent share price surge. We believe we are the first broker to highlight the possibility of potential partners that would address concerns that, as sponsor, it does not have a long enough tail of injectable assets, and extend SPH’s attraction as a property play to augment its waning media business.

REIT Listing Min. Impact to Valuations

SPH has announced a potential REIT listing for its property assets. The properties and terms to form the portfolio are still under review. A scenario in which Paragon and Clementi Mall form the REIT portfolio with a dividend yield of 5.5% by our estimates will have little impact to our SOTP TP. We are maintaining our NEUTRAL call, but raise our SOTP TP to SGD4.30 (from SGD3.80 previously). Our revised TP does not factor in a listing of its property assets into a REIT.

Positives of a REIT listing include cash inflow, asset value realization. The listing of SPH’s property assets (we assume Paragon and Clementi Mall) into a REIT has its positives: (1) potential gross cash inflow of SGD1.5bn (assuming SPH keeps 50% cash and remainder as REIT shares), (2) upside in gross asset value realization of SGD1.3bn (Paragon and Clementi are valued at SGD1.75bn on SPH’s books versus market value of SGD3.03bn), (3) higher income in the form of dividends as a REIT is tax exempt with a minimum earnings payout of 90%.

However we see a REIT listing to have little impact on our valuations. With the assumption of SPH receiving 50% of the asset value (of Paragon and Clementi) in cash, and the remainder as equity interest in the REIT (which trades at implied dividend yield of 5.5%), our SOTP TP would be unchanged at SGD4.30. Should the REIT trade at a lower 5.0% dividend yield, our SOTP TP would increase by 2.1% to SGD4.39.

Positive for investors given retail REITs current 4.5-5.0% yield. We assumed (1) a listing of Paragon and Clementi Mall, (2) 35% debt ratio, (3) NPI of SGD140m, (4) finance cost at 2% of debt to derive a dividend yield of 5.5%, which is more attractive than the current retail REIT sector’s 4.5-5.0%.

Maintain NEUTRAL, SOTP TP of SGD4.30. We have (1) increased our N&M segment P/E multiple by 25% to 13.8x (in line with peers), (2) revised our in house property segment valuation to that of market, and (3) updated value of stakes in list cos. Our SOTP TP has been lifted to SGD4.30 (from SGD3.80). Our TP does not factor in a REIT listing of SPH’s property assets.