Singapore Press Holdings (SPH SP) - UOB Kay Hian 2016-10-17: 4QFY16 Earnings To Weaken Further With Economy; Dividends Will Decline

Singapore Press Holdings (SPH SP) - UOB Kay Hian 2016-10-17: 4QFY16: Earnings To Weaken Further With Economy; Dividends Will Decline SINGAPORE PRESS HLDGS LTD T39.SI

Singapore Press Holdings (SPH SP) - 4QFY16: Earnings To Weaken Further With Economy; Dividends Will Decline

  • Reported FY16 headline profit of S$265m was within expectations. Dividend for FY16 was lower as expected, though from 20 S cents to 18 S cents. 
  • The core media business will likely weaken further as the Singapore economy falters, given its correlation to it. 
  • Further dividend cuts are likely as a result. 
  • We cut core earnings by another 6-8%, on continued weakness from the media business. 
  • We update DCF assumptions and our target price falls to S$3.29. Downgrade to SELL.


RESULTS


4QFY16 net profit down 8.7%. 

  • SPH reported net profit of S$77.2m, down 8.7% yoy. For FY16, headline net profit was S$265.3m (-17.5% yoy) and in line with our forecast of S$267m. 
  • Adjusting for one-offs, which included an S$11.8m fair value gain on investment property and S$28.4m in impairment from its magazine business, FY16 core net profit was S$277.6m, down 9% yoy. 
  • The lower earnings are a reflection of continued weakness in its core media business.

Media business down 7% yoy, helped by cost cuts and lower production. 

  • The core media business softened further in the quarter as it witnessed the sharpest decline in ad revenue for the financial period. 
  • Operating profit for the unit as a result fell 7% to S$43.8m in 4QFY16. The decline would have been steeper, if not for lower production and staff costs, as well as a pick-up in circulation revenue from the revision in cover prices. 
  • Operating margins for the unit fell from 26.5% to 24.4% for the year.

Property segment weakens surprisingly. 

  • Despite 4QFY16 showing a 1.3% increase in revenue, operating profit fell by 4.2% from S$47.6m to S$45.6m for the period. This is surprising, given that management had noted higher same-store sales (SSS) and strong footfall for Seletar Mall.

Share of associates’ losses improved in 4QFY16. 

  • The loss shrunk from S$4.2m to S$3.7m for the period, attributed to some of its ventures turning profitable. This is expected to improve in coming quarters.

Dividend cut to 18 S cents, down from 20 S cents. 

  • As expected, FY16 dividend was down from 20 S cents to 18 S cents. The final + special dividend declared for FY16 was 11 S cents in total. 
  • As expected, SPH paid above the 100% payout ratio on a core earnings basis to manage it.


STOCK IMPACT


Media business to trend with Singapore’s economy. 

  • The media business is closely inter-linked to the Singapore economy. With the latest GDP figures showing a 0.6% yoy growth, further softness is to be expected ahead. As reflected by the sharp declines in advertising revenue for 4QFY16, this will likely to worsen and result in continued earnings erosion for the media unit. 
  • Additionally newsprint supply issues may see costs rise in the near term, further affecting the business.

Dividend cuts will continue for the foreseeable future. 

  • We do not see any end to this in the near term. Caught in a double whammy of a fading legacy business and a deteriorating local economy, earnings and thus dividends will continue to trend down.
  • SPH can manage their dividend through continued cost cuts but there are limits to this.
  • As the global economy slows down, we expect challenges in exiting and realising value in its investments. Considering that this is the pillar supporting its positive free cashflow, we view this with concern.

Seletar Mall not ripe for injection yet. 

  • Management remarked that while Seletar Mall was doing well, with SSS up and experiencing high traffic, it was not yet ripe for injection into SPH Reit. Ideally, a yield of 5+% is to be seen before injection, as compared with the 4+% yield the mall was currently experiencing. 
  • A special dividend if any, has to be weighed against SPH’s need for capital to make investments.


EARNINGS REVISION/RISK


Lower FY17-FY18 earnings by 6-8%. 

  • We input a 5-8% decline to print revenue growth, from 0% originally, as we take into account the weakening Singapore economic outlook.
  • Our FY17 and FY18 earnings fall to S$251m (-6%) and S$247m (-8%) respectively. We introduce out FY19 earnings at S$247m, which assumes a 3% decline in print revenue growth.

Dividend to deteriorate. 

  • We expect dividend to further decline over FY17-19, to 17 S cents for FY17, and 16 S cents thereafter. This translates to yields of 4-5%. As EBITDA continues to deteriorate, it is only natural that dividends follow in tandem.


VALUATION/RECOMMENDATION


Downgrade to SELL, target price lowered to S$3.29. 

  • With the economy taking a turn for the worst, SPH’s business woes will likely be exacerbated in the near term. 
  • A dividend cut for FY17 will likely see share price take a tumble as it re-rates to the traditional 5% yield level that market accords it. 
  • Our SOTP target price values the media business by DCF, and the rest at market value. 
  • Post a review of our media business DCF assumptions, we have lowered our SOTP target price to S$3.29. This assumes WACC of 6.17% and terminal growth of 0%. 
  • Given the 12.5% downside, downgrade to SELL.


SHARE PRICE CATALYST


  • Divestment of Seletar Mall.




Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-17
UOB Kay Hian SGX Stock Analyst Report REDUCE Maintain HOLD 3.29 Down 3.800



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