SPH - Declining advertising revenue
- 1Q17 earnings below as adex remains lacklustre.
- Ad revenue declines by 12-16%.
- Cut FY17-18F earnings by 4-5%.
- Maintain FULLY VALUED and lower TP to S$3.32.
Maintain FULLY VALUED.
- We maintain our FULLY VALUED recommendation for SPH.
- We see that advertising expenditure will remain under pressure on the back of a flat GDP growth forecast of 1.3% for 2017. We anticipate that core print ad revenue will remain weak, dragging earnings and DPS.
- At the current share price, valuation at 24.7x PE and 4.6% yield are unattractive given the poor earnings outlook.
1Q17 results below expectations.
- Headline earnings were below expectations at S$45.7m (-43.8% y-o-y). This was largely dragged by
- decline in advertising revenue, and
- investment losses resulting from hedging losses due to the USD appreciation.
- Revenue declined by 6% y-o-y to S$278.3m as ad revenue for the various sub-segments (classifieds, newspaper and display ads) fell by 12-16%.
- Operating costs were also a tad higher (2.8% y-o-y) due to manpower restructuring costs and impairments, offset by lower newsprint prices.
Anticipate weak adspend environment on flat GDP outlook.
- Our 2017 forecast for Singapore’s GDP from our economics desk is 1.3%, rather flattish from 1.2% in 2016. We also note that Singapore’s industry adex remains weak, declining by 13-18% y-o-y from September to November.
- The downward pressure on adspend has led us to trim our FY17-18F earnings by 4-5% as we assume that adex revenue will fall by 7%, from -5% previously.
Valuation: TP of S$3.32 based on sum-of-parts.
- Our target price of S$3.32 is based on sum-of-parts valuation.
- We value SPH's core newspaper and magazine operations at S$1.38/share based on discounted cash flow model, SPH’s property business at S$1.38, and net cash and investments of SS$0.56 to derive our TP.
Key Risks to Our View
- Ad ex reversal, disposal of investment stake and expectations of special dividends. A strong economic recovery and pick-up in consumption will lead to adex improvement, which is a key risk to our view.
- Sale of its investments, such as M1, could also lead to expectations of higher special DPS.