Singapore Press Holdings (SPH SP) - UOB Kay Hian 2017-07-17: 3QFY17 Poor Media Performance As Expected; Downside Largely Priced In; Upgrade To HOLD

Singapore Press Holdings (SPH SP) - UOB Kay Hian 2017-07-17: 3QFY17 Poor Media Performance As Expected; Downside Largely Priced In; Upgrade To HOLD SINGAPORE PRESS HLDGS LTD T39.SI

Singapore Press Holdings (SPH SP) - 3QFY17 Poor Media Performance As Expected; Downside Largely Priced In; Upgrade To HOLD

  • SPH reported 3QFY17 net profit of S$28.9m, which included S$37.8m impairment for its magazine business. Excluding one-offs, net profit was within expectations. 
  • A divestment gain of S$150m will be recorded in 4QFY17; special dividends from the proceeds are unlikely. 
  • Outlook for the core media business remains dismal but downside appears limited. 
  • Upgrade to HOLD but maintain target price of S$2.90. Entry price: S$2.75.



RESULTS


Core earnings down 13.8%, within expectations. 

  • Singapore Press Holdings (SPH) reported 3QFY17 headline net profit of S$28.9m (-45.2% yoy) on a 15.7% yoy decline in media revenue and S$37.8m in impairments. Excluding one-off items, core net profit was S$68.8m (-13.8% yoy). 
  • Results were within expectations, with 9MFY17 net profit making up 74% of our full-year estimate.

Media: Operating profit down 34% yoy on continued revenue weakness. 

  • Core operating profit was S$39.9m, excluding a S$37.8m impairment that was primarily related to its magazine business. Core operating margin was 21.8%, down 6ppt yoy, mainly due to a sharp decline in media revenue (S$182.5m, -15.7% yoy) which saw double-digit declines in all segments. 
  • Display revenue was especially impacted, falling to S$65.1m (- 24% yoy), while Classifieds, Magazine and circulation revenue fell 11-12% yoy each. 
  • The weakness was largely anticipated, as we had flagged in our note dated 9 Jun 17 (see Singapore Press Holdings (SPH SP) - Page Count Points To Further Weakness In 3QFY17 Print Revenue).

Property: Operating profit up 5% yoy on higher rental income. 

  • The segment reported a 5.3% yoy increase in operating profit. Core operating margin was stable at 77.2%, within the 75-80% range for the business. 
  • The improvement was due to higher rental income as well as higher contributions from Chinatown Point.

Maiden S$3m revenue contribution from Orange Valley Healthcare (OVH). 

  • OVH made a 1-month contribution of S$3m during the quarter. No further details were provided although we note that the contribution was in line with its historical annual revenue of S$36m (2015). Staff costs rose by S$1m due to the addition of 400+ OVH staff to its accounts for a 1-month period. 
  • We expect 3QFY17 staff costs to represent the future run rate.

Divestment of 701Search to see S$150m gain in 4QFY17. 

  • SPH completed the divestment of 701Search to Telenor on 30 June for US$109m (S$150m). A gain of S$150m will be recognised from the divestment in 4QFY17. 
  • We are sceptical that a special dividend will be paid as the proceeds will likely be used to pay down its recent 100% debt-funded acquisition of OVH and its 50% stake for the Bidadari site.

Net gearing up on S$164m debt drawdown for OVH. 

  • SPH saw debt drawdown of S$164m on its cash flow as it funded the S$164m OVH acquisition completely in debt. Net gearing for 3QFY17 stood at 26.7%, which we expect to go up further once the debt drawn for the Bidadari bid is taken into account. 
  • We expect interest expense to rise by 12% over FY17-18.


STOCK IMPACT


Media outlook remains weak, no near-term turnaround envisioned. 

  • The outlook for advertising revenue remains weak. While the latest GDP figure paints a rosier outlook for 2017, it belies the continued decline in corporate profitability and rising unemployment.
  • This structural issue is expected to persist in the near term, which in turn will keep the outlook for advertising spend subdued.

Diversifications not likely to support earnings in the near term. 

  • Continued diversification efforts are not expected to arrest the earnings decline in the near term. Earnings from OVH remain small (estimated S$6m-7m annually) while earnings contribution from Bidadari is small by our estimates. 
  • We expect the decline in media earnings to continue outpacing contributions from its diversification efforts at least for the next 12 months.

Bidadari site annual contribution unlikely to be significant. 

  • The Bidadari project sees SPH and Kajima Development Corporation (KDC) jointly develop the area, yielding > 600 residential units and an estimated 272,000sf of retail/commercial area (excludes the 88,200sf community centre and police post). Total development cost for the site is estimated at S$0.6b. Based on our assumption of S$1,750psf for residential and 5% cap rate with S$15psf pm rental for the commercial development, we estimate property development profits to be


EARNINGS REVISION/RISK

  • No change to our dividend forecast of 16 cents for FY17. We caveat potential downside to 15 cents, given the rather tight cash flow.
  • Tweak FY17-19 earnings by ~1%. We have incorporated earnings adjustments for OVH (FY17: S$2m, FY18-19: S$6m p.a.) and property development income from Bidadari, which is partially offset by higher staff cost and interest expense. A disposal of Seletar Mall has been pencilled in for FY18. 
  • Our revised net profit forecasts for FY17-19 are S$235m (+0%), S$217m (-1%) and S$211m (+0%) respectively.


VALUATION/RECOMMENDATION


Upgrade to HOLD; target price unchanged at S$2.90. 

  • Our SOTP target price moves slightly from S$2.90 to S$2.91 after incorporating valuation changes for: 
    1. OVH, pegged to 25x PE, 
    2. RNAV (20% discount) for the Bidadari site and 
    3. movements in its net debt.
  • While the media business continues to face structural weakness, share price has declined by 12% ytd and negatives are largely priced in. Unless the media segment sees another 20+% slump in revenue, another sharp decline in share price should not be the case. 
  • Upgrade to HOLD, given limited downside. Entry price is S$2.75.




Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-17
UOB Kay Hian SGX Stock Analyst Report HOLD Upgrade SELL 2.900 Same 2.900



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