Singapore Press Holdings (SPH SP) - UOB Kay Hian 2017-10-12: 4QFY17 Weak Results And Lower Dividend; Downgrade To SELL

Singapore Press Holdings (SPH SP) - UOB Kay Hian 2017-10-12: 4QFY17 Weak Results And Lower Dividend; Downgrade To SELL SINGAPORE PRESS HLDGS LTD T39.SI

Singapore Press Holdings (SPH SP) - 4QFY17 Weak Results And Lower Dividend; Downgrade To SELL

  • SPH reported FY17 core net profit of S$239m, within expectations. 
  • The media business remains weak, and we note minor headwinds at Seletar Mall. A divestment of the mall is not expected in the foreseeable future. 
  • The cut in final dividend from 8 S cents to 3 S cents leaves us concerned over the viability of SPH remaining a yield play. With the dividend yield challenged, and no positive outlook for earnings, downgrade to SELL and cut target price to S$2.38.



RESULTS


FY17 core net profit of S$239m within expectations. 

  • Singapore Press Holdings (SPH) reported headline FY17 net profit of S$350.1m (+32% yoy) on net gains from the divestment of its stake in 701Search. Core net profit was S$239m (-14% yoy) and within expectations (UOBKH: S$235m), excluding:
    1. impairments (S$37.8m for the magazine business, S$22.8m for impairment of a printing line, S$35.5m from sale of Mediacorp),
    2. gains of S$149.7m from the divestment of 701Search, and
    3. fair value gain on investment properties (S$57.4m).

Media business continues to face headwinds. 

  • Media revenue continued to fall, with 4QFY17 revenue declining to S$173.0m (-15% yoy). 
  • Core operating profit for the segment was S$32.7m (-25% yoy), with margin lower at 19% (-2.5ppt) owing to the decline in revenue outpacing the fall in costs. The decline was largely attributable to the decline in Print revenue (-19% yoy), which saw weakness in all advertising industry segments. 
  • Circulation revenue fell by 10% yoy, despite the net increase in circulation numbers for all its newspaper lines.

Property earnings stable, Seletar Mall notes a decline in value. 

  • Operating profit from the segment was stable at S$46.8m (+2.7% yoy, -1.4% qoq). A S$57.4m fair value gain on investment properties was reported for the quarter. 
  • Both Paragon and The Clementi Mall saw fair value gains. Seletar Mall suffered a slight decline of ~1% owing to a weaker rental outlook.

Staff cost reductions leave nothing sacred. 

  • An estimated 230 staff, including newsroom and sales operations, are expected to be let go by end-17 as part of SPH’s targeted headcount reduction of 10% over two years. 
  • We estimate this to lower staff costs by 4-5% in FY18.

Final dividend reduced to 3 S cents. 

  • SPH declared a final and special dividend of 9 S cents, bringing full-year payout to 15 S cents, below our expectation of 16 S cents. 
  • Most alarming was the reduction in final dividend from 8 S cents to 3 S cents, with the difference made up by a steep increase in the special dividend from 3 S cents to 6 S cents. 
  • Management remarked that future dividends would be dependent on recurring earnings.


STOCK IMPACT


Final-dividend cut throws yield play thesis into doubt. 

  • The key attraction to SPH’s share has been its high dividend. However, the sharp cut to the final dividend possibly signals an unwillingness to maintain the high dividend payout of yesteryears. 
  • While management reassured that any reduction will be gradual, the pace of decline could still accelerate. SPH's share price could tumble as investors question whether the yield play on SPH remains intact.

Divestment of Seletar Mall unlikely within next 12 months. 

  • The decline in fair value for Seletar Mall was due to a less favourable outlook for the mall. 
  • While the mall experienced positive rental reversions, rents remain below stabilised levels. As such, it seems unlikely that Seletar Mall would be divested in the next 12 months.


EARNINGS REVISION/RISK


Lower FY18-19 earnings by 3-4%. 

  • We have adjusted our earnings to reflect the cost savings from further reduction in headcounts. Print revenue growth is forecasted to decline 5-10% over FY18-19, with the effects of lower cash flow from the business resulting in a slight rise in debt and hence finance expense. 
  • Our revised net profit estimates are now S$210m (-3%) and S$204m (-4%) respectively.

Introduce FY20 net profit of S$205m. 

  • This assumes the media business bottoming out in FY20.

Dividend at risk of further decline. 

  • We forecast dividends to decline to 13 S cents, 11 S cents and 10 S cents over FY18-20 respectively, with downside risks of further cuts.


VALUATION/RECOMMENDATION


Downgrade to SELL and cut target price to S$2.38. 

  • We lower our target price from S$2.85 to S$2.38, building in a 10% discount to our SOTP. 
  • SPH is starting to look less attractive as a yield play and share price is likely to suffer a knee-jerk reaction. 
  • Little positive catalysts exist for the stock in the near to medium term aside from a possible bottoming out in media earnings post-restructure. Management efforts to restructure and diversify leave us uninspired to envision a brighter outlook. 
  • With a potential lack of yield to balance the lack of earnings growth amidst its restructuring efforts, downgrade to SELL.





Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-12
UOB Kay Hian SGX Stock Analyst Report SELL Downgrade HOLD 2.38 Down 2.850



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