DBS Group Research 2015-07-10: SPH - SOFT OUTLOOK. 2Q15 results in line. Maintain HOLD.

SOFT OUTLOOK 

  • Maintain HOLD, unexciting outlook for print ads, yet stock is supported by c.5% dividend yield. 
  • We are neutral on SPH as we believe print ad growth will be soft on the back of tepid GDP growth and consumption spending. 
  • We believe this presents fundamental risks to earnings growth and upward resistance to the stock. 
  • Yet the stock is supported by a strong DPS payout of 21 Scts and c.5% dividend yield that limit its downside. 
  • Our view on the stock is neutral and hence a HOLD. 


2Q15 results in line. 

  • Core earnings were within expectations, but headline earnings were ahead, boosted by S$24m investment gains. 
  • Revenue declined by 1% to S$307m while operating profit improved 1% to S$112.4m, driven by lower material, staff and depreciation expenses. 
  • Print ad spend has registered negative y-o-y growth since 2014. Since February 2014, ad spend has been declining at rates of between flat and -13% y-o-y. We attribute this to sluggish GDP growth in Singapore and muted consumer spending. 
  • Going forward, our economics desk is expecting Singapore to enter its slowest GDP growth in six years for 2015 at 2.4%. 


Valuation: 


TP of S$3.98 based on sum of parts. 

  • Our target price of S$3.98 is based on sum-of-parts valuation. 
  • We value SPH's core newspaper and magazine operations at S$1.86/share based on discounted cash flow model. 
  • SPH’s 70% stake in SPH REIT is valued based on our target price of S$1.03. 
  • These two parts are added to the estimated value of Seletar Mall, net cash and investments to derive our TP. 


Key Risks to Our View: 


Uncertainty in macroeconomic environment. 

  • SPH’s advertising revenue is contingent on economic sentiment, and a turn for the worse could further impact core advertising revenue. 
  • Key indicators include the general state of economy including GDP, inflation and consumption spending. These will ultimately impact advertising spend and earnings.

(Alfie YEO; Andy SIM, CFA)

Source: http://www.dbsvickers.com/




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