Singapore Press Holdings - UOB Kay Hian 2016-01-13: 1QFY16 ~For How Long Can It Hold The Fort?

SPH SINGAPORE PRESS HLDGS LTD T39.SI

Singapore Press Holdings (SPH SP) 1QFY16: For How Long Can It Hold The Fort?

Newspaper advertising revenue (AR) contracted by a whopping 11.9% yoy in 1QFY16 (4QFY15: -8.4% yoy).
Group operating profit was shored up by higher property earnings and investment income, and lower associates’ contributions.
While dividend yields of 5.2-5.5% are good, AR contraction is a major risk.
Maintain HOLD and reduce our target price to S$3.85. Entry price: S$3.40 and below.

Singapore Press Holdings (SPH) reported a net profit of S$81.3m for 1QFY16, up 17.3% yoy. This amounted to 27% of our net profit forecast of S$304m for FY16.
Traditionally, 1Q of the financial year is seasonally SPH’s best quarter.

Newspaper advertising revenue (AR) contracted by a whopping 12% yoy with display AR down 13% yoy while classified AR fell 10% yoy.
This was offset by aggressive cost cuttings - materials, production and distribution costs (-8%), depreciation (-13%) and interest expense (-13%) - and higher property earnings (+16% yoy), a surge in investment income (+614%) and lower associates’ losses (-78% yoy).

...because of the full impact of The Seletar Mall which commenced business on 28 Nov 14.
Investment income of S$10.3m for 1QFY16 was higher yoy because investment income for 1QFY15 included a fair-value loss on forward hedges for portfolio investments.
Associates’ losses were reduced by S$6.2m (-77% yoy) due to lower losses from the regional online classifieds business.

Newspaper AR remains weak. AR has registered a multi-year contraction. It contracted further by 11.9% yoy in 1QFY16 (4QFY15: -8.4% yoy), which was much larger than our expectation of -5% yoy. Thus far, earnings have been shored up by cost cuts and higher property earnings.
Despite 1QFY16’s large AR contraction, operating profit of S$99m for 1QFY16 dipped only 3% yoy.
Ad-spend has been affected on many fronts. The concern is for how long SPH can continue to shore up earnings if AR continues to contract.

We keep our earnings forecasts relatively unchanged, but cut our projected media earnings, given a 7% AR contraction assumption (-5% previously). This is offset by lower-than-expected associates’ losses.
Weaker-than-expected AR remains a key risk.

With the print media business in a structural decline, we expect SPH to rein in costs on that front and divert its attention towards new business initiatives.
Weak tourist arrival numbers have two effects:
1. cautious ad-spend by retailers due to lower tourist spend and locals becoming increasingly savvy in e-commerce, and
2. weakening rentals in the Orchard Road area, which have declined 2.9% since 4Q14.
The Paragon Mall is exposed to tourist spend. However, this is offset by relatively resilient suburban rentals, which have remained unchanged since 4Q13.

SPH’s AR is expected to perform in tandem with Singapore’s GDP growth, which is projected at 2.0% and 2.7% for 2015 and 2016 respectively. We do not see this as a share price catalyst. However, annual dividend yields of 5.2-5.5% over FY16-18 present an attractive yield proposition in the continued low interest rate environment.

Maintain HOLD. We lower our target price to S$3.85 from S$4.10, based on a lower SOTP valuation. Recommended entry price is S$3.40 and below.

Share price catalysts are lacking. Traditionally, earnings performance has a good correlation to AR growth.

Nancy Wei UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-13

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 3.85 Down 4.10