SPH Singapore Press Holdings - UOB Kay Hian 2016-03-22: Possibly A Smaller Advertising Revenue Contraction in 2QFY16

Singapore Press Holdings SPH - UOB Kay Hian 2016-03-22: Possibly A Smaller Advertising Revenue Contraction in 2QFY16 SPH SINGAPORE PRESS HLDGS LTD T39.SI 

Singapore Press Holdings (SPH SP) - Possibly A Smaller Advertising Revenue Contraction in 2QFY16 

  • We expect a smaller yoy advertising revenue contraction in 2QFY16 (1QFY16: -11.9% yoy). We see the cover price increase as a measure to mitigate rising operating costs as SPH has cut its media-related costs to the bones. 
  • We see no share price catalyst and continue to expect flat price performance. 
  • Average annual dividend yields of 5% over FY16-18 remain attractive in the still-low interest rate environment. 
  • Maintain HOLD with our target price raised to S$3.90. Entry price: S$3.60 and below. 


WHAT’S NEW 


 First total ad pages growth of 3.9% since 4QFY11. 

  • Our page monitor of The Straits Times points to a growth of 3.9% yoy in 2QFY16 for total ad pages. This is the first quarterly growth since a decline that started in 4QFY11. Recruitment ads saw a 6.7% decline yoy, but classified ads rose 24.2% yoy while display ads rose 9.1% yoy. 

 Possibly a smaller advertising revenue contraction in 2QFY16. 

  • While our pagecounts indicate ad growth, we still expect Singapore Press Holdings (SPH) to report a contraction in newspaper advertising revenue (AR). However, the contraction is likely to be smaller than 1QFY16’s large 11.9% contraction, which was greater than the -2.4% implied by our page-counts. 
  • While our page-counts are still good in predicting the general trend in ad-spend, actual contraction figures are markedly larger. This could be due to discounts offered in the current difficult economic environment. 

 Impact of higher cover charges effective 1 March. 

  • We project annual circulation revenue of S$160m from the sale of newspapers and subscriptions. 
  • A 20% (+20 cents) increase would imply S$32m in additional revenue, but we expect an initial knee-jerk cutback in consumption that would dampen the revenue impact. Assuming a 10% fall in circulation, the net impact to revenue would be an increase of S$16m. Net profit would increase by S$13m, or 4% of our FY17 S$312m forecast. 
  • As people get used to higher cover prices over time, circulation volume should recover but operating costs are always rising. 


STOCK IMPACT 


 Higher cover charges are more likely to offset rising costs. 

  • Newspaper AR remains weak, having registered multi-year contractions. It contracted 11.9% yoy in 1QFY16 (4QFY15: -8.4% yoy), which was much larger than our earlier expectation of -5% yoy. 
  • Thus far, earnings have been shored up by cost cuttings and higher property earnings. Despite 1QFY16’s large AR contraction, operating profit of S$99m in 1QFY16 dipped only 3% yoy. Adspend has been affected on many fronts. 
  • We see the cover price increase as a measure to mitigate rising operating costs as SPH has already cut its media-related costs to the bones. 
  • Further cuts will likely affect the quality of its newspapers. 


EARNINGS REVISION/RISK 


 Maintain earnings forecasts. 

  • We keep our FY16 net profit forecast of S$304m unchanged, which assumes an 8% AR contraction. 

 Focus continues to be on cost cutting and new initiatives. 

  • 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. 
  • Singapore’s low economic growth has led to: 
    1. cautious adspend by retailers as locals become increasingly savvy in e-commerce, and 
    2. weakening rentals in the Orchard Road area, which have declined 4.3% since 4Q14. 
  • This has been offset by relatively resilient suburban rentals which have remained unchanged between 4Q13 and 3Q15; a 1.3% yoy decline was noted in 4Q15. 
  • With the upcoming re-opening of 1 Sengkang Mall with 270,000sf of space, we expect some downward rental pressure on Seletar Mall. 

 Dividend yield remains attractive. 

  • SPH’s AR is expected to perform in tandem with Singapore’s GDP growth, which is projected at 2.7% and 3.2% for 2016 and 2017 respectively. 
  • We do not see a share price catalyst. However, annual dividend yields of c.5% over FY16-17 present an attractive yield proposition in the continued low interest rate environment. 


VALUATION/RECOMMENDATION 


 Maintain HOLD. 

  • We tweak our SOTP target price upwards to S$3.90, adjusting for the change in market value of SPH Reit since our last report. 
  • Recommended entry price is S$3.60 and below. 


SHARE PRICE CATALYST 


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



Nancy Wei UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-22
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 3.90 Up 3.85


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