Singapore Press Holdings SPH - UOB Kay Hian 2016-04-12: 2QFY16 Advertising Revenue Outlook Remains Dreary

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SPH SINGAPORE PRESS HLDGS LTD T39.SI 

Singapore Press Holdings (SPH SP) - 2QFY16: Advertising Revenue Outlook Remains Dreary 

• Results were within our expectation. 
• Newspaper advertising revenue (AR) contracted by 8.4% in 2QFY16 compared with 11.9% in 1QFY16. 
• Management said the property and FMCG segments saw the largest contraction, while other sectors saw a mild contraction, in line with the general malaise of the domestic economy. 
• A higher newspaper cover charge - effective from 1 March - is expected to have a small positive impact on revenue. 
• Maintain HOLD. Target price unchanged at S$3.90. Entry price: S$3.60 and below. 

RESULTS 

• Results in line. 

• Singapore Press Holdings’ (SPH) 2QFY16 net profit was down 22% yoy at S$54.1m. 
• For 1HFY16, net profit was down 3% yoy at S$135.5m, and was in line with our expectations. 
• Net profit was down mainly on a 4% decline in revenue, led by the media segment, a 62% decline in investment income and a loss from associates vs the prior period. The media segment fell on a 8.4% yoy decline in AR revenue, while the sharp decline in investment income was due to the prior period recording a one-off gain from sale of investments. Associates recorded a loss as compared with a gain from restructuring in the prior period. 

• Core operating margin intact on lower costs. 

• Despite the 4% decline in revenue, operating profit margin was relatively unchanged at 29% for the quarter, up 0.4ppt yoy. This was largely helped by lower material, production and distribution costs (-5.6%), staff costs (-3.0%) and other operating expenses (-12.6%). 

• Media revenue down on weak economy. 

• Revenue fell 6% yoy to S$191m owing to a 8.4% decline in advertising revenue. Advertising revenue for display and classified ads fell by 7.6% and 9.9% yoy respectively for the quarter. 
• AR was down in particular for property and fast moving consumer goods (FMCG) due to the threat from e-commerce. The other sectors saw a mild contraction: 
  1. recruitment, 
  2. travel, 
  3. office equipment, and 
  4. banking & financials. 
• An uptick was noted in advertising spending in the auto sector due to higher car sales on the back of lower COE prices in recent months. SPH attributed the weaker numbers to the “general malaise of the market”, and that 2015 had a one-off boost from SG50 activities. 

• Property revenue up on higher same-store sales. 

• Revenue for this segment was up 1% from S$60.6m to S$61.1m on higher same-store sales (SSS) from shopping malls Paragon and The Clementi Mall. 

• Dividend of 7 S cents declared. 

• SPH declared an interim dividend of 7 S cents, payable 24 May 16. Ex-date is 4 May 16. 

STOCK IMPACT 

• Higher cover charges to have a small positive impact. 

• We had earlier highlighted that the higher cover charges effective 1 Mar 16 would have a small positive impact on earnings. 
• Post management briefing, we understand that there will be a lag in application of the higher charges. As such, its impact will be gradual, not immediate. 
• We are factoring in a 1% increase p.a. in circulation revenue over FY16-17. 

• Circulation revenue to remain largely stable. 

• Overall circulation numbers remain stable. However, more subscribers are increasingly going digital, in line with ongoing trends in the media industry. The lower print subscribers will reduce SPH’s newsprint consumption and hence, costs. 

• Earnings to be driven largely by cost reduction. 

• With lower advertising revenue, SPH will be reliant on keeping its cost low to maintain operating margins. 
• Stable staff costs and declining newsprint charge-out price will largely help with this. 
• On the flipside, lower advertising revenue means lower newsprint consumption which, in conjunction with the lower newsprint price, will largely help mitigate the negative impact of lower advertising revenue. 

• Fourth telco operator likely to boost ad spending. 

• SPH commented that should a fourth telco operator materialise, it would likely stimulate ad spending from the telco sector. This is due to the resultant media campaigns as telcos compete for market share. 

EARNINGS REVISION/RISK 

• Tweak earnings upwards by 2-4% for FY16-18. 

• We adjust our FY16-18 earnings upwards by 2-4%, updating our assumptions for the impact of higher cover charges and lower operating costs. 
• Our revised FY16-18 earnings are S$310m, S$323m and S$331m respectively. 

• 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 FY16 and FY17 respectively. 
• Barring the fourth telco operator, we do not see any other near-term price catalyst. However, annual dividend yields of approximately 5% over FY16-18 present an attractive yield proposition in the continued low interest rate environment. 

VALUATION/RECOMMENDATION 

• Maintain HOLD, target price unchanged at S$3.90. 

• Our SOTP-derived target price of S$3.90 remains unchanged. Maintain HOLD. Recommended entry price is S$3.60 and below. 

SHARE PRICE CATALYST 

• Entrance of a fourth telco operator. 
• Higher-than-expected economic growth.

Nancy Wei UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-12

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 3.90 Same 3.90