Singapore Press Holdings SPH - UOB Kay Hian 2016-06-09: Continued Economic Malaise A Likely Drag On Advertising Revenue

SPH SINGAPORE PRESS HLDGS LTD T39.SI

Singapore Press Holdings (SPH SP) - Continued Economic Malaise A Likely Drag On Advertising Revenue

Total ad page growth slowed to 0.6% yoy as of end-May 16. Higher classified ads growth helped offset a sharper-than-expected fall in recruitment ads.
Despite higher tourist arrivals as of Mar 16, a stronger Singapore dollar and corruption clampdown in China saw tourist spend fall 7.6%. Retailers were impacted and adspend likely fell.
SPH’s focus remains reining in costs while seeking new business initiatives.
Maintain HOLD with an unchanged target price of S$3.90. Entry price: S$3.60.

Our page monitor of The Straits Times points to a yoy growth of 0.6% in 3QFY16 for total ad pages. Though this represents a slowdown, it continues the growth trend from 2QFY16, which saw the first uptick since 4QFY11.
The growth was led mainly by a 26.9% yoy increase in classified ads, which helped offset the yoy decline from recruit (-18.7%) and display ads (-3.7%).

The sharp 18.7% yoy decline in recruit ads is likely a reflection of Singapore’s challenging labour market. The decline was a reversal from the usual seasonal uptick in 3QFY. The weak figures coincide with the higher redundancy figures and lower vacancy rates as Singapore businesses continue to undergo restructuring amid the soft economic outlook.
A weak labour market will likely curb discretionary spending, impacting retailers and thus adspend.

While tourist arrivals have picked up by 16.5% yoy, led by a resurgence in Chinese tourists, tourist spend has fallen. Compared with 2014, tourist spend in 2015 had fallen by 7.6% yoy. This was likely driven by two factors:
1. a strong Singapore dollar against regional currencies, and
2. economic slowdown in China coupled with a corruption crackdown lowering the appetite for luxury goods from Chinese tourists.

Tourist spending is most likely to impact sales at shops of high-end shopping malls like Paragon. However, our channel check indicated that occupancy remains at 100%, with continued heavy footfall.
Suburban malls Seletar Mall and Clementi Mall are not affected by tourist arrivals as customer traffic is driven by local residents. Both reported 100% occupancy, with decent customer traffic. Property earnings are thus expected to remain comparable with previous quarters.

While our page count reports continued ad growth, a contraction in Singapore Press Holdings’ (SPH) advertising revenue (AR) is likely to be expected.
Despite the uptick in ad growth, we reckon discounts were offered in light of the poor economic environment. This was clearly reflected in 2QFY16, where a 3.9% yoy increase in ad growth still translated into an 8.4% fall in advertising revenue. Correspondingly, we expect a revenue decline given the flat 3QFY16 growth in ad pages.

Singapore’s low economic growth has led to cautious adspend by retailers as consumers rein in spending. A structural shift from print to electronic media has put SPH’s core business model on the decline.
With the anaemic economic outlook to persist for the foreseeable future, we expect SPH to focus on cost cutting, especially labour costs, to preserve profits as it continues to seek new business initiatives.

While we do not see a share price catalyst, or an improvement in business prospects, SPH is expected to continue paying almost all of its profits in dividends.
Despite the decline in profit, dividend yield is expected to remain relatively stable at c.5% over FY16-18, presenting an attractive yield proposition in the continued low interest rate environment.

Maintain earnings forecasts. We keep our FY16 earnings forecast of S$310m unchanged, which assumes 8% AR contraction.

Maintain HOLD with an unchanged target price of S$3.90. Entry price is S$3.60.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-09

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