Singapore Press Holdings - CIMB Research 2016-10-17: Efficiency gains wiped out by poor revenue

Singapore Press Holdings - CIMB Research 2016-10-17: Efficiency gains wiped out by poor revenue SINGAPORE PRESS HLDGS LTD T39.SI

Singapore Press Holdings - Efficiency gains wiped out by poor revenue

  • 4QFY8/16 net profit was above on higher investment income, but operating profit was in line. FY16 core net profit formed 107%/102% of our/consensus forecasts.
  • Cost control measures showed up in lower staff costs (-8% yoy) and other production costs, but savings were wiped out by lower media revenue (-8% yoy).
  • Maintain Reduce, with a lower SOP-based target price of S$3.35 as we cut FY17- 19F EPS by 1% on expectations of lower advertisement and circulation revenue.

Net profit above on investment income; operating profit in line 

  • 4QFY16 net profit of S$77.2m exceeded expectations on a S$11.8m fair value gain recorded for The Seletar Mall, and higher net income from investments on better performance of the S$1.2bn group investible fund and lower interest payments with the redemption of its MTN. 
  • Stripping out these items, operating profit of S$77.3m was in line at 100% of our forecast. 
  • While media revenue continued to disappoint (-8.2% yoy), it was mitigated by higher other revenue (+15.1% yoy) and lower staff cost (-8.4% yoy).

Circulation revenue helped by price hike and expanding channels 

  • Newspaper and magazine circulation revenue fell at a slower pace of 1.6% yoy, partly helped by the newspaper cover price increase which took effect on 1 Mar, while it also reached out to new distribution channels. 
  • Management said the majority of the company’s subscriber base has stabilised since the price hike, with street sales (30%) seeing the biggest impact while those on subscription plans (70%) are quite sticky.

Decline in advertisement revenue worsened, no end in sight 

  • Newspaper ad revenue fell 12.5% yoy, dragged by display ads (-14.4% yoy) and classifieds (-8.6% yoy). This was the steepest decline in FY16, as poor sentiment continued to weigh on adex. 
  • The transport and telco sectors were the only two bright spots in 4Q, while property remained a drag. With adex being a function of the economy, we expect newspaper ad revenue to fall by a further 10% yoy in FY17F.

Cost cutting can only help so much 

  • SPH has embarked on a comprehensive review of its core media business since 3QFY16, with a view to streamline costs and drive growth. This showed up in lower staff costs as headcount and variable bonuses decreased, and also lower other production costs from efficiency gains. 
  • Even with these measures, operating profit still fell 0.9% yoy as total income decreased by 5.5% yoy. 
  • With raw material (newsprint) prices bottoming out, we believe it would be increasingly difficult to squeeze out cost savings.

DPS cut by 2 Scts; divestment of Seletar Mall on the cards 

  • A total DPS of 18 Scts was declared for FY16 (FY15: 20 Scts). This is in line with our estimate, but a shade below consensus’s 19.2 Scts. This represents a 109.1% payout ratio (FY15: 102.1%), which increasingly appears to be a stretch. The Seletar Mall has been in operation for close to two years (opened on 28 Nov 2014), and could be ripe for divestment to SPH REIT after it has achieved meaningful rental reversions at the end of the first rental cycle. 
  • Yield is now c.4%, and has to reach 5% before it can be injected.

Maintain Reduce; yield remains unsustainable 

  • We maintain Reduce, with a lower SOP target price of S$3.35 as we adjust for a lower valuation of its media business and market value of investments. 
  • We remain concerned about media earnings, which could be further dragged by weak GDP growth and poor sentiment. 
  • Investments in new media and adjacencies have yet to bear fruit, while it has to rely on sale of investments to prop up earnings, but these are still viewed as non-core.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-10-17
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 3.35 Down 3.710