SPH - DBS Research 2017-07-17: Adex, Circulation Leads Disappointment

SPH - DBS Vickers 2017-07-17: Adex, Circulation Leads Disappointment SINGAPORE PRESS HLDGS LTD T39.SI

SPH - Adex, Circulation Leads Disappointment

  • 3Q17 earnings below estimates dragged by weak adex.
  • Lower FY18-19F DPS payout of 16 Scts.
  • Cut FY18/19F earnings by 18-22%.
  • Downgrade to FULLY VALUED, Target Price cut to S$2.79.

Downgrade to FULLY VALUED, Target Price cut to S$2.79 as adex remains weak. 

  • We downgrade our HOLD call to FULLY VALUED as weak adex continues to affect earnings. Online disruption continues to dampen the core media business, which is resulting in falling ROE as well as a lower earnings and DPS outlook. 
  • Even though the stock offers dividend yield of > 5%, we believe that a declining revenue outlook could lead to lower earnings and risks of DPS cut. We are hence turning negative on earnings growth and DPS payout going forward.

Where we differ: Negative on earnings. 

  • Our earnings are now below consensus as we believe that declining revenue and earnings trend will be ongoing, led by online media disruption.
  • We have held the view that Singapore’s improving GDP would support recovery in the media business. However, SPH’s core adex performance has continued to disappoint despite a better GDP outlook.

Potential catalyst: Sale of stake in M1 and spin-off of Seletar Mall. 

  • The substantial shareholders of M1 including SPH are looking into a potential sale. We also believe Seletar Mall will be spun off into SPH REIT in the next 12 months. Both will offer relief and support to the share price and DPS.


Target Price of S$2.79 based on sum-of-parts. 

  • Our target price of S$2.79 is based on sum-of-parts valuation. 
  • We value SPH's core newspaper and magazine operations at S$0.84/share based on discounted cash flow model, SPH’s property business at S$1.43, and net cash and investments at SS$0.52 to derive our TP.

Key Risks to Our View

Adex reversal, disposal of investment stake and expectations of special dividends. 

  • A strong economic recovery and pick-up in consumption will lead to adex improvement, which is a key risk to our view. 
  • Sale of its investments, such as M1, could also lead to expectations of higher special DPS.


3Q17 Results below expectations on lower revenue, margins, and earnings: 

  • Core earnings was down 17% y-o-y while headline earnings declined by 45% to S$67m and S$29m, respectively. 
  • Both revenue and margins were down y-o-y. Revenue fell by 11% to S$260m, led by display ads and classified ads, which each segment falling by 21-22% y-o-y. 
  • Overall media segment, including display ads and classified ads, saw a 16% decline to S$183m. Property and others revenue segment grew slightly.

Lower margins: 

  • Margins were also lower y-o-y due to 
    1. the sharp revenue decline in 3Q17; and 
    2. opex and COGS remained largely stable in with the exception of lower newsprint costs. 
  • Newsprint costs fell significantly (-12% y-o-y) to S$37.8m. This was due to a depreciating USD against SGD (more favourable costs priced in USD) and a decline in average monthly newsprint consumption.

Impaired magazine business 

  • There were one-off charges of S$37.8m on impairment of goodwill and intangibles for the magazine business, which continue to be written down from the S$28.4m seen in 3Q16.

Adspend not expected to be robust. 

  • The media business showed a firm decline in 3Q17, especially in display ads, circulation and input cost for newsprint. This, in our view, validates that readers are shifting away from traditional newsprint, resulting in lower circulation and demand for newsprint. 
  • In addition, declining adex is also shown through a continuing falling display ad segment. Outlook for adspend will likely continue to be lackluster going forward.

Cut FY18-19F earnings by 18-22%. 

  • We reduce our earnings estimate for FY18F and FY19F by 18-22% and we now see declining revenue, as opposed to a slight increase previously.
  • During the quarter, SPH announced that it has spun off its 1/3 stake in 701Search for US$109m to Telenor. With this sale, dividends may be sustainable for FY17F, but sustainability of DPS will have to depend on the sale of M1 stake and the sale of Seletar Mall to SPH. We have hence lowered DPS to 16 Scts from 17 Scts previously, on the back of a declining core business outlook.

Downgrade to FULLY VALUED, TP reduced to S$2.79. 

  • Our earnings reduction leads to a lower SOTP-based Target Price of S$2.79 for SPH. This is pegged to a FY18F dividend yield of 5.7%. In our view, valuations at current price are unattractive on falling dividend yield and ROE in addition to potential earnings risks.
  • Downgrade to FULLY VALUED on more negative outlook going forward.

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-07-17
DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade HOLD 2.79 Down 3.390