Singapore Press Holdings - CIMB Research 2017-09-08: Toner Low

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SINGAPORE PRESS HLDGS LTD T39.SI

Singapore Press Holdings - Toner Low

• SPH's Share price has fallen 22% YTD; but at current level, we think downside risk persists still. Downgrade from Hold to Reduce, with a lower SOP-based TP of S$2.38.
• Current valuation of 21.7x FY18F P/E expensive against multi-year earnings decline.
• No longer an attractive dividend play, with little hope for near-term special dividends.
• Recent Bidadari project win and OVH acquisition could not revive its share price.
• If we were the new CEO, strategic review could be on the cards but there is impairment risk.
• Downgrade from Hold to Reduce; stock still expensive at 21x P/E.

NOT YET AT THE BOTTOM 

Weak core media earnings… 

• With no right fix and clear strategy to mitigate the structural challenges its media business currently faces, we expect SPH’s core media earnings to remain weak. Support from the government sector (SPH’s top advertiser) and recent uptick in property sentiment could only provide temporary relief, in our view. 
• We also expect newsprint costs to climb marginally from FY18F, in tandem with rising global newsprint prices and SPH’s depleting inventory, and hence weighing on its margins.

…threaten the sustainability of dividends 

• Hampered by deteriorating media earnings, as well as substantial investments made into digital and property, SPH was unable to sustain its dividend track record of more than S$0.20 DPS, making it no longer the dividend paymaster that investors were attracted to. 
• With no end in sight for the woes of its cash-cow media business, we forecast more dividend cuts over FY17-19F from FY16 DPS of S$0.18, still pegged to its historical payout of 90-95% recurring earnings. We now also do not expect special dividends to materialise in the near term, given that
  1. talks to sell its M1 stake have been cancelled;
  2. potential injection of Seletar Mall into SPH REIT could be delayed by the ongoing sale of United Engineers, its other 30% shareholder; and
  3. the majority of S$153m cash proceeds from SPH's 33.3% stake sale in 701Search will instead be channeled towards funding the acquisition of Orange Valley Healthcare (OVH).

Recent diversification hardly a stock catalyst 

• On 25 Apr 2017, SPH announced its foray into healthcare with the S$164m acquisition of Orange Valley Healthcare (OVH), a 900-bed nursing home operator in Singapore. 
• Subsequently on 21 Jun 2017, SPH was also awarded a project tender for a mixed development at Bidadari (estimated GDV of S$1.6bn), in a consortium with Kajima. Despite it being the 5th property development project after almost three years since the completion of Seletar Mall, neither the news of this nor the foray into healthcare offer any relief to SPH’s sliding share price.
• Likewise, we do not expect
  1. OVH’s S$6m-7m annual profit from FY18F onwards (FY17F: S$2m), and
  2. income from the Bidadari residential cum retail development beginning FY19F to reverse the downward trend of the company’s overall profitability.

WE THINK A STRATEGIC REVIEW IS LIKELY 

More impairment to come? 

• On 25 Aug 2017, SPH announced a divestment of 40%-owned Mediacorp Press and 22% stake in Mediacorp TV for a total cash consideration of S$18m, but with a S$31m write-down. 
• SPH previously sold its stake in loss-making 701Search for S$153m, while its Plug and Play accelerator programme was discontinued in early-2017. We think this could mark the start of a strategic review for the company, especially with a new CEO having officially joined on 1 Sep 2017. 
• As we looked more in-depth into SPH’s existing intangible assets and investments in associates/JVs, and given the substantial amount accumulated from its previous investments, we see risk for further impairment; this could have a drag on overall earnings.

If we were the new CEO… 

• As the new CEO Mr Ng Yat Chung has little experience in media, we think it would be an uphill task for him to turn SPH’s business around. 
• Apart from a leaner cost structure (ongoing rightsizing exercise announced in FY16), we outline the following priorities of a possible strategic review.
  1. Devising a clearer strategy for core media business. SPH’s past investments in the digital media space have yet to translate into meaningful earnings for the group. With its multiple assets and omni-channel presence, such as online classifieds (sgCarMart, StreetSine), radio stations, events and exhibitions (Sphere, Bizlink Exhibition Services), as well as out-of-home advertising solutions, we think there is potential to reap further synergies and improve advertising revenue.
  2. More accelerated diversification into healthcare and education, which we believe are the core pillars of Singapore’s future economy. We think a single acquisition of OVH is not sufficient to achieve economies of scale as it only accounts for c.3% of SPH’s FY18F net profit. SPH also owns 22% of Mindchamps (leading pre-school in Singapore), and recently bought a 75% stake in Han Language Centre (Singapore-based Chinese language education provider) for S$8.5m.
  3. Better monetising of S$1.1bn investible fund - Apart from a 13% stake in M1, SPH also holds a passive portfolio of equities, bonds and investment funds that generates 3-4% annualised yield, and contributed c.18% to the company’s FY16 earnings. We believe a divestment of non-core assets and monetisation of such investible fund could benefit shareholders in the form of better returns.

VALUATION AND RECOMMENDATION 

Not paying 21x forward P/E for a declining media business; downgrade to Reduce 

• As we adjust our forecasts for lower media margins but higher contributions from associates/JVs, our FY17-19 EPS forecasts fall 4-12%. 
• We now also factor in property income from the Bidadari mixed development (we estimate sales launch in 2H18) and include this asset in our valuation. Accordingly, our SOP-based target price falls to S$2.38, and we downgrade our call from Hold to Reduce.
• Our SOP target price includes a DCF valuation of S$0.92/shr for the core media business, which implies 15x FY18F P/E. SPH currently trades at above 21.5x 12M forward P/E (+1s.d.), which we think is expensive given its lack of earnings growth and potential cuts to its 5% FY17-19F dividend yield.

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2017-09-11

CIMB Research SGX Stock Analyst Report SELL Downgrade HOLD 2.38 Down 3.220