SPH - DBS Research 2017-10-12: Relief From Staff Rationalisation

SPH - DBS Vickers 2017-10-12: Relief From Staff Rationalisation SINGAPORE PRESS HLDGS LTD T39.SI

SPH - Relief From Staff Rationalisation

  • Singapore Press Holdings (SPH)'s core 4Q17 operating profit within expectations.
  • DPS of 9 Scts declared, below expectations.
  • Raise FY18-19F earnings by 5-11% on staff rationalisation.
  • Limited downside; upgrade to HOLD on revised S$2.79 Target Price.

Upgrade to HOLD. 

  • We believe recent plans to cut staff count by 10% will provide near term relief to earnings and provide some support to share price. We raised our FY18F earnings by 5% on lower staff expenses. 
  • SPH share price has corrected by 14% following our downgrade back in July; and, on the back of its costs containment, we are turn neutral on the stock. That said, headwinds prevail, including a weak adex environment and lower DPS are downside risks. 
  • Our SOTP based TP is maintained at S$2.79 as given a higher implied valuation to its media business given costs reduction initiatives, offset by a lower net cash/investment.

Where we differ: Lower earnings forecast due to lower investment income. 

  • Our FY19F earnings is below consensus as we are currently factoring in a more conservative rate of return for its investment income, projecting at its annualized rate of return of c.4.3% vs 6.5% achieved in FY17. This negates the stability in its core media business due to its expected cost rationalization and could provide upside should investment returns turns out better than our projections.

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

  • The substantial shareholders of M1 including SPH are looking into a potential sale. 
  • We also believe The Seletar Mall will be injected into SPH REIT in the next 12 months. Both moves will offer relief and support to SPH’s 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$0.89/share based on discounted cash flow model, SPH’s property business at S$1.47, and net cash and investments at SS$0.43 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.

WHAT’S NEW - 4Q17 Results 

4Q17 within expectations, adspend leads revenue decline: 

  • SPH delivered core operating profit of S$78m for 4Q17 that was within expectations. Revenue of S$256m (-7.5% y-o-y) was also in line with our estimates. 
  • SPH continues to register lower revenue led by weaker media revenue (-15% y-o-y, S$173m), particularly display ads (-18% y-o-y, S$63m), classified ads (-20% y-o-y, S$31m) and magazine segment (- 20% y-o-y, S$23m). 
  • Property revenue remained flat at S$60m, while Others segment grew 76% y-o-y to S$23m due to contribution of newly acquired nursing home business, Orange Valley.

Lower margins as revenue declined: 

  • SPH's Operating margins fell from 32.4% in 4Q16 to 30.6% in 4Q17. While 4Q16’s opex was held steady at S$29m, the revenue decline resulted in lower operating margins. 
  • Reduced losses at regional online classified business helped to narrow losses in associate income while there were one-off items amounting to S$149m which included divestment gain from sale of ST701, offset by S$30.5m write-down from the divestment of stake in Mediacorp TV and Mediacorp Publishing, and impairment of print facility at Genting Lane.

Lower dividends. 

  • SPH's 2H17 dividend was 9 Scts comprising 3 Scts final and 6 Scts special dividends. This was below our expectations of 8 Scts final and 3 Scts special. 
  • Along with the interim dividend paid out for 1H17, total dividends for FY17 amounted to 15 Scts, below our expectations of 17 Scts.

Staff rationalization underway, raise FY18-19F earnings by 5- 11%. 

  • SPH intends to reduce its staff count by 10% in the coming year. The last time SPH announced a staff cut was in October 2016 when it intended to reduce up to 10% of its workforce over two years through attrition, retirement, non-renewal of contracts, outplacement, and retrenchment. 
  • Its staff count in August 2016 was 4,182 and there were 4,410 staff on the payroll as of August 2017. 
  • While it did reduce staff from its core operations, it added 457 staff from the recent acquisition of Orange Valley. We estimate that once this exercise is completed, earnings could improve by 5% - 11% for FY18F/19F as we could have been too aggressive in our cost assumptions previously.

Neutral on the stock, HOLD TP remains at S$2.79. 

  • We upgrade our recommendation to HOLD from Fully Valued with an unchanged TP of S$2.79. 
  • We project that intended staff rationalisation exercise will help to lessen the pressure on earnings, in our view. Besides, its share price has corrected by 14% since we advocated a sell on the stock in July.

Maintaining DPS expectations at 15 Scts. 

  • Our sum-of-parts based TP remains unchanged despite the adjustment in earnings (due to the cost rationalization exercise) as we factored in a higher net attributable debt. 
  • We are currently maintaining a DPS expectation of 15 Scts for FY18F/19F (similar to FY17), implying a yield of c.5.6%, which should provide some support for share price. 
  • Downside risks to the counter could come from further cuts in DPS on the back of further deterioration of its core media business.

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-10-12
DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 2.790 Same 2.790