SPH Singapore Press Holdings - CGS-CIMB Research 2018-07-04: Sleeping Beauty Awakens

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SINGAPORE PRESS HLDGS LTD SGX:T39

Singapore Press Holdings (SPH) - Sleeping Beauty Awakens

• Media’s structural weakness is largely priced in; we see a possible re-rating from earnings recovery, successful diversification and higher-than-expected dividends.
• We upgrade SPH to ADD with higher FY19-20F EPS and Target Price of S$2.85. Further upside could stem from media stabilising and higher asset management income.
• Management is seeking new income source in overseas property asset management, for which we forecast 8% cash-on-cash returns, on average.
• We expect the upcoming property sales launch to boost FY19-20F earnings by S$8m-11m, based on an estimated ASP of S$1,850 psf.
• The 3QFY18 results are due to be released on 11 Jul. We forecast that core PATMI (S$52m-57m) will be stronger q-o-q (on seasonality) but lower y-o-y by 14-20%.

Upgrade From Hold to ADD, With Higher FY19-20F EPS

• We raise our FY19-20F EPS by 5.6-6.2%, mainly to reflect higher sales contributions from the upcoming Woodleigh Residences launch, and investment income from property asset management. Our SOP-based Target Price thus rises to S$2.85. 
• We upgrade SPH from Hold to ADD as we think its weak media outlook is largely priced in, with near-term earnings recovery from property sales and diversification into overseas asset management. io.
• Downside risks are poor overseas execution and worse-than-expected ad spending.

Media Pessimism Seemingly Priced In

Digital-first strategy could decelerate earnings decline

• Singapore Press Holdings (SPH)’s 7.4% y-o-y media revenue decline in 2QFY18 to S$155.6m was quite unlike that of its past four quarters. While the figure was 10.5% q-o-q lower, we note that 2Q is a seasonally weaker quarter. io. 1HFY18 media revenue of S$330m was in line at 49% our full-year forecast, suggesting that such weakness could already be priced in.
• SPH's share price retraced from its 52-week low of S$2.44 on management's plans to diversify into overseas property asset management, and its current price (excluding other subsidiaries) values core media operations at S$0.51/share, implying FY19F P/E of 10x. 
• With an increasing shift towards digital-first, we believe the strong correlation between media revenue and page count numbers could moderate over time, and digital revenue would account for a bigger proportion of group media revenue (1HFY18: 12%). 
• As SPH’s new initiatives gradually take form, including
  1. greater push for integrated marketing,
  2. development of Singapore Media Exchange (SMX) with Mediacorp, and
  3. two new appointments in May 2018 to drive digital offerings (Chief Product Officer, Chief Technology Officer),
• we expect the pace of media earnings decline to decelerate over FY18-20F, and forecast media profit-before-tax (PBT) to weaken 6.0-10.0% p.a. over the same period.
• We also think the media business is worth at least S$0.78/share based on DCF valuation (WACC 7%, LTG 0%), even after factoring in such weakness.

Earnings Rejuvenation From Property

Property asset management as a new growth driver

• SPH has 33% net gearing and total liquid assets of S$653m as at end-2QFY18. Apart from annual dividend payout of S$240m-270m and S$12m-15m maintenance capex, we see little need for cash preservation, representing opportunities for the group to better utilise its balance sheet for higher returns.
• Management has indicated plans to explore other property asset management sectors overseas (e.g. UK, Australia, US) as a new income stream, with education and healthcare as its preferred themes. We also understand that SPH is in the midst of bidding for some overseas portfolios, with a target of 10% cash-on-cash yield.
• We forecast SPH securing an estimated project size of S$500m before early-2019F, with 8% cash return on average to reap additional profits of S$10.4m in FY19F and S$17.3m in FY20F, on top of the 3-4% annualised yield it receives from the S$1.1bn investible fund.
• A bigger-than-expected acquisition of project size could pose further earnings upside, in our view. However, we also highlight the
  1. difficulty in acquiring good assets given its limited track record, and
  2. sensitivity of investment returns in a rising interest rate environment, as potential pitfalls that SPH faces.

Education (student housing) and healthcare (retirement homes) related property assets are favourites among investing themes

• Education (student housing) and healthcare (retirement homes) related property assets are favourites among investing themes, given their defensive nature, favourable demographics that sustain demand, and lack of quality assets. 
• Specifically, for purpose-built student accommodation (PBSA), there is a chronic shortage in the UK, Australia and Europe, unlike in the US. The average return for Australia student housing is 10-11%, made up of a yield of around 7-7.5% and a rental growth rate of 3-3.5% per annum. The return on investment in UK can be equally attractive, at 13% (8% cash rental and 5% capital growth), according to industry experts.
• Meanwhile, retirement homes also make an appealing investment asset class because of its long and stable lease contracts, and relatively low vacancy risks. Such asset class offers decent cash yield of 6-11% p.a. on average.

Singapore investors leading the wave of overseas student housing investments

• In 2016, Singapore’s sovereign wealth fund GIC and real estate developer Mapletree invested almost GBP1.2bn on UK student housing. Subsequently in early-2018, GIC also formed a 45%-owned joint venture with Canada Pension Plan Investment Board (CPPIB) and The Scion Group, to acquire a student housing portfolio in the US for approximately US$1.1bn (S$1.47bn).
• Other Singapore-listed players which have invested in PBSA include Centurion Corporation (SGX:OU8), which raised its first US Student Housing Fund of S$89.5m in late-2017. The group entered the US market by investing in a portfolio of 1,936 beds in five student accommodation assets across four US states for about US$136m (S$187m). It now holds 28.74% of the assets, with the remaining held by third-party investors.

Upcoming sales launch of The Woodleigh Residences

• Recall that SPH and Kajima (50/50 joint venture) won the bid for the first Bidadari mixed commercial and residential site in Jun 2017. Construction for this 99-year leasehold mixed development (also known as “The Woodleigh Residences”) broke ground on 28 Mar 2018 and its sales launch is scheduled to commence in Sep 2018. This project is likely to yield over 680 units and priced close to S$2,000 psf (according to news articles), with the retail portion retained for recurring income.
• Based on our estimated S$1,850 psf, SPH could see S$8m-11m profit contribution over FY19-20F, thereby mitigating its soft media outlook.

Other Near-Term Catalysts

Potential Seletar Mall spin-off for special dividends?

• With the completion of its first rental renewal cycle (better tenant mix and full occupancy), as well as the removal of shareholder overhang at United Engineers (SGX:U04) (which owns 30% stake), we think Seletar Mall is now closer to the possibility of being injected into SPH REIT (SGX:SK6U) (which has a right of first refusal). Should the stake divestment materialise, we project gross proceeds of S$132m, based on the latest market value of S$488m (FY17: S$490m) and S$300m related borrowings.
• Assuming a 20-100% payout of these proceeds as special dividends, we think this could add another S$0.02-0.08 to its forecasted DPS of S$0.15, translating to a 6.5-8.7% dividend yield for FY18-19F. 

Valuation and Recommendation

3QFY18F results preview

• SPH will be reporting its 3QFY8/18 results after market close on 11 July 18. We expect 3QFY18F core PATMI to be in the range of S$52m-57m, which is 14-22% lower than a year ago (2QFY18: -25% y-o-y), on the back of a single-digit decline in media revenue and weaker margins. However, we should see earnings improvement on a q-o-q basis given that 2Q is traditionally weaker.

Upgrade to ADD with higher FY19-20F EPS

• As we adjust our forecasts to reflect
  1. higher sales contribution from The Woodleigh Residences on higher ASP of S$1,850 psf (prev S$1,750 psf), and
  2. investment income from property asset management, our FY19-20F EPS is increased by 5-6%.
• We also include the asset management in our SOP valuation (pegged to 15x FY19F P/E), and remove the holding discount (prev 10%), resulting in a higher Target Price of S$2.85.
• We upgrade SPH from Hold to ADD, as we think that media pessimism is largely in the price, with near-term earnings boost from the Bidadari sales launch. The stock could also re-rate from the successful roll-out of new digital initiatives to stem further drops in core media earnings, as well as diversification into overseas property asset management.
• Potential special dividends from Seletar Mall’s spin-off is another near-term catalyst.
• Key downside risks include poor overseas execution and weaker-than-expected ad revenue.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-04

SGX Stock Analyst Report ADD Upgrade HOLD 2.85 Up 2.490