Singapore Press Holdings (SPH) - UOB Kay Hian 2018-10-16: 4QFY18 Finding An Earnings Bottom

SINGAPORE PRESS HLDGS LTD (SGX:T39) | SGinvestors.io SINGAPORE PRESS HLDGS LTD (SGX:T39)

Singapore Press Holdings (SPH) - 4QFY18: Finding An Earnings Bottom

  • SPH reported 4QFY18 core net profit of S$25m. Full-year earnings was S$203m, forming 97%/93% of UOBKH/consensus earnings, slightly below expectations.
  • Full-year dividend was 13 S cents, in line with our expectations.
  • The print revenue drop was smaller than expected and suggests that the media business is bottoming out. Challenges remain in maintaining its dividend payout despite its acquisition strategy.
  • Maintain HOLD with a revised target price of S$2.75. Entry price: S$2.50.



4QFY18 RESULTS


4QFY18 headline net profit of S$133m.

  • Singapore Press Holdings (SPH) reported headline net profit of S$133m (-40% y-o-y), down largely due to a S$150m divestment gain from disposal of 701Search in the prior period. Excluding exceptional items, 4QFY18 core net profit was S$25m (-20% y-o-y). The lower results stemmed largely from a poor set of results from the media segment, which saw core EBIT decline by 38% y-o-y.

Full-year earnings slightly below expectations.

  • FY18 core net profit was S$203m (- 11.4% y-o-y), and represented 97% / 93% of UOBKH / consensus earnings. Results are slightly below expectations.
  • For exceptional items, we have chosen to recognise S$69m in net profit from disposal of investments in 4QFY18 as non-recurring, on top of the usual one-off items such as impairments, and fair value gains on investment properties. SPH does not traditionally recognise gains from disposal of investments as one-off items. However, we deem the quarter’s gain to be larger than the usual S$10m-20m, thus necessitating the reversal.



~ SGinvestors.io ~ Where SG investors share

Pending an analyst briefing today (16 Oct), our first cut of the results:


Pace of print revenue decline is slowing.

  • Our page count indicated a 14.3% y-o-y decline for 4QFY18, which suggested that a revenue decline > 11% should have been observed. This is based on the fact that page count in 3QFY18 fell 12.5% y-o-y and saw a reported revenue decline of 10.6%. Instead, 4QFY18 print revenue fell by a smaller 9%.
  • The correlation between our page count and print revenue decline has weakened further, suggesting that there are other factors supporting it.

Circulation revenue slides despite overall print circulation growth.

  • Circulation revenue for 4QFY18 fell by 8.8% y-o-y. For the full-year, revenue fell by 7.3% y-o-y, despite higher overall daily average newspaper circulation. Print subscriptions continue to decline, with digital subscription growth more than offsetting this.

Property reports a weak quarter.

  • The segment reported an operating profit of S$40m, lower than the typical S$45m-48m per quarter.

Dividend cut to 13 S cents for FY18.

  • A final dividend of 3 S cents and special dividend of 4 S cents was declared. For the full year, total dividend payout was 13 S cents, in line with our expectations.


STOCK IMPACT


Earnings could be forming a base.

  • While the media business remains in decline, the pace is slowing. Earnings contribution from SPH’s recent student accommodation purchase could fully offset this decline.
  • On the property front, full-year contributions from the Rail Mall, acquired in 4QFY18, will help to offset the negative rental reversions at Paragon.
  • Coupled with earnings accretion from the M1 (SGX:B2F) deal, an earnings base could be forming.

Dividend payout remains challenged despite potential earnings improvement.

  • Despite the potential earnings improvement, the latest dividend payout of 13 S cents could still see further cuts in FY19. While the core dividend of 9 S cents is unlikely to be cut as it is supported by earnings from the UK student accommodation purchase (which offset media earnings decline), the special dividend remains at risk.
  • Anecdotal evidence suggests that this is being paid out of net gains from investments, which saw a bumper FY18. It seems unlikely that SPH can repeat this feat, so much depends on how it deploys its investible fund into other assets to sustain the 4 S cents special dividend.

Risky strategy to stabilise dividend payout via acquisition.

  • SPH can protect the dividend payout via more asset acquisitions purchased with leverage. While this is feasible, we do question the prudence of doing so in a rising interest rate environment, and when valuation yields for student accommodation assets are at a decade low.


EARNINGS REVISION/RISK


Cut FY19-21 earnings by 4-9%.

  • Our print revenue decline assumption remains unchanged at 6%. Earnings have been adjusted to reflect the contributions from the UK student accommodation acquisition, as well as earnings accretion from M1. Partially offsetting this is higher interest expense from debt used for acquisitions.
  • Our revised FY19-21 earnings are S$206m (-4%), S$199m (-9%) and S$200m (-9%) respectively.

FY19 dividend assumed at 11 S cents.

  • While we have factored in a decline, further acquisitions could mitigate this and maintain the dividend payout at 13 S cents.


VALUATION/RECOMMENDATION


Maintain HOLD, target price revised to S$2.75.

  • SPH’s earnings outlook might have seen the worst behind it, but maintaining its dividend payout remains a challenge.
  • The strategy to acquire more student accommodation assets to support the dividend has its merits, but is fraught with risks given the timing and rising interest rate environment.
  • Our target price has been adjusted upwards to S$2.75, to reflect the lower media staff costs and slowing media earnings decline.
  • Maintain HOLD. Entry price: S$2.50.





Foo Zhi Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-16
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.75 UP 2.580



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