Singapore Press Holdings (SPH) - UOB Kay Hian 2019-04-03: Transition Into A Defensive Play Underappreciated, Upgrade To Contrarian BUY

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SINGAPORE PRESS HLDGS LTD (SGX:T39)

Singapore Press Holdings (SPH) - Transition Into A Defensive Play Underappreciated, Upgrade To Contrarian BUY

• We upgrade Singapore Press Holdings (SPH) to a contrarian BUY with a 2.5% increase in target price to S$2.82, mainly accounting for the 6% rally of SPH REIT.
• The rising importance of resilient assets in SPH’s portfolio and new management’s effort to expand the defensive business have been underappreciated. The recent acquisition of a student accommodation portfolio is a good start. Capital efficiency is also improving under the new management, from the disposal of low-yielding assets for higher-yielding ones.
• SPH’s 2019F yield of 4.5% is higher vs the STI’s 4.1% after the recent selldown.

WHAT’S NEW

A good start in building a counter-cyclical business.

• SINGAPORE PRESS HLDGS LTD (SPH, SGX:T39) acquired its first student accommodation portfolio of 14 assets in Sep 18 and this marks its first foray into a scalable defensive business.
• Based on a research from Savills, student accommodation has demonstrated a counter-cyclical nature, as the yields for the assets inched up during 2008-2009 to approximately 6.5%. Cushman & Wakefield also highlighted that student number typically increases in the event of an economic slowdown and a weaker labour market, as people look to “up-skill” or stay in higher education for longer.

No deterrence in UK universities application; student accommodation is defensive.

• Despite the uncertainty over Brexit talks, UK universities experienced record numbers of international student applications for full-time undergraduate courses in the academic year of 2019, with total applications rising (+0.4% y-o-y) for the first time in three years, according to the Universities and College Admission Service (UCAS). This is supported by international student applicants from China which saw a 33% increase y-o-y, with EU student applications growing by 1% y-o-y.
• While Brexit concerns for EU students funding and research initiatives still linger, the sector looks to be resilient with a continued strong demand. This bodes well for SPH’s property diversification strategy following the Mayflower acquisition in Sep 18.

Better capital efficiency from new management team.

• Since more than a year after the new CEO and CFO took over in Sep 17 and Apr 18, we are starting to see improvement in capital efficiency from several capital recycling exercise, including:
  1. disposal of its treasury and investment portfolio of S$189m that generated only around 4% yield in FY18, and
  2. acquisition of accommodation assets for S$321m that generates an attractive 6.3% net yield, which is further amplified by the low interest rate in UK.
• With a loan-to-value ratio of 55-65%, the cash on cash yield is nearly 10%.

Print business is a cash cow that requires minimal capex; reducing in significance.

• The contribution of operating profits from the media business segment has been on a decline, from 55% in FY15 to 32% in FY18. Acquisitions in the student accommodation space can help cushion the fall of the traditional print business.

Advertising revenue still weak but decline is easing.

• Based on our page count of SPH’ The Straits Times, total page count was down 3.7% y-o-y in 2QFY19. While we note the weakening correlation between page count and ad revenue, there seems to be an easing of ad revenue decline in recent quarters. (4QFY18: -10%, 1QFY19: -7%).
• We still expect to see a contraction in ad revenue for 2QFY19 though the decline may not be as extraordinarily high. Overall, the three segments (Recruit, Classifieds and Display) reported a 10.6%, 15.4% and 0.5% y-o-y decline in page counts respectively.

STOCK IMPACT

Print revenue decline on track; looking towards earnings from defensive assets.

• Our current FY19 estimate for a 6% decline in print revenue looks to be on track, but we remain wary that it may not have fully bottomed.
• Going forward, earnings from student accommodation assets can help relieve the decline in print revenue.

EARNINGS REVISION/RISK

We tweak earnings up slightly for FY19-21 by up to 1.4%.

• We account for SPH’s marginal increased stake in M1 LIMITED (SGX:B2F) post offer, rising from 13.45% to a maximum of 16.13%. As of 18 Mar 19, the offeror holds approximately 95% of M1 shares.

VALUATION/RECOMMENDATION

Upgrade to BUY with revised target price of S$2.82.

• SPH's share price sell-down is unwarranted, given the transition into a more defensive and stable unit. We reckon that negatives from a declining media segment have been priced in and the company can look towards building up more defensive assets.
• We account for housekeeping of 1QFY19 results as well as a higher SPH REIT (SGX:SK6U) price, noting its recent acquisition of Figtree Grove shopping centre in New South Wales, Australia.
• Dividend yield remains fairly attractive at 4.5% vs STI’s 4.1%.

SHARE PRICE CATALYST

Barely stretching its potential.

• SPH’s foray into student accommodation has barely taken off after its recent acquisition. The company still has room to grow its portfolio with an investible fund of approximately S$600m-S$700m (including cash, excluding M1 investment).

Lucas Teng UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2019-04-03

SGX Stock Analyst Report BUY UPGRADE HOLD 2.82 UP 2.750