Singapore Press Holdings - DBS Research 2019-07-16: Macro Headwinds Ahead


Singapore Press Holdings - Macro Headwinds Ahead

  • SPH's 9M19 earnings disappointed, hurt by lower advertising revenue.
  • Expect slower GDP growth to dampen already weak adspend growth and earnings.
  • Cut FY19-20F earnings by 14-24%.
  • Maintain HOLD, Target Price lowered to S$2.22.

Maintain HOLD with lower Target Price of S$2.22.

  • We maintain our neutral stance on SINGAPORE PRESS HOLDINGS (SPH, SGX:T39) as earnings continue to be dragged by lower adspend. 9M19 earnings lagged our previous estimate.
  • We expect earnings growth outlook to be more challenging as our economist now expects 2019 GDP growth to be slower at 0.7% from 2.1% previously. In addition, we expect declining adspend revenue to continue putting pressure on earnings.
  • We note that interim dividend was lower than expected at 5.5 Scts, vs our 6 Scts expectation. See SPH's dividend history.
  • With a less optimistic earnings outlook, we lower our SOTP-based Target Price to S$2.22, to reflect lower earnings on the back of a weaker macro outlook. Our full year DPS forecast is lowered by 0.5 Scts to 12.5 Scts.

Where we differ:

  • Our FY20F earnings estimate is below consensus as we see a slower earnings recovery after our economics desk downgraded 2019 and 2020 GDP growth outlook.

Potential catalyst:

  • Our neutral stance is premised on weaker economic growth going forward. Improvement or turnaround in GDP growth would be a potential stock catalyst as economic recovery will drive higher advertising spend.

WHAT’S NEW - Macro headwinds ahead

Flat core net down on lower investment of Orange:

  • SPH's 9M19 net profit was S$111.8m (-24.1% y-o-y) on lower revenue of S$723.7m (-2.5% y-o-y). Operating profit was largely flattish at S$209.6m (-1% y-o-y) due to lower operating expenses. PBT dropped to S$164.2m (-21% y-o-y), largely a result of lower investment income (S$6.4m vs S$43.6m in 9m18), as there was an absence of disposal gains including Qoo10’s capital reduction income, and M1 dividend income recognised in 9M2018.
  • Core 9M19 net profit fell 13% y-o-y after excluding one-offs. There were also one-offs recognised such as impairment of S$22.8m for Orange Valley in 3Q19 and S$12.9m fair value change in 2Q19 from recently acquired Figtree Grove in Australia by SPH REIT (SGX:SK6U).

Lower leads decline:

  • Revenue was down by 2.5% y-o-y to S$723.7m. Decline in media and advertising business (-11.6% y-o-y, S$439.7m) was offset by Property (+21% y-o-y, S$220.7m). Others segment – conferences, nursing home, events, education etc was flat at S$63.3m.
  • Revenue decline was led by lower adspend and circulation of10.5% to S$405.8m. Newly acquired UK student accommodation portfolio for property segment helped to offset media segment’s revenue decline.

Lower opex keeps operating margins flat:

  • Operating costs was down 3% y-o-y to S$514.2m largely due to staff costs (- 5% y-o-y S$251.6m) on lower headcount and bonus provision, lower depreciation (-18% y-o-y, S$20.3m), lower raw material costs (-6% y-o-y, S$99.6m), and other opex (- 9% y-o-y, S$93.9m from the absence of S$10.3m retrenchment costs incurred in 9M18). As a result, operating profit was down by just 1% y-o-y to S$209.6m. 9M19 operating profit was slightly higher (+0.5ppt) at 29% due to the lower opex.

Orange impairment is initial assumptions:

  • SPH marked down the value of its Orange Valley investment by S$22.8m to largely account for a more difficult operating environment, where it is competing against charities and non-profit organisations in the government build-operate-lease (BOL) model, with more BOL projects coming up for tender.
  • SPH bought 100% of Orange Valley in 2017 for c.S$164m with a pro-forma revalued net asset value at about S$71m. Based on Orange Valley’s ACRA filings, net profit for FY16 was S$5.8m, with 8M17 earnings falling to just S$1.7m.

Slower to dampen earnings outlook:

  • Singapore’s GDP growth outlook is expected to be slower, with our economist downgrading 2019 growth rate to 0.7% and 1.8% in 2020 from 2.1% and 2.5% previously. Second quarter’s advance GDP estimates surprised on the downside and projected to register a paltry growth of just 0.1% y-o-y, the weakest in ten years. The manufacturing sector saw three quarters of consecutive declines, with the services and construction sectors experiencing sequential declines as well.

Maintain HOLD with lower Target Price of S$2.22:

  • We lower our FY19- 20F earnings by 14-24% largely to newspaper ops segment revenue.
  • Our SOTP-based Target Price is now S$2.22, comprising newspaper and magazine at -SS$0.17.
  • Maintain HOLD.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-07-16
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.22 DOWN 2.580