SPH - DBS Research 2020-04-08: COVID-19 Disrupting Developments


SPH - COVID-19 Disrupting Developments

  • SPH (SGX:T39)'s 2QFY20 earnings within expectations; adex declines.
  • Interim DPS of 1.5 Scts declared, below expectations.
  • Cut FY20F/21F earnings by 15%/20% respectively.

Earnings within expectations

  • SPH's 2Q20 earnings in line: 2Q20 core net profit was S$31m (-23.6% y-o-y), in line with our estimate. Revenue grew 1.8% y-o-y to S$227m led by the property segment which expanded by 33% to S$96m, offsetting a 15% y-o-y (S$114m) decline in the Media segment. Operating margin was slightly higher at 28.8%.

Interim DPS of 1.5 Scts disappoints:

  • An interim DPS of 1.5 Scts was declared - below expectations. This was significantly lower than 5.5-6 Scts declared in the past three years.
  • The lower dividend payout is in line with conserving cash in view of the uncertainties surrounding the impact of COVID-19.

Media segment declines, led by weaker adex:

  • The 15% y-o-y fall in media revenue was broad-based across display ads, circulation, classified, magazines & others. We note that display ads and magazines declined by 25% and 17% y-o-y respectively.

Higher revenue from property segment was led by new properties:

  • Growth was led by the expanded Purpose-Built Student Accommodation (PBSA) portfolio and new property Westfield Marion at SPH REIT (SGX:SK6U).
  • Since 2Q19, SPH has added over S$1bn worth of PBSA assets which helped to contribute to the 33% increase in property revenue.

Margins higher:

  • Operating costs were lower at S$20.4m (- 26.5% y-o-y) with decreases from lower raw material costs including newsprint and other material costs, factory overheads and distribution costs for the media business and other operating expenses, largely lower promotion costs.
  • Operating margin was slightly higher at 28.8%.

Earnings largely supported by property.

  • Around S$50m of SPH’s S$55m PBT is now contributed by the property segment, compared to just 50% in FY17. With COVID-19, the risk to earnings would be potential losses in the media segment. Our weak GDP forecast of -2.8% for 2020 would be a potential driver of lower earnings, and losses in the media segment going forward.

COVID-19 disrupting corporate developments

Raised debt for acquisitions.

  • SPH raised S$500m 3.2% notes due 2030 in January in addition to 4% S$300m subordinated perpetual securities under S$1bn MTN programme in November 2019. Apart from the PBSA acquisitions, these additional borrowings also helped to fund the acquisitions of 5 elderly care assets in Japan worth S$66m. The proposed acquisition of 6 elderly care assets in Canada worth S$245m was subsequently suspended.

PBSA acquisitions undone by COVID-19:

  • The COVID-19 outbreak in the UK has led to a three-week lockdown since 23 March and UK universities are now delivering lessons online for the academic year 2019/20. SPH in response is refunding students who have already paid up till the end of the term (June) and will not collect rent for students who have decided to return home.

PBSA refunds will impact revenue by S$7-14m.

  • While most students have chosen to remain, revenue loss is expected to be £4-8m (S$7-14.2m). Based on our estimates, SPH’s PBSA assets are expected to deliver revenue of about S$80m and net profit of S$40m in FY20F.

Saved by low base in FY19.

  • The saving grace is that 5,059 (c.65%) of its 7,726 beds acquired during FY19 and FY20F have not contributed for a full year. There was minimal contribution in FY19. The COVID-19 outbreak happened just when the first full year of contribution (FY20F) was expected to be recognised.
  • Key risk for this segment is the poor visibility for the September 2020 to June 2021 academic year. If lessons continue to be delivered online, utilisation of the assets would be at risk.

Proposed Canada acquisition cancelled as management takes pay cut.

  • In response to the outbreak, SPH has
    1. cancelled its acquisition of Canada aged care assets without penalty and break fee;
    2. reduced salaries at senior management level (5% reduction, CEO will take a 10% reduction);
    3. made donations to Red Cross and The Courage Fund.

Outlook marred by COVID-19 and weak GDP outlook

Cut FY20-21F earnings by 15-20%.

  • Since our last earnings note in January, more travel restrictions have been implemented globally as COVID-19 has spread fast from Asia to the US and Europe. Our GDP forecast for 2020 has been cut to -2.8% with recovery assumed at 1.8% in 2021. This would potentially lead to lower adex and higher earnings risks going forward.
  • In view of the recent COVID-19 developments we have imputed more conservative earnings assumptions, and now expect adex declines in FY20F and FY21F of 30% and 12%.
  • Factoring in government’s wage support package of S$30m across FY20F and FY21F, we have reduced our FY20-21F net earnings by 15-20%. We reduce our DPS assumption as well, given management’s need to conserve cash going forward.

Maintain HOLD with lower Target Price of S$1.56

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-04-08
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.56 DOWN 2.120