SPH - DBS Research 2020-07-16: Lower Adex But Properties Kicking In


SPH - Lower Adex But Properties Kicking In

  • Weak adex of -51.4% y-o-y for 3Q20, weak GDP growth to further weigh on adex in FY20F.
  • Lower earnings for FY21F on higher funding costs and slower property sales assumption.
  • Cut SPH's core earnings FY20-21F by 9-15%, FY21F growth supported by higher-margin property segment.

Maintain HOLD on SPH with a lower Target Price of S$1.26.

  • We maintain our HOLD rating on SPH (SGX:T39) with a lower SOTP-based Target Price of S$1.26 after reducing our FY20-21F earnings by 9-15%. We expect weak adex to be an overall drag on our previous FY20F forecast, with reduction of FY21F earnings led by higher funding costs and slower property sales assumption at The Woodleigh Residences.
  • Notwithstanding lower earnings, we see growth for FY21F being driven by contribution from the higher-margin property segment, led by the new PBSA business in the UK.
  • We expect FY22F earnings outlook to remain flattish as new acquisitions help to offset anticipated decline in the Media business. Higher interest expense and perpetual securities’ dividend costs would cap earnings growth rate as well. We will turn positive when visibility for the Media segment’s revenue decline has petered out.

Adex lower than expected in 3Q20

3Q20 corporate update shows weaker media revenue:

  • In SPH’s recent corporate update for 3Q20, Print Ad revenue fell by 51.4% y-o-y, led by display ads and classified ads decline of 55.8% and 42.7% y-o-y respectively. This contributed to print ad decline for 9mFY20 of 30.4% y-o-y. 3QFY20 suffered from the March-May Circuit Breaker, which saw subdued economic activity across Singapore, resulting in lower advertising revenue. Circulation, however, increased 9.5% y-o-y, led by digital subscribers from more digital engagement despite loss of sales to airlines and hotels.
  • Lower footfall at retail malls: SPH’s retail malls suffered from the Circuit Breaker and lockdown in Australia, as well as lower footfall. Footfall generally declined at its malls. Rental rebates as well as GTO will drive weaker earnings outlook this year.

UK student accommodation assets remain operational, but enrolment going forward may be affected by COVID-19:

  • Most UK universities have shifted to online learning since March. SPH has offered to refund students who had already paid up till the end of the term (June) and this amounted to £4.6m. Bookings have been delayed for academic year 2020/21. But as of 10 July, SPH’s Purpose Build Student Accommodation (PBSA) had achieved its 75% revenue target for the same academic year. The academic year has started largely on time. Edinburgh, York, Southampton and Huddersfield are starting in September, with Oxford and Cambridge commencing in October. There is some slight delay in AEI works for its St Theresa property due to COVID- 19 and it will miss the first term (September-December) of the academic year (St Theresa has 104 studios and 5 Twodios).
  • SPH’s PBSA portfolio UK has over 7,000 beds across more than 25 property assets when they were acquired.

Aged care stable.

  • For aged care, SPH reported four cases of COVID-19 in May at Orange Valley. Operations remain stable with sequential bed occupancy ratio improvement and higher average bill size.
  • In February, SPH announced the acquisition of five senior independent living assets in Nara (one asset), Tokyo (one) and Hokkaido (three) for S$66m. The acquisitions house a total of 365 beds. Two remaining assets with 161 beds in Hokkaido, Japan are on track for completion.

Entering data centre business.

  • SPH recently announced that it will enter the data centre business with Keppel Data Centre via a 40% JV, selling its Genting Lane property to the JV to support the new venture. The property sale has only a marginal benefit to EPS, with little or no hope of distributing sale proceeds as dividends, in our view, as it has committed to invest S$23m in bonds and up to an additional S$140m in shares and bonds of the data centre business.

Weak GDP forecast puts adex under pressure

Outlook for adex remains weak.

  • Our Singapore GDP growth forecast for 2020 is a 5.7% decline followed by 3.5% growth for 2021. This would weigh on adspend outlook and for FY20-21F.

Cut FY20-21F earnings by 9-15%

Lower earnings led by adex, slower recognition of property sales and higher funding costs.

  • We are factoring lower revenue projection for FY20F post disappointment in adspend for 9mFY20. Our operating margins are lower, dragged by the media segment. For FY21F, even though we are projecting continued revenue decline in the Media segment, our revenue is raised as the contribution of UK PBSA assets kicks in, along with some recovery in events, exhibitions and a token assumption of contribution from Japan Aged Care assets.
  • Operating margins are expected to be higher with more contribution from the higher-margin property segment. However, after deferring sales recognition of The Woodleigh Residences (about 30% of units sold) further out to FY22 and beyond as a result of COVID-19, and factoring interest and dividend expense for S$950m of perpetuals and senior unsecured notes raised earlier, we lower our net earnings forecasts by 9% for FY20F and 15% for FY21F.
  • We also reduce our dividend assumption as we believe management would want to conserve cash due to the COVID-19 outbreak.

Neutral stance as new businesses are starting to buffer Media segment’s earnings decline

Maintain HOLD with lower Target Price of S$1.26:

  • Barring PBSA’s contribution to growth in FY21F, our earnings growth outlook for FY22F is largely flattish, with contribution of new businesses in property and aged care offsetting decline in advertising revenue. Benefit of margin increase is mitigated by cost of fundraising in interest expense and perpetual dividend costs.
  • We are neutral on SPH, as new revenue streams from the acquisitions are eroded by a decline in Media business. We therefore believe it is not time to be positive until the Media segment’s revenue decline has petered out.
  • With lower earnings forecasts, our SOTP-based Target Price is reduced accordingly to S$1.26.
  • The core newspaper and magazine operations are valued at S$0.26/share based on discounted cash flow model, properties and other investments at S$1.97, and net cash and investments at - S$0.97.
  • Maintain HOLD.
  • See SPH Share Price; SPH Target Price; SPH Analyst Reports; SPH Dividend History; SPH Announcements; SPH Latest News.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-07-16
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.26 DOWN 1.560