We hosted a post-results luncheon for SPH. During the luncheon, CEO Alan Chan and CFO Tony Mallek offered interesting insights into SPH’s business and strategy going forward. Despite the continuous weakness in its core media business, we like SPH’s effort in increasing digital circulations, developing online media business and its initiatives of cost cutting. As a defensive yield play, SPH is fairly value at 5.1% FY14F yield, even after we cut our dividend forecast to SGD21cents due to the dilution in property income. Maintain our HOLD rating on the stock with TP SGD4.18. The change in our TP is mainly because we factor in the 18cts special dividends, which have been paid in August and value SPH’s property assets based on market price (SPH REIT).

Key takeaways from group luncheon:

Moving into more digital circulation. We understand from the management that daily paper-based circulation has dropped below 1m copies now but the digital subscription increased very fast and managed to cover the shortfall. Now the digital circulation for certain English newspapers such as The Straits Times has accounted for 1/3 of paper-based circulation. SPH offers two options of digital subscriptions: native iPad version with less ads and PDF version with equal amount of ads as paper-based. The profitability would not be much affected because most of the subscriber chose to read PDF version according to management. In fact we believe that SPH can even save on printing cost as more readers move to digital subscription.

Decline in ad revenue seems moderating. Although ad revenue has been declining yoy for three consecutive quarters, the rate of decline appeared to have moderated in the latest quarter. Responding to concerns about a slowdown in property segment, Mr Chan explained that the slower take-up at new property launches would bode well for SPH as developers would then be more aggressive in advertising, thus lifting the demand for display ads. But in our view, Classified ad revenue may shrink due to government cooling measures on property and auto sector.

Retail is still the focus of SPH’s property arm. SPH has a very good track record in Paragon and Clementi Mall. Management reconfirmed that SPH’s property arm will continue to focus on developing retail malls. We believe that with SPH REIT as a platform to recycle capital, SPH could be more active than before in bidding for retail sites. Seletar Mall, which will likely to be injected into SPH REIT in the future, remains on track and it has already secured three anchor tenants.

SGD100m new media fund ready for more online media acquisitions. Part of the REIT spinoff proceeds went to a SGD100m New Media Fund for investing in online media businesses to stimulate growth. Management shared with us that the future acquisition targets will be relatively mature companies. It is a necessary move in our view to adapt to the fast-growing online advertising market. But investors need to be patient as it takes time for new acquisitions to be monetized.

Retaining talent through incentives. In the past financial year, total staff cost declined despite a minor increase in headcount. Management explained that the decline in total staff cost was due to a decline in bonus, which is linked to newsprint profit. The ability to retain talent is an ongoing challenge for SPH, with annual staff turnover rates at about 10%. But there is little difficulty attracting new talents thanks to the journalist scholarship. Management also said that they continued to see some of the former employees returning to SPH due to camaraderie at the company.

We lower our dividend forecasts due to dilution in property income… FY13 full year dividends, excluding SGD18cents special dividends from REIT spinoff, came in at SGD22cents, down from SGD24cents for the last two years. Management reiterated that they would still pay a high percentage of print and property net profit as dividends. However we think that after paying a special dividend in FY13, the remaining IPO proceeds are mainly for future acquisitions purpose and SPH is not likely to tap it for paying dividends in FY14/15. There is possibility that SPH could cut dividends further more in the next two years due to the full year impact of 30% dilution in property income. We cut our FY14/15 dividend forecasts to SGD21cents (at 103/102% payout ratio respectively).

…but SPH still yields 5.1% even at lower dividend forecasts. As a defensive yield play, SPH is fairly value at 5.1% FY14F yield, even after we cut our dividend forecasts. Maintain our HOLD rating on the stock with TP SGD4.18. The change in our TP is mainly because we factor in the 18cts special dividends, which have been paid in August and value SPH’s property assets based on market price (SPH REIT).  

Source: Maybank Kim Eng Research - 16 Oct 2013