• SPH's 1Q20 earnings in line; lower adspend drags overall earnings, offset by growth in property segment.
• Decline in media segment led by higher depreciation and retrenchment costs.
• Marginally lower FY20-21F earnings estimate by 1-3%.
• Maintain HOLD.

Dampened by Weak Adspend

• Continued decline in maintain our neutral advertising spend (adspend) has led us to our neutral stance on SINGAPORE PRESS HOLDINGS (SPH, SGX:T39) with a lower target price. 2020 gross domestic product (GDP) growth is expected to be slow at 1.4% with declining advertising expenditure (adex) putting pressure on earnings growth.
• Post SPH REIT (SGX:SK6U)’s acquisition of Westfield Marion Adelaide Australia, the value of SPH REIT is reduced from S$1.38 to S$1.23 per SPH share and hence lowering our Target Price of SPH.
• While property is starting to contribute more to overall earnings, media segment’s earnings is still declining at a faster pace. We maintain our neutral view on the stock until the media segment’s decline has tapered off.

SPH's 1Q20 Earnings in Line

• SPH's 1Q20 operating profit was in line with our estimate at S$67.6m (-21% y-o-y). Net profit was S$46.3m (-20% y-o-y), within our expectations. There was a one-off fair value change of investment properties for S$10m for purpose-built student accommodation (PBSA). Otherwise, core 1Q20 earnings would have been lower at S$36.4m after stripping out one-off gains.

Media Segment Leads Revenue Decline

• Revenue fell 4.1% y-o-y to S$244m led by media segment which declined 13.6% y-o-y to S$140.1m, offset by property revenue growth of 19% y-o-y to S$80.8m. Other revenue including Orange Valley nursing home, events, education, conferences etc., declined by 5% y-o-y to S$23.1m.

Lower Revenue Led by Declining Adspend

• Continued declines were seen in Display and Classified advertising segments, which fell 20% by y-o-y, the steepest fall within the media and advertising segment. Magazines, circulation and other sales fell by 6% y-o-y.

Higher Opex

• Operating costs were higher at S$31.1m (+60.1% y-o-y); increases were from higher depreciation and other operating expenses (opex), offset by savings in lower staff, raw materials and premise costs. There was lower bonus provision as well as impact of Financial Reporting Standard (FRS) (I) 16 lease accounting, which saw lower leases but higher depreciation costs.
• Other operating expenses increased 50% to S$36m partly due to retrenchment costs of S$7.2m, foreign exchange (forex) of S$1.6m and write-back of provisions of S$1.8m. As a result, operating margins were 27.7%, 5.9ppt lower than 1Q19.

Property Helping to Mitigate Media’s Decline

• While the property segment is helping to mitigate the decline in overall earnings, the media segment remains a drag. GDP growth outlook for 2020 is not expected to be strong at 1.4% based on our economics desk’s forecast. We believe this will continue to be a drag on the Media segment.
• SPH has built a S$1.5b portfolio of PBSA assets in Germany and UK, a total of 7,726 beds at 28 property assets across 18 cities. We believe sales for Woodleigh Residences are not expected to be strong due to available supply in nearby areas. Property contributes only 33% to revenue but makes up over 80% of SPH’s profit before tax in 1Q20.

Maintain HOLD With Lower Target Price

• We lower our FY20-21F earnings estimate by a marginal 1-3%. Our SOTP-based Target Price is also lowered, accounting for lower earnings, and reduced Target Price and stake in SPH REIT.
• Our SOTP-based Target Price comprises core newspaper and magazine operations at S$0.07/share based on DCF model, properties at S$2.50, and net cash and investments at -SS$0.45.
• Maintain HOLD.

Source: DBS Research - 14 Jan 2020