• SPH's FY20 core earnings below expectations led by disappointment in the Media segment.
• Media continues to be a drag, expect property to drive growth in the longer term.
• Cut SPH's FY21-22F earnings by 7-18%.

FY20 Disappoints on Higher Than Expected Opex

• SPH (SGX:T39)'s FY20 core revenue (S$865.7m, -9.8% y-o-y) was within expectations. However, core operating profit (S$136m, 48% y-o-y) fell short due to higher than expected operating costs, particularly Premise costs. Even with Jobs Support Scheme and property tax rebates (S$68.5m), operating profit was below our estimate. FY20 headline earnings included one-off items that contributed to net headline losses of S$109m.
• Excluding the one-off items, pre-tax would have been in positive territory at S$160.3m, but still falling short of our expectations.
• Dividends were below expectations with final DPS of only 1 Sct declared.

Media Disappoints, Property Earnings Contributed by New Assets

• SPH's media segment disappointed with pre-tax losses of S$11.4m and operating losses of S$9.4m. Retrenchment cost was S$17.4m, and without which operations would have remained profitable, albeit on the low side. Media revenue declined by 23% y-o-y to S$445m, dragged largely by print advertisements. Meanwhile, circulation revenue remained flat boosted by tablet subscriptions, a slight positive.
• SPH's property segment’s revenue grew 10% y-o-y to S$327.2m, driven by contribution of UK PBSA assets and Westfield Marion.

Lower Operating Margins

• Operating margins fell to 15.7% (from 27.2% in FY19), a function of lower revenue led by adex decline and higher operating costs. The lower margins led to operating profit trailing our estimates. There were higher premise costs and depreciation as more properties were added to the group’s portfolio.

One-off Items

• There were one-off losses of S$232m pertaining to fair value change of investment properties - S$196.5 from retail malls and S$41.5m from its UK PBSA portfolio. Other one-off items included COVID-19 government aid schemes of S$68.5m and retrenchment costs of S$17.4m.

Weak Adex Expected to Persist With Slow GDP Recovery

• Outlook for Adex remains challenging especially with GDP netting a -1% decline over 2020 (-6.5%) and 2021 (+5.5%). We believe this will continue to be a drag on earnings. We have hence lowered our SPH's FY21-22F earnings by 7-18% to factor in lower operating margins given its current run rate.
• Nonetheless, we see property driving earnings growth in the longer term, contributing to better margins for the group from FY22F.

Maintain HOLD on SPH With Lower Target Price

• We lower our SOTP-based target price, in line with our earnings cut.
• We expect UK PBSA to drive earnings growth in FY21F.
• We value the core newspaper and magazine operations at S$0.16/share based on discounted cash flow model, properties and other investments at S$1.89, and net cash and investments at -S$0.96.
• Maintain HOLD on SPH.

Source: DBS Research - 14 Oct 2020