Core media revenue in 2Q09 fell 18.8% YoY, below our expectations of a 12% decline. The group has instituted cost-savings measures via staff salary reductions, lower profit share and recruitment freeze. Staff cost is the largest cost component at 40% of total costs, and SPH expects to save 20% of the wage bill from this exercise. The charge-out cost for newsprint (19% of total cost) rose 7.1% QoQ to US$827/tonne. We expect newsprint cost to fall progressively given lower spot prices as well as lower volume usage. We expect advertising revenue to fall 19.8% this year (from -11.5% previously) but only -3.3% next year as we anticipate an economic recovery toward the end of this calendar year.
The group retail rental income is stable, with the remaining residential profits from its Sky@eleven project expected to contribute to earnings until 2010, when the project receives temporary occupation permit. Retail rents could see mild pressure from three malls opening this year along the Orchard Road belt, as we estimate rents to fall about 10-15% YoY in this segment. The group’s investment losses totalled S$34m in 1H09, with the losses mainly in 1Q09 due to mark-to-market losses. We do not anticipate significant losses for the rest of FY09, but we expect overall investment income will be -87% YoY.
FY09 EPS lowered 28% to account for lower ad revenue and investment losses. Advertising revenue expected to fall 19.8% instead of -11.5% this year. Our target price is lowered 8.8% to S$3.83 from S$4.20 as a result of the FY09 earnings downgrades.
12-month price target: S$3.83 based on a Sum of Parts methodology. Catalyst: Weak results expected in 3Q09 but dividend support over the next two years and relatively resilient earnings versus other key sectors are attractions. The group has put in cost-savings measures to navigate through the current weak market conditions. Core media profits are expected to slide 25% this year but recover 16% in FY2010.
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