SPH - results preview: Improving Advertising Revenue

Improving advertising spending. Singapore Press Holdings (SPH) will be releasing its 4QFY09 (June ? August) results on 12 October. Our pagecounts of The Straits Times point to an 11% yoy contraction in SPH's advertising revenue (AR) in 4QFY09 (3QFY09 page-counts: -18% yoy). SPH earlier reported newspaper AR contraction of 23% in 3QFY09 (2QFY09: - 20.1% yoy; 1QFY09: -9.3%), higher than the 18% indicated by our pagecount monitor and ACNielsen's -14%. We are expecting a newspaper AR contraction of 15% for 4QFY09. While AR is still below the level a year ago, it has been making a comeback since April. Monthly page-counts suggest AR contraction is narrowing with only 8% yoy contraction, much smaller than 20+% yoy contraction six months ago.

Investment income could surprise on the upside, in view of better financial market conditions. Investment gain in 3QFY09 was S$17.6m (- 31.4% yoy) compared with a loss of S$0.1m in 2QFY09. As of end-May 09, SPH had a S$0.9b investible fund of which 44.4% was cash, 28.7% in equities, 14.2% in bonds and 12.7% in investment funds.

We estimate final DPS of 13-16 cents. DPS of 13 cents being our worst-case scenario premised on a full-year payout ratio of 86% of earnings and 16 cents is our best-case scenario premised on a payout ratio of 98%. Including the interim DPS of 7 cents that has already been paid, full-year DPS would be 20 cents and 23 cents respectively (FY08 DPS: 27 cents). Historically, SPH's net DPS ranges from 80% to 100% of EPS. We have adjusted our FY09 DPS estimate to 21.5 cents, the average of our worst- and best-case scenarios.

SPH is a proxy to an improving domestic economy as well as a yield play. We believe Singapore's integrated resorts ? Marina Bay Sands and Resorts World@Sentosa, scheduled for phased opening in 1Q10 ? will have a multiplier impact on consumer spending and hence, advertising spending. This should benefit SPH. At current share price, the stock offers attractive FY10 and FY11 annual dividend yields of 6.5%.

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SPH - Newspaper ad demand rising sequentially

Newspaper ad demand bottomed in 3Q FY09 and picked up in 4Q FY09. Estimated total classified volume fell 17% YoY in 4Q – a big improvement from -33% in 3Q.

Also, our estimates indicate that display ad volume fell 9% YoY in 4Q, marginally better than 3Q’s -11% and 2Q’s -10%.

More importantly, we continue to see a sequential pick-up in ad demand. 4Q classified ad volume is estimated to have jumped 11% QoQ (as job ad volume grew 16% sequentially), versus 3Q’s -3% QoQ and 2Q’s -13% QoQ. Further, despite a seasonally stronger 3Q display ad demand, 4Q display ad volume is estimated to be flat QoQ.

While SPH has started to outperform, the stock continues to trade at a discount to the market. We maintain an OUTPERFORM rating with a target price of S$4.41.

SPH is scheduled to report its FY09 results on 12 October. CS is hosting the company’s post results investor meeting on 14 October.

Maintain neutral stance towards SPH

According to latest data from The Nielsen Company ("Nielsen"), Singapore advertising expenditures (adex) in July 09 fell 6.8% YoY to S$168.2m, representing the highest monthly adex year-to-date. Radio, Cinema and Internet adex showed YoY improvements and in particular, the July Internet adex grew a record 54.9% YoY (albeit from a low base). But performance across all other adex platforms continued to be weak, with Bus & Taxi adex registering the largest YoY decline (-24% YoY). Newspaper adex (excluding Today) decline decelerated to 8.7% YoY, but newspaper's (excluding Today) 32.9% share of total adex was only marginally above June 09's three-year low. Total print (newspaper and magazine) adex in July reached S$74.5m, 7% lower than a year ago.

Although adex decline appears to be decelerating, it is difficult to get too excited about the July 09 adex data. Our channel checks reveal that advertisers remain generally cautious. And although sentiment is strengthening, this has not translated into an increase in advertising orders and marketing budgets remain restrained. As we have previously highlighted, there is a typical lead-time for planning of and adjustments to marketing budgets and as such, we continue to expect any substantial adex recovery to happen towards mid-2010.

We estimate SPH booked approximately S$109m advertising revenues in the first two months of 4Q09, in-line with our estimates for the quarter (S $166m). Given lack of evidence of any strong recovery in the adex market, we maintain our forecasts and Hold recommendation.

SPH : Advertising spending fuelled by property boom

Diminishing contraction. Our page-count monitor of The Straits Times indicates further improvement in advertising spending in July with a smaller yoy contraction of 10% from -16% in June (May: -14%, April: -16%, March: - 22%). Anecdotal evidence points to a rise in property ads given the current residential property boom with new project launches practically every week. Developers are also re-marketing old projects which are not yet fully sold. The property boom is also generating higher activities in the secondary property market, thus leading to more classified ads Rising job ads point to greater business confidence. The total number of recruitment ad pages has also improved from 230 in March to 279 in July.

Singapore’s unemployment rate remains comfortable. The seasonallyadjusted unemployment rate for 2Q09 has remained unchanged at 3.3%, the same as in 1Q09. Resident unemployment even declined to 4.6% in 2Q09, from 4.8% in 1Q09. This could be due to the government’s Jobs Credit scheme cushioning job losses and the hiring of 13,000 to fill civil service jobs since the start of this year.

The worst is over. While SPH is usually a late-cycle recovery play, we believe advertising revenue (AR) growth will stage an early comeback this time round, with advertising spending recovery aided by the opening of Singapore’s two mega integrated resorts- Marina Bay Sands and Resorts World@Sentosa in end-09/1Q10.

Singapore Press Holdings - Shifting expectation towards an earlier recovery

We price in an earlier recovery: SPH has underperformed the FTSE STI Index by 30% YTD, reflecting the market’s preference for high-beta stocks and the expectation of a recovery in core business in FY11. With improving economic conditions in Singapore (J.P. Morgan has raised its real GDP growth forecast to -4.3% for 2009 and 4.4% for 2010), a stabilizing job market, and the recent strong pick-up in the property market, we could see an earlier-than-expected recovery in the group’s core business. We therefore raise our FY10 and FY11 EPS forecasts by 12% and 9%, respectively, and our FY10/FY11 DPS forecasts by 11%.

Operating margin to improve in earnest in 2010: The spot newsprint price has fallen to US$500/ton, a 75% drop from the peak of US$875/ton. As SPH locks in newsprint on a rolling basis, we expect low newsprint prices to kick in during FY10. In addition, the S$ has appreciated 5% in the past three months, further helping SPH to reduce raw material costs. In view of this and the staff cost cuts earlier in the year, we estimate operating costs to fall 11% YoY and operating margin to improve to 39% in FY10.

Reduced risks associated with property division: With the strong pick-up in the property market, and as secondary prices for the Sky@Eleven project have increased to S$1,100psf on average since May, the concerns about potential default upon completion should be alleviated. In addition, the stronger-than-expected take-up rate for the upcoming retail space along Orchard Road should also help to reduce the pressure on rental renegotiations for Paragon.

We reiterate our OW rating, and raise our SOTP-based PT to S$3.90 from S$3.15: The increase is a result of our higher earnings estimates, change in valuation methodology for the core business, and rolling forward our timeframe to Jun-2010 from Dec-09. Key risks to our rating and price target include a later-than-expected recovery in ad revenues and a quicker-than-expected pick up in raw material costs.

Singapore Press Holdings: Stabilisation ≠ Recovery

Remains sluggish overall. Singapore Press Holdings (SPH) reported its 3Q09 results with a topline of S$331.2m (-4.8% YoY) while bottomline came in at S$126.7m (-5% YoY). The group experienced an 18.9% reduction in staff costs as the effects of its recently announced pay cuts flowed through the system. However, its core operations dived 13.5%, signalling that the group might still be in for a bumpy ride in the next few quarters.

Key swing factors: Property & Investment. Its property division continued to chalk up a 40% YoY rise in revenue due to stronger-than-expected progress recognition from its Sky@Eleven condo project. However, rental growth from Paragon has started to flatten out and we are pensive on its ability to continue upward rent revisions. SPH's investment income was another swing factor. While it incurred a 31% YoY fall, it managed to register a S$17.6m absolute gain (mostly due to stronger portfolio valuation) compared to a loss of S$104k in the previous quarter. In view of the volatile market, we opt to retain our conservative estimates for SPH's investment income.

Display and Classifieds still at rock bottom. SPH continues to have a short runway of visibility for its core business, indicating that businesses are still keeping their advertising belts tightened. SPH's Display and Classifieds adverts are still experiencing short printing notice periods of 1- 3 weeks and 5-7 days respectively. Businesses are also choosing to utilise black & white or single colour adverts vs. full colour adverts. As such, despite seeing a positive uptick in advert pages printed, profitability remains suppressed. We were updated that all advertising segments are still declining/flat, with the telecoms and finance segments experiencing the most sluggish performance. The only silver lining for advertising lies in the recent acceleration in property launches.

Final quarter will not see recovery. The Great Singapore Sale (GSS) may be able to buffer declines on a QoQ basis but we opine that it would still pale to the comparable GSS quarter in the previous year. We are maintaining our earnings estimates but have bumped up our SOTP valuation in view of a better-than-expected valuation for Paragon at S$1.98b (prev: S$2b valuation). We had estimated S$1.8b. We are retaining our HOLD rating with a SOTP fair value of S$3.31 (prev. S$3.18). Our forecast of 14.5 S cents for SPH's final dividend can yield 4.7% if investors accumulate around S$3.05.

Singapore Press Holdings Ltd - Recovery underway

SPH's 3Q09 net profit was S$126.7m (-5% yoy), beating consensus estimates and 20% above our forecast. The outperformance came mainly from higher-than-expected operating revenue of S$327.1m (-5% yoy) and lower-than-expected operating expenses thanks to lower-than-expected newsprint costs. We continue to believe that ad demand is close to a bottom and project a faster recovery for print ads in FY10-11. We have raised our FY09-11 earnings estimates by 1-6% on the better-than-expected media earnings. Maintain Outperform with a higher sum-of-the-parts target price of S$3.62 (from S$3.52) following our earnings upgrade.

3Q09 operating income declined marginally to $131.3m but was up 40% qoq mainly due to the stepped-up revenue recognition for Sky@Eleven. An investment gain of $17.6m was recorded, compared to $25.7m in 1Q08. Net profit was 5% lower yoy at S$126.7m; Overall, a decent set of results with the fall in print ad revenue being cushioned by strong development profits and cost containment measures.

Core publishing business could have bottomed as operating profit in 3Q09 posted a sharp rebound qoq. Display ad revenue had reversed the downtrend and the risk of more cutbacks on the budgets of SPH’s top ad revenue contributors (telcos, property) seems low given that government’s pump-priming measures such as the jobs credit scheme are taking effect. Government ads spending also support the recovery of print ad revenue.

Sky@Eleven remains on track for TOP in CY2010. To date, 56% of the project’s revenue has been recognised. Property development margin was consistently strong at 71.7%. At Paragon, rental revenue declined 5.4% qoq despite the addition of 40,000 sqf of space in the quarter. We suspect renewal rental rates could have fallen or replacement of commercial tenants could have led to disruptions.

Group investible fund remained at $0.9b. Net loss from investment to-date narrowed to $16.1m from $33.8m as at Feb-09, as dividend and interest income offset the loss in value of the externally managed funds during 1Q09. SPH’s cash war chest has strengthened to S$380m (+18% from Feb), forming 44.4% of investible fund. Its net cash position places it in a sweet spot to engage in opportunistic investment activities.

Our SOTP target price is remains unchanged at $3.90. SPH looks on track to deliver our full year revenue and earnings estimates. With the divestment of the loss-making TOM Outdoor Media Group in May, the Group is focused on positioning itself for the next growth phase which in our opinion may include property development. Prospective PER of 11.3x for its core publishing business does not look expensive. Maintain BUY.

SPH: a bellwether of the Singapore economy

Singapore Press Holdings (SPH) is a Singapore-based media and property conglomerate, publishing nearly all of the island- nation’s newspapers and owning Orchard Road’s iconic Paragon Shopping Centre (Paragon).

With a near-monopoly on a major industry sector in Singapore, SPH’s revenue and earnings are directly affected by the country’s economic conditions. However, while the company is near the average in terms of revenue and earnings volatility out of all Straits Times Index (FSSTI) constituent companies, its stock price is one of the least volatile (ie, SPH has a low beta). Since 1 October 1986, there have been 34 periods when the share price has either outperformed or underperformed the FSSTI by at least 15%. Twenty-eight (82.4%) of those periods were due primarily to the low beta of SPH’s stock.

We forecasts the FSSTI to decline over the next six months to 1,932. We expect SPH’s stock to continue to have a low beta and expect it to outperform in a falling stock-market environment. We initiate coverage of the company with a 2 (Outperform) rating and a six-month target price of S$2.84 based on a quantitative analysis.

SPH - Valuation gap should narrow

Newspaper ops valuation should normalise. SPH PE valuation to STI has narrowed to 8%, significantly below the 10-year average of 34%. Newspaper operations implied PE is now at 12x, -2 standard deviation from its average. We think the market has undervalued it; and, this should trend up towards normalized levels (20x PER) as the economy recovers.

Worst fall in AdEx seems over. AdEx fell sharply during past 2 recessions. But, they also recover shortly thereafter. Latest data from Nielsen media research shows Apr AdEx for SPH’s newspaper display and classified ads fell by c.9%, significantly better than the 25% y-o-y fall in Jan. We also noted that recent pagination for The Straits Times (Saturday edition) is hovering above 200 pages, up from Jan’s 100-plus pages.

Lowered newsprint costs. Newsprint spot price is at around US$550/mt. This is positive for SPH from a cost aspect and we should see this positive impact flowing through for SPH is subsequent quarters.

Maintain BUY, SOP TP remains at S$3.70. We maintain our Buy recommendation as we believe the worst fall in AdEx is over. We believe valuations should normalize, and we peg our newspaper operations to 16x FY10F earnings, -1 standard deviation to its average (20x). Dividend yield is also attractive at c.6.6% based on our conservative assumption of 20cents/share.

Singapore Press Holdings SPH - Job Ads Are Rebounding From Depressed Level

Job ads are rebounding from depressed level. Job ads started sliding from August last year (a total of 408 job ad pages) to hit a depressed level in December (172 pages, -41% yoy), according to our page-counts of The Straits Times. The latest May page-count is a clear sign that confidence is returning with recruitment drive stepping up. Job ads in The Straits Times totalled 230 (-48% yoy), 224 (-46% yoy) and 258 (-38% yoy) pages in March, April and May respectively. Apart from rising advertising spending, this trend also points to broader positive macroeconomic implications.

Worst in 3QFY09, but monthly data suggest a gradual recovery. Singapore Press Holdings (SPH) will be releasing its 3QFY09 results in early-July. 3QFY09 is likely to show the worst performance in the current economic crisis. Our page-counts point to an 18% yoy contraction in SPH’s advertising revenue (AR) in 3QFY09 (2QFY09 page-counts: -13% yoy). Our monthly page-counts, however, are showing a gradual recovery with a contraction of 23% yoy, 16% yoy and 14% yoy in March, April and May AR respectively.

Newsprint price continues on a downtrend. The price of 30-lb newsprint currently stands at US$550/tonne and has yet to bottom. Newsprint price peaked at US$760/tonne in December and has been on a decline since then.

Defensives to play catch-up with cyclicals, which have rallied strongly in the current market rebound from March lows. With advertising spending showing signs of a gradual recovery, we see a re-rating of SPH. While the stock is usually a late-cycle recovery play, we believe it will stage an early comeback this time round, aided by the opening of Singapore’s two mega integrated resorts, Marina Bay Sands and ResortsWorld@Sentosa. We maintain our BUY call and target price of S$3.90.

SPH: Sky@eleven fears debunked

Markets are expected to pull back in the near term and we would advocate a return to defensives like SPH. Our page count indicates that ad demand bottomed out early this year and we believe print ad revenue could beat expectations. Other positives for SPH include potential investment gains in 3Q09 and lower Sky@eleven default risks. We have raised our FY09 earnings estimate by 5% to account for lower investment losses. Maintain Outperform and our sum-of-the-parts target price of S$3.52.

Twin DPS fears over Sky@eleven unfounded; Maintain BUY. The market has been worried over the possibility of default over the deferred payment scheme as well as dividend payout beyond Sky@eleven. We believe that such fears are unfounded. The condominium project is a bonus to SPH, and following the project's TOP, investors will continue to enjoy good yields. Maintain BUY with a SOTP-based price target of S$3.40.

Deferred payment scheme (DPS) to hit this year's payout? The market is speculating that SPH may hold back on paying out the earnings from Sky@eleven till the money comes in upon TOP, dragging payout ratio down to 70% (90% in FY08). In our view, that is unlikely and we expect payout to be at 90%. SPH has stated that it will pay out a "high percentage of recurring earnings" and not cashflow. It has the capability to do so, given its healthy balance sheet (net gearing of 12%) and low capex requirements. We believe that default risk is low for the project, and have gotten even lower with the revival of the property market. CDL's The Arte, which is also located in the Thomson area, saw keen interest and units were sold at an average of S$1,000 psf (S$975 psf for Sky@eleven). Should buyers default, SPH actually stands to benefit as it has already collected the first 20% as down payment.

Dividend per share (DPS) beyond Sky@eleven to dive? Contributions from Sky@eleven account for 30-35% of dividends over the next two years. In FY11, there will no longer be any contributions coming through from property development when the project TOPs. We believe that Paragon, which has seen its rental space expand 6% to 700k sq ft after its recent renovation, will partially make up for the vacuum. We have assumed a 10% average rental growth to S$14.9 psf/month by 2011, which we believe to be a conservative figure given the successful remaking of Orchard Road. This will raise rental from Paragon by 17% from FY08. Coupled with its core newspaper business, SPH should be able to dish out at least S$320m in dividends (or S$0.20 per share) post Sky@eleven, and more during good years. At current share price, this works out to a palatable yield of 6.3%.

SPH: Press is set to spin, Buy

Newspaper ops valuation should normalise. SPH’s PE valuation to STI has narrowed to 8%, significantly below 10-year average of 34%. Newspaper operations implied PE is now at 12x, -2 standard deviation from its average. We think the market has under valued it; and, this should trend up towards normalized levels (20x PER) as the economy recovers.

Worst fall in AdEx seems over. AdEx fell sharply during past 2 recessions. But, they also recovered shortly thereafter. Latest data from Nielsen media research shows April’s AdEx for newspaper display and classified ads fell by 9%, significantly better than the 25% y-o-y fall in Jan. We also noted that recent pagination for The Straits Times (Saturday edition) is hovering above 210-odd pages, up from Jan’s 100-plus pages.

Lowered newsprint costs. Newsprint spot price is at around US$550/mt. We lowered our average newsprint charge-out rate to US$760/mt for FY09F and US$580/mt for FY10F.

Paragon valuation out soon. The independent valuation for Paragon should be released in mid-Jun. We expect it to stay above our RNAV estimate of S$1.5bn. There should also be nominal defaults at its development property project (Sky@Eleven), in view of the up tick in transactions and stable prices.

Upgrade to Buy, SOP TP raised to S$3.70. We upgrade our recommendation to Buy, from Hold as we believe the worst fall in AdEx is over. We believe valuations should normalize, and we peg our newspaper operations to 16x FY10F earnings, -1 std dev. of its average (20x).

SPH - Advertising spending bounces back from depressed level

Advertising spending is bouncing back from a depressed level. This is evidenced in our page counts of The Straits Times. The Saturday papers, the barometer of advertising spending, point to the beginning of a recovery in advertising spending. Saturday issues typically more than double the average weekday’s pagination as advertisers prefer to advertise on Saturdays. As evidenced in the table overleaf, advertising spending hit a depressed level with The Straits Times’ Saturday issues falling to around 190 pages in March compared with 270 pages a year ago and 250 pages six months ago. Pagination bottomed in April and has since rebounded to above 210 pages in May, albeit The Great Singapore Sales started two weeks ago.

Nevertheless, monthly data from ACNielsen also points to SPH’s advertising revenue (AR) contraction getting smaller from -18% yoy in March to -9% yoy in April. A similar trend is emerging in our page counts of The Straits Times, which suggest SPH’s AR contraction has improved from -22% yoy in March to -16% yoy in April.

SPH offers an attractive risk-reward proposition. As high-beta cyclicals have rallied strongly, the defensives now offer a relatively more attractive risk- reward proposition and should start to attract investor interest. SPH, trading at a P/B of 2.6x, offers a 36% upside to its long-term P/B mean valuation of 3.6x. The stock will likely be favoured by investors starting to search for value among the laggard defensives that have not rallied as much as the cyclicals. In addition, SPH offers annual dividend yield of 7-8%. Maintain BUY and our target price of S$3.90, which is based on our sum-of-the-parts (SOTP) valuation of S$3.94/share.

Singapore Press Holdings - Attractive value

Over the past six months, consensus FY09E and FY10E EPS for SPH has been revised down by 18-24%. During this period, SPH has underperformed the market by 50%. As a result, the stocks‘ P/E premium to the market has declined from +58% to -17% currently.

According to the CS Page Monitor, it appears that the YoY contraction in job ad demand is bottoming. Plus, management indicated during our recent meeting that there are signs that newspaper ad demand is bottoming. Management also indicated that newsprint prices have fallen further to the US$500 levels.

We have adjusted our earnings forecasts mainly to reflect potentially lower newsprint costs and higher investment income. We have also raised our sum-of-the-parts target price by 12% to S$3.36. This represents 14% upside from current levels. In addition, the stock is expected to generate a dividend yield of 9%.

We believe that in addition to the weak newspaper earnings outlook, the market has also discounted the potential cut in dividends following the company‘s interim dividend cut. We are upgrading SPH from Neutral to OUTPERFORM.

SPH - Managing a downturn

We maintain our Outperform recommendation. Singapore Press Holdings (SPH) reported 2Q09 net profits of S$87m, with core media profits at circa S$62.3m. This was below our expectations. The interim dividend of 7.0 cents was higher than our estimate of 6.0 cents.

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.

SPH - 1H09 impacted by one-offs but core ops generally in line

1H09 impacted by one-offs but core ops trending in line; Hold maintained SPH reported S$160m 1H09 net profit, slightly below DBe (S$180-200m), as 1Q09 investment losses and 2Q09 associate losses impacted. But the core operations are trending in line, with stable rental income and advertising revenue decline within expectations. Management declared a S$0.07/share interim dividend and reiterated commitment to the existing dividend policy. We maintain Hold given our expectations the stable core operations and Sky@eleven will support FY09e yield.

1H09 total operating revs +2.8% YoY, largely supported by Sky@eleven and Paragon rental income. And although 1H09 core print revenues -9% YoY, this did not exceed expectations. For example, while 1H09 ad revenues fell 14% YoY, the S$334m 1H09 ad revenues were in line with DBe (S$340m). 1H09 Sky@eleven revenues (S$91m) were below expectations on slower-than-expected construction progress, but management assured the project is on track for CY2010 completion. We recognize SPH’s FY09e earnings and yield are dependent on Sky@eleven contributions and as such will watch construction progress closely.

1H09 core print opex grew 5.7% YoY as higher newsprint costs and new media investments offset an 8% YoY decline in staff costs (lower bonuses). As such, core print EBITDA margins declined to 28.1% (vs 1H08 36.1% and DBFY09e 29%). Going forward, management is implementing a number of cost controls (e.g. controlled hiring, salary reductions) that should support 2H09 margins.

Despite the general slowdown and various one-offs impacting SPH’s 1H09, the core operations were generally in line and we expect cost controls to increasingly support. We believe SPH’s near-term dividends are sustainable and maintain Hold. Our SOTP TP of S3.10 is derived using DCF for the core media business (7% WACC & 1% g, reflecting S’pore’s long-term growth potential), Paragon at discount to book value, M1 at DB TP and investments as at end 1Q09. Key risks include adex, property valuations and investments.

S'pore adex still falling but SPH estimates appear in-line

The Nielsen Company ("Nielsen") have released their estimates for Feb 09 Singapore advertising expenditures (adex).

Total estimated February market adex fell 16.2% YoY to S$128m, the fastest YoY rate of decline in five years and the lowest total adex level since Feb 06. However, the newspaper sector performed better than in recent months with the S$55m February newspaper adex just 1% less than in 2008. However, this YoY comparison is slightly distorted by the fact that whereas the 2009 Lunar New Year was in January, in 2008 it was in February (so Feb 08 adex was significantly less than the preceding or succeeding months). Nevertheless, the long-term adex trend is clearly downwards reflecting recent economic trends. For example, cumulative estimated print adex over the last three months was approx S$205m, 13% less than the same 2008 period.

Nielsen estimates imply SPH's advertising revs trending as expected Based on this data, we estimate SPH booked approx S$150m advertising revenues during the Dec 08 to Feb 09 quarter, an approx 16% decline YoY. We therefore expect SPH to have achieved approx S$340m in 1H09 advertising revenues, 11% lower than in 1H08 and representing 49% DB09e. We maintain our forecast that SPH's FY09e advertising revenues will fall 12% YoY especially as these Nielsen estimates suggest that SPH's advertising performance is trending generally as projected.

Clearly advertising revenues are correlated with economic activity and a further deterioration in Singapore's economy could be punitive - an issue to watch closely. But at this stage, advertising appears to be trending in-line with our forecasts and we maintain our estimates and Hold rating.

SPH: Time to buy the daily

Upgrade to Buy. P/B at 1.8x is at lowest point in the last 20 years. Previous lowest P/B was 1.95x, in 1998. Wage cuts savings will mitigate fall in ad revenues. We believe SPH’s share price (-30% since Jan’09) has already factored in the weaker economic outlook. Dividend yield is attractive at >8%. TP: S$2.93 reflects a potential c.34% total returns upside.

Wage cuts savings... SPH will be cutting wages by 2%-10% for 3,000 staff from 1 Apr. The savings from this and profit-related bonuses is an estimated 20% in wage bill for its core operations. Wages account for c.25% of revenue and c.40% of the Group’s costs. We view this as positive for the Group, to help mitigate fall in ad revenues.

Offsets drop in ad revenues. According to data from Nelsen Media Research, advertising revenues (AdEx) for the period from Sep’08 to Jan’09 fell by 10% y-o-y. In Jan, it fell by 25% y-o-y, deteriorating from a 14% y-o-y drop in Dec. We trimmed our ad revenue assumption and assumed a -20% yoy drop, from -15% previously. This offsets our estimated savings from the wage cuts.

Expect a weak 2Q. We expect SPH’s 2Q09 results to be weak on a c.20% fall in ad revenues, coupled with a high newsprint costs. However, we have taken this into account in our estimates. Current newsprint spot price is at c.US$680/mt versus our assumption of US$800 for FY09F.

Outlook priced in, lowest P/B in 20 years. We believe the current shareprice (-30% since Jan’09) has already priced in the weak economic outlook. Valuations are very attractive at 1.8x P/B with a dividend yield of >8%, based on our 20cents DPS assumption.

Upgrade to Buy. Our sum-of-parts derived target price is lowered to $2.93 (from $3.25) as we factor in lower RNAV for Paragon at S$1.69bn (based on a cap rate of 6%). We pegged our newspaper operations at 12x FY09F earnings, a premium to peers’ average, given SPH’s dominant position in Singapore. But, this is still lower than Star Publications’ PER of c.15x.

SPH - Alarming dive in Job and classified ads

The average page count for weekend editions of The Straits Times classified ads plunged 22% yoy in 2Q09. According to salary surveys, the job ad volumes in Singapore declined 41% during Sep to Dec of 2008, representing the sharpest decline among the Asian countries. Classified ad revenues, accounting for 1/3 of ad revenues, will continue to be dragged down by the deepening recession.

Display ad volumes have also been observed to decline further in 2Q09, having fallen 4% in 1Q09. Display ad revenues account about 56% of ad revenues. We have entered an unprecedented period of recession, with GDP growth likely to be -5% in 2009. Print ad revenue decline could be more severe than during the previous crises as Internet advertising today has emerged as a cheaper alternative for businesses. Consequently, we cut our FY09F print ad revenue growth forecast to -25% from -20%.

Consequently, we cut our net profit estimates for FY09-10 by 3%, after factoring in lower newsprint charge-out price. Our DPS forecasts, based on a payout ratio of 90%, has been reduced to 21.9 cts and 21.3 cts for FY09-10F, representing yields of 8.7% and 8.5% respectively. However, following the TOP of Sky@Eleven expected in 2010, we see no catalysts to fill the earnings void, and expect DPS to fall back to 16cts (6.5% yield).

With its core business facing unprecedented challenges, including falling readership which may not recover in tandem with the economy, SPH may have to entice shareholders with higher dividend payout. We expect mounting pressure for management to return its hefty $1.2b investment portfolio to shareholders.

We cut our SOTP target price from $4.30 due to the lower DCF valuation of its core media business, and further assuming 20% declines in the value of Paragon and investments. Risks to core business and lack of catalysts after the completion of Sky@Eleven undermine the defensive quality of SPH. However, the implied valuation of its media business (8.2x PER) is at a steep discount to its ten-year trough of 11x. We maintain our Buy recommendation.