Residential property woes a blessing to SPH

Target Price S$4.60

What’s New
• Rising Saturday page-counts. Our monthly page monitor of The Straits Times is a proven leading indicator of Singapore Press Holdings’ (SPH) newspaper advertising revenue. The thickness of the Saturday issues of The Straits Times is the key barometer of newspaper advertising spending. The February and March issues have seen an increase in thickness with the total number of pages reaching a high of 278, a lot thicker than an average of 230-240 pages in October to December last year (see table below).

• A reversal of declining trend. We had earlier seen a slowdown in advertising spending from March last year as Singapore’s domestic economic growth slowed. Spending contracted further as the European debt crisis deepened in 3Q11. The thickness of The Straits Times’ Saturday issues dipped to as low as 210 pages in August.

• Residential property woes a blessing. The current residential property woes have turned out to be a blessing to SPH as property developers stepped up advertising to overcome sluggish sales. Management concurred that developers have increased advertising spending. While SPH does not disclose the percentage of its advertising revenue (AR) from property advertisements, we understand from management that the rise in recent newpaper page-counts was “significantly due to property advertisements”. This is obvious from anecdotal evidence. SPH derives its AR from 12 sectors with the property sector being one of the larger sectors in the advertising pie.

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Stock Impact
• Media business is intact. Although history has shown that advertising spending is vulnerable to a sharp economic downturn (albeit not as severe as cyclical sectors), this time round advertising spending appears to be well supported by an anticipated mild economic growth in 2012 for Singapore and more property advertising spending.

• Upcoming 2QFY12 results may not be that bad. We had earlier expected a set of poor 2QFY12 (Dec 11–Feb 12) results given a weak advertising spending as this year’s Chinese New Year was close to Christmas. Advertisers would be reluctant to spend as much as consumers were not likely to have a second spending spree. However, with the uptick in advertising spending, boosted by property advertisements, we reckon (based on our monthly page monitor of The Straits Times) advertising spending has rebounded from a contraction of 3.7% yoy in 1QFY12 (as reported in SPH’s 1QFY12 results) to a 2.6% yoy growth in 2QFY12.

Earnings Revision/Risk
• No change in our earnings forecasts which have assumed SPH’s annual AR growth at 2%. The key risk to our earnings forecasts is a sharp economic downturn.

Valuation/Recommendation
• We maintain our BUY call and target price of S$4.60. At current share price, SPH offers a cheap entry into a quality dividend stock. Upcoming 2QFY12 results, expected to be released in the second week of April, should declare an interim DPS of 7 S cents.

• SPH’s attraction lies in:
a) A cash-cow media business in its backyard.
b) A focused strategy on building recurrent earnings with retail malls having been identified as a core business to achieve this strategy.
c) A robust balance sheet that has plenty of scope to fund new property assets, thus capitalising opportunities in an economic slowdown.
d) Low risk of rights issue to fund expansion given strong cashflows from its media business.
e) A high annual dividend yield of 6% with upside potential.

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