SPH REIT listing is on hold

SPH REIT listing is on hold, pending better market conditions. Back to basics, 3QFY13 advertising revenue contraction is likely to be smaller than 2QFY13’s 9.3% yoy. We lower our target price from S$4.50 to S$4.25 because of a higher DCF discount rate as we have raised our risk-free rate by 80bp. Maintain HOLD with entry price at S$4.00 or below.

What’s New 

+ SPH REIT IPO is temporarily on hold. In view of the currrent poor sentiments on REITs, Singapore Press Holdings (SPH) said it continues “to monitor market conditions and will make an announcement at the appropriate time”. 

+ Back to basics. So, it is back to its core print media business and advertising revenue (AR) growth. Our monthly page monitor of The Straits Times suggests a flattish (1-3% yoy growth) advertising spending (adspend) in 3QFY13 (Mar-May). SPH is due to announce its 3QFY13 results on Monday, 15 July, after market close. Despite a flattish adspend implied by our page-counts, we expect SPH to report an AR contraction, but this should be smaller than the 9.3% contraction in 2QFY13. The sharp fall in 2QFY13 AR (in particular display ads, - 10.2% yoy) was due to a knee-jerk reaction to additional property measures and the new stringent measures on car loans.

3QFY13 results preview. We expect a higher net profit of
S$90m for 3QFY13 (3QFY12: S$99.8m), vs 2QFY13’s S$71.5m (2QFY12: S$84.1m). 2QFY13 earnings were very weak because: a) seasonally, 2QFY (December-February) is the weakest quarter in its financial year, and b) 2QFY13 suffered a knee-jerk adspend pull-back following additional property measures and new car loan measures.

Stock Impact 

SPH’s share price should hold up as long as its property REIT listing is in the pipeline. Aside from this, adspend, and hence SPH’s AR growth, is in line with Singapore’s sluggish GDP growth (2Q13F real GDP growth: 2.7% yoy). In our earnings forecasts, we have assumed flat print AR for FY13 and FY14 before recovering to a 2% yoy growth for FY15, in line with Singapore’s muted real GDP growth projection for 2013. UOB Economic-Treasury Research forecasts Singapore’s real GDP growth at 3.0% for 2013 (2012: 1.3%).

+ Share price awaits REIT IPO; dividend yield remains attractive at 4.8%. Traditionally, SPH’s share price is closely related to its AR growth, but in recent months, share price has diverged from AR growth in anticipation of a special dividend payout following the planned listing of SPH REIT. SPH has declared a special DPS of 18 cents in conjunction with the SPH REIT listing.

Earnings revision/risks 

+ No change to our earnings forecasts. The key risk to our earnings forecasts is a deep economic downturn.

Valuation/Recommendation 

+ Maintain HOLD. We lower our target price from S$4.50 to S$4.25. We raise our DCF discount rate on a higher risk-free rate, but reduce our discount to sum-of-the-parts valuation (SOTP). We raise our risk-free rate to 3.0% (from 2.2%) due to a cyclical turn in interest rates. Our revised DCF discount rate for SPH’s media business is raised to 5.95% (from 5.15%). As a result, our SOTP valuation is reduced from S$5.28 to S$4.73/share. However, our target price is now set at a lower discount of 10% (15% previously) to our SOTP valuation because SPH’s share price is likely to be supported by the SPH REIT listing which, albeit delayed, is still in the pipeline. Against SPH’s current share price of S$4,20, our HOLD call is unchanged. Entry price is at S$4.00 and below.