Singapore Company Focus

SPH
Bloomberg: SPH SP

Reuters: SPRM.SI

DBS Group Research . Equity

11 Jan 2012

HOLD S$3.70 STI : 2,719.83

Price Target : 12-month S$ 4.01 (Prev S$ 4.20) Reason for Report : Revision in forecasts Potential Catalyst: Better-than-expected operating results, special dividends DBSV vs Consensus: In line Analyst Andy SIM CFA +65 6398 7969 [email protected]

Muted growth, but yield still attractive

1QFY12 profit edged down due to lower ad income Rental income surged, led by Clementi Mall Muted growth ahead, but supported by attractive 6.5% dividend yield Hold, TP nudged down to S$4.01
1QFY12 down a notch. Net profit fell 4.7% YoY to S$97.5m on the back of a 1.3% drop in print ad revenue to S$203.7m, and sharply lower investment income (S$0.6m, -90%). Print ad revenue fell due to lower display (-3.5%) and classified (-4.3%) ads. However, property rental income surged 27% to S$46.9m, helped by Clementi Malls S$9m contribution and a marginal increase in Paragons rental to S$37.9m (+2.6% YoY). Slower GDP will trim print revenues. The Singapore Government has lowered its growth forecast for 2012 to 1-3%. DBS economist has also cut his forecast for the year to 3.5%, from 5% previously. The uncertain macro environment will dampen consumer and business sentiment, and in turn, advertising income for SPH. But still supported by healthy 6.5% dividend yield. We trimmed FY12F earnings by 5% and FY13F by 6.4% after imputing weaker growth for print ad revenue; we now expect zero and 2% growth, respectively. However, we still see support from relatively attractive 6.5% dividend yield based on our 24 Scts DPS assumption. Maintain Hold with a lower sum-of-parts TP of S$4.01.

Price Relative
S$ 5 .1 4 .6 4 .1 3 .6 142 3 .1 2 .6 2 .1 Ja n -0 8 122 102 82 Ja n -1 2 R e la tiv e In d e x 222 202 182 162

Ja n -0 9

Ja n -1 0

Ja n -1 1

S P H (L H S )

R e la t iv e S T I IN D E X (R H S )

Forecasts and Valuation

FY Aug (S$ m) 2010A 2011A 2012F 2013F

Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs:

1,381 638 590 498 485 31.3 30.5 18 15 30.3 27.0 140.1 11.8 12.1 7.2 9.5 7.3 2.6 0.0 23.3

1,251 515 457 389 389 24.4 24.4 (22) (20) 23.7 24.0 140.1 15.2 15.2 10.8 11.8 6.5 2.6 0.0 17.4

1,267 524 460 389 389 24.4 24.4 0 0 23.7 24.0 140.5 15.2 15.2 12.6 11.5 6.5 2.6 0.0 17.4 (5.0) 24.4 S: 1

1,290 531 472 399 399 25.1 25.1 3 3 24.3 24.0 141.6 14.8 14.8 12.5 11.3 6.5 2.6 0.0 17.8 (6.4) 25.0 H: 11

B: 4

ICB Industry : Consumer Services ICB Sector: Media Principal Business: Publishes newspapers in Singapore and owns the Paragon

At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Free Float (%) Avg. Daily Vol.(000)

1,596 5,903 / 4,581 100.0 2,200

Source of all data: Company, DBS Vickers, Bloomberg

www.dbsvickers.com Refer to important disclosures at the end of this report ed: SGC / sa: YM

Company Focus SPH

Results Summary and Comments

FYE Aug (S$m) 1Q11 2Q11 3Q11 4Q11 1Q12 yoy %chg qoq Comments %chg

Operating Revenue Newspaper and magazine

265.5

234.3

263.0

250.6

262.3

Display Classified Magazines and Others Circulation Other Sales

Others Property Total Revenue Materials, consumables & broadcasting costs Staff Costs Depreciation Other Operating Expenses Other Operating Income Operating Profit Finance Costs Net Income from investments Associates PBT Tax Minority Interests PATMI PBT Newspaper and magazine Others Treasury and Investment Property Total

127.3 60.0 19.0 51.3 7.9

16.4 36.8 318.7 (41.6) (87.0) (16.9) (49.1) 2.7 126.8 (10.5) 6.1 1.0 123.3 (22.1) (1.0) 102.3

107.2 52.8 16.2 50.0 8.0

14.1 39.5 287.8 (38.4) (90.3) (18.7) (54.4) 3.1 89.1 (10.3) 10.3 (0.2) 88.9 (16.6) 3.1 75.4

117.4 64.0 19.7 54.0 7.9

22.7 43.2 328.8 (44.6) (88.1) (20.8) (58.7) 4.1 120.7 (10.5) 23.7 (1.1) 132.8 (19.0) (1.0) 112.8

114.4 60.2 16.4 12.9 46.6

16.6 48.4 315.6 (39.8) (83.1) (20.5) (69.0) 9.0 112.2 81.6 (79.8) (2.3) 111.6 (15.2) 3.8 100.2

122.8 57.4 23.4 50.2 8.4

23.3 46.9 332.4 (42.5) (88.3) (18.9) (57.1) 2.5 128.1 (6.9) 0.6 (0.7) 121.1 (23.5) (0.1) 97.5

-1% -4% -4% 23% -2% 7% 42% 27% 4% 2% 2% 12% 16% -6% 1% -35% -90% -175% -2% 7% -92% -4.7%

5% Fell YoY on weaker sentiment. 7% -5% 43% 288% -82% 40% Contribution from newly acquired shows in exhibition business. -3% Rental revenue, Clementi Mall S$9m. 5% 7% Higher newsprint charge out rate. 6% Salary increments offset by lower bonus provisions. -8% Clementi Mall depreciation and existing assets enhancement. -17% Clementi Mall operating expenses, newspaper subscription drive, business activities. -72% 14% -108% Lower debt -101% Unrealised forex loss on investments. -69% 8% Marginally below. 55% -102% -3% Marginally below.

109.2 (5.9) 3.6 16.4 123.3

73.6 (9.7) 7.9 17.2 88.9

95.7 (2.9) 21.3 18.7 132.8

87.1 (7.6) 8.8 23.3 111.6

99.4 (2.1) (0.1) 23.9 121.1

-9% -65% -103% 45% -2%

14% Lower revenues. -73% -101% 2% Helped by Clementi Mall and higher rates at Paragon. 8%

Source: Company, DBS Vickers

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Company Focus SPH

Results Summary and Comments (continued)
FYE Aug (S$m) Newsprint Costs (S$m) 1Q11 25.0 10,289 607 1.34 16.6 2Q11 23.8 9,408 651 1.29 14.6 3Q11 26.7 10,631 666 1.26 17.9 4Q11 26.1 10,241 680 1.25 13.7 1Q12 26.7 9,988 691 1.29 15.8 yoy %chg 7% -3% 14% -3% -5% qoq Comments %chg 2% Higher charge-out rates. -2% 2% Increased as expected. 3% 15%

Ave Monthly Cons (MT) Ave Charge-out price (US$) Implied Ave US/SGD
Other consumables and broadcasting costs Staff Cost (S$m) Average Head Count Cost per head ($'000)

87.0 4,054 21.5

90.3 4,078 22.1

88.1 4,077 21.6

83.1 4,078 20.4

88.3 4,221 20.9

2% 4% -2%

6% Salary increments mitigated by lower bonus provisions. 4% Headcount in other businesses. 3%

Source: Company, DBS Vickers

Result comments Print revenue edged down 1.3% YoY to S$203.7m due to lower display and classified ad revenues (down 3.5% and 4.3%, respectively). The strong 23% increase in revenue from Magazines & others failed to arrest the decline due to its relatively small share of revenue (11.3%). We attribute the weaker display and classified ad revenues to weaker sentiment amid a slower economic growth outlook for 2012. Rental income lifted by full occupancy, Clementi Mall. The bright spot in 1QFY12 was rental income, which was helped by a S$9m contribution from Clementi Mall and a marginal increase in Paragons contribution to S$37.9m (+2.6% YoY). Occupancy remained healthy at both malls. Newsprint cost rose 4.2%. Newsprint charge-out rate rose to US$691/mt from US$607 in 1QFY11, which explains the increase in SPHs newsprint cost despite a c.3% drop in average consumption. However, the Group expects prices to soften in the near term in view of the global uncertainties. We are retaining our US$680/mt assumption for newsprint cost. Newsprint costs higher but will soften

Ad revenue growth is weak

yoy chg (%) 40% 30% 20% 10% 0%
06 06 07 07 08 08 09 09 10 10 11 11 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 1Q
Total Ads

-10% -20% -30% -40%

Seeing the effects of a slower economic growth and uncertainties

Display

Classified

Magazines and Others

Source: Company, DBSVickers

12

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Company Focus SPH

Valuation Slower GDP growth, weaker sentiment, will affect print revenues; trimmed earnings by 5%/6%. We trimmed FY12F earnings by 5% and FY13F by 6.4% after imputing weaker growth for print ad revenue; we now expect zero and 2% growth, respectively, compared to 5% and 3% previously. Consequently, we now expect muted 0%/3% net profit growth in FY12F/13F. Supported by a healthy 6.5% yield, TP nudged down to S$4.01. We cannot consider SPH a defensive counter because media revenues will be affected by an economic downturn. However, downside will be supported by attractive >6% dividend yield, based on our 24 Scts DPS assumption. Maintain Hold, our sum-of-parts TP is nudged down to S$4.01.

SPH: Sum-of-parts valuation

Methodology Newspaper & Magazine Properties Cash and Investment Holdings 16x FY12F PER DBSV RNAV Estimate As at end FY12F Value (S$m) 3,761 2,318 1,402 (1,112) 6,369 6,369 Value (S$) 2.37 1.46 0.88 (0.70) 4.01 4.01 3.78 (0.88) 0.70 (1.46) 2.14 EPS (Cts) 14.8 15.2 PER 14.5 14.0

less: debt at FY12F

Total Target price Current Value Less Revalued cash and investment holdings Add Debt Less Property RNAV Implied Value of Newspaper Operations

Newspaper PER FY12 Newspaper PER FY13

Source: DBSVickers

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Company Focus SPH

Key Assumptions
FY Aug 2009A 2010A 2011A 2012F 2013F

Adex growth rate (%) Newprint (US$/mt) Avg USD/SGD Avg Staff #

(16.9) 747.0 1.45 3,983.0

13.1 535.0 1.40 3,965.0

5.7 680.0 1.23 4,078.0

0.0 680.0 1.30 4,088.0

2.0 720.0 1.25 4,098.0

Segmental Breakdown
FY Aug 2009A 2010A 2011A 2012F 2013F

Trimmed AdEx growth assumption to 0% from 5%, on lower GDP growth expectations

Revenues (S$ m) Newspaper ops Rental Property devt. Total EBIT (S$ m) Newspaper ops Rental Property devt. Others Total EBIT Margins (%) Newspaper ops Rental Property devt. Total Income Statement (S$ m)
FY Aug

936 123 243 1,301 245 86 174 14 519 26.2 69.9 71.7 39.8

1,025 134 222 1,381 314 85 160 17 575 30.6 63.2 71.9 41.7

1,083 168 0 1,251 316 114 0 19 449 29.2 68.0 N/A 35.9

1,092 175 0 1,267 322 121 0 19 462 29.5 69.0 N/A 36.4

1,112 179 0 1,290 330 123 0 19 472 29.6 69.0 N/A 36.5

Property to be helped by full year contribution from Clementi Mall.

Margins Trend
43.0% 41.0% 39.0% 37.0%

2009A

2010A

2011A

2012F

2013F

35.0% 33.0% 31.0% 29.0% 2009A 2010A 2011A 2012F 2013F Operating Margin % Net Income Margin %

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

1,301 (608) 694 (175) 519 0 (9) (28) 0 482 (64) 4 0 422 422 578 0.0 (0.7) (0.4) (3.6) 53.3 39.8 32.4 20.4 13.2 15.8 94.0 18.7

1,381 (626) 755 (184) 570 0 (1) 8 13 590 (80) (12) 0 498 485 638 6.1 10.4 10.0 18.0 54.6 41.3 36.0 23.3 13.3 14.6 86.2 NM

1,251 (590) 661 (212) 449 0 (3) 11 0 457 (73) 5 0 389 389 515 (9.4) (19.2) (21.3) (22.0) 52.9 35.9 31.1 17.4 9.6 10.3 98.4 NM

1,267 (593) 674 (212) 462 0 (4) 2 0 460 (71) 0 0 389 389 524 1.3 1.8 2.9 0.0 53.2 36.4 30.7 17.4 10.0 11.1 98.3 NM

1,290 (602) 689 (217) 472 0 (4) 4 0 472 (73) 0 0 399 399 531 1.8 1.3 2.1 2.7 53.4 36.5 30.9 17.8 10.2 11.3 95.8 NM

Expect growth to be muted on the back of slower domestic economic growth

Source: Company, DBS Vickers

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Company Focus SPH

Quarterly / Interim Income Statement (S$ m)
FY Aug 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012

Revenue Trend
450 400 350 300 250 0% 200 150 100 50 0 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 -10% -20% -30% -40% 40% 30% 20% 10%

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

319 (145) 173 (46) 127 0 1 (4) 0 123 (22) (1) 100 100 145

288 (147) 140 (51) 89 0 0 0 0 89 (17) 3 75 75 108

329 (153) 175 (55) 121 0 (1) 13 0 133 (19) (1) 113 113 140

316 (143) 172 (60) 112 0 (2) 2 0 112 (15) 4 100 100 130

332 (150) 183 (55) 128 0 (1) (6) 0 121 (24) 0 97 97 146

Revenue

Revenue Growth % (QoQ)

Topline helped by property contribution

8.6 42.5 47.1 33.1 54.4 39.8 31.4

(9.7) (25.6) (29.7) (24.7) 48.8 31.0 26.2

14.2 30.4 35.4 49.5 53.3 36.7 34.3

(4.0) (7.1) (7.0) (11.2) 54.6 35.6 31.7

5.3 12.2 14.2 (2.7) 54.9 38.5 29.3

Source: Company, DBS Vickers

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Company Focus SPH

Balance Sheet (S$ m)
FY Aug 2009A 2010A 2011A 2012F 2013F

Asset Breakdown (2011) 463 63 1,477 748 29 434 22 3,235 1 327 723 120 2,055 9 3,235 158 24 92.3 120.9 22.2 0.4 3.8 3.6 CASH 0.0 4.4 NA 428 67 2,090 1,358 27 259 5 4,234 571 419 860 78 2,226 80 4,234 (128) (73) 91.6 177.4 18.4 0.4 1.7 1.6 0.0 0.0 1.7 3.5 394 83 2,202 1,015 37 152 5 3,889 101 387 1,011 84 2,232 75 3,889 (192) (97) 60.0 204.5 22.5 0.3 2.5 2.4 0.0 0.0 2.4 3.7 378 89 2,202 1,042 38 127 5 3,881 101 372 1,011 84 2,238 75 3,881 (203) (70) 40.1 206.9 26.0 0.3 2.6 2.5 0.0 0.0 4.5 3.8 345 96 2,202 1,089 38 129 5 3,905 101 380 1,011 84 2,255 75 3,905 (207) (23) 36.2 205.4 25.8 0.3 2.6 2.5 0.0 0.0 2.7 3.8
Inventory 3.5% Debtors 14.4% Net Fixed Assets 37.2%

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Associates'/J Vs 7.8% Bank, Cash and Liquid Assets 37.1%

Debtor turnover days will decrease as property development proceeds has been collected

Will remain in net cash position

Cash Flow Statement (S$ m)

FY Aug 2009A 2010A 2011A 2012F 2013F

Capital Expenditure
60

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)

482 68 (77) 9 (231) 39 289 (32) 116 2 2 0 89 (417) 149 0 (22) (289) 0 88 32.8 16.2

590 69 (59) 1 196 23 820 (24) (980) (14) 0 0 (1,018) (401) 719 4 38 360 0 162 39.3 50.1

457 69 (107) 3 107 18 546 (27) 197 4 3 0 176 (434) (321) 4 (40) (790) 0 (68) 27.6 32.6

460 66 (89) 4 29 0 469 (50) 0 (10) 0 0 (60) (382) 0 0 0 (382) 0 27 27.6 26.3

472 63 (71) 4 3 0 470 (30) 0 (10) 0 0 (40) (382) 0 0 0 (382) 0 47 29.3 27.6

50 40 30 20 10 0 2009A 2010A 2011A 2012F 2013F

Capital Expenditure (-)

Expect 24Scts DPS, similar to FY11

Source: Company, DBS Vickers

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Company Focus SPH

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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Company Focus SPH

COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as 1. of 09-Jan-2012 2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered brokerdealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of 11 Jan 2012. Compensation for investment banking services: i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the company mentioned. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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