Unjustified share price weakness. Recent weakness in Singapore Press Holdings’ (SPH) share price is unjustified, as the stock tumbled along with the benchmark Straits Times Index (STI). Since the peak in early October 2005, SPH has shed 8.6% vs. -5.9% for the STI. The larger decline appears to be out of step against a backdrop of favourable operating environment given recent strong 3Q05 economic data and SPH’s cyclical nature (between 1994 to 2005, SPH’s newspaper ad growth correlates 82% with Singapore’s nominal GDP growth). Recently, we also upgraded Singapore’s 2005 GDP growth target to 5% from 4.5% vs. official forecast of 3.5% to 4.5%.

Results for FY05 were in line. As a recap, SPH reported a set of in-line FY05 results. Revenue rose 3.9% to hit the S$1b mark, with net earnings falling 9.4% to S$494.7m, mainly due to exceptional losses associated with the media merger. One key feature was the drive to keep costs under control, resulting in operating earnings rising 12.7% to S$380.8m. The completion of the restructuring of the broadcast business and the cessation of Streats mean a return to SPH’s dominance in the print media business and will help refocus the growth in its core operations. This allows for more pricing power, as shown in the upcoming ad rate increases (effective 1 Nov 05 for Lianhe WanBao and Shin Min Daily: 3% weekend and 10% weekday; effective 1 Jan 06 Straits Times weekend and Sunday Times: 3%).

Upgrade to BUY on price upside. Based on our sum of the parts valuation, we reiterate SPH’s target price at S$5.15, with core operations valued at S$4.28 and non-core assets valued at 86 cents (i.e. for Paragon, Times Industrial Building, and the 14.1% holding in MobileOne). SPH at its FY05 results declared a net final dividend of 15.8 cents, i.e. net normal dividend of 8 cents and special dividend of 7.8 cents, bringing full year FY05 dividend to 22.8 cents. Ex date is 8 Dec 05. Based on the potential price upside of 14%, we thus upgrade our recommendation on SPH to a BUY from HOLD

Extracts fm CitiGroup Report dated 12-Oct-05,

• Core operation improved at a slow pace. Ad rev grew 6% yoy but bulk of the increase was attributed to magazines while that from newspapers was up only 2% yoy (up about 4.5-5% yoy excluding Streats).
  
• Circulation rev was up by about 6.7% yoy due to higher cover prices. Circulation copies were down for all newspapers except for Business Times. 
  
• Newsprint prices still rising but the rate of increase has moderated. We have upgraded our forecasts to reflect a slower increase in newsprint prices
  
• MediaCorp TV made a smaller loss of S$0.6m in 4Q (vs S$3.2m loss in 3Q). Management of MediaCorp expects this venture to turn around this year.
  
• Sales of Paragon and Times Industrial Building not imminent as mgt is holding out the properties for better prices.
  
• Final div is 19.5 cents/share, bringing total div for the full year to 28.2 cents/share (before tax), higher than our forecast of 20 cents. We expect management to at least maintain this level of div payout going forward.
  
• Rolling our numbers to FY06 and assuming a slower increase in newsprint prices, we are raising our price target to S$5.34 from S$5.26. Maintain Buy

• FY05 results were 7% ahead of our expectation and in-line with consensus. FY05 net earnings declined 9% to S$495m, but were ahead of our expectations. Operating income and margin saw improvements despite cost pressure from newsprint chargeout price, partially driven by higher oil prices. 
  
• Exceptional items proved a drag on overall performance. The expected exceptional loss in FY05 of S$39m comprised S$26m in charges associated with the media merger and S$13m from impairment of goodwill that arose from the acquisition of interests in magazine companies. Stripping off these items, net profit excluding exceptionals came in at S$533m (FY04: S$518m). 
  
• Paragon is now worth around S$1.38bn. SPH currently enjoys an ROE in excess of 10% on Paragon, with net yield of 4.8%. Management seems to be holding to Paragon though they also indicated that they are open and are evaluating options available, which include REIT. 
  
• Total net dividend payout is 2.8cts for FY05. Management indicated that its practise has been to distribute close to 95% of its operating profit as dividend to shareholders, and that would be a target that the Group would continue to do going forward. 
  
• We have trimmed our FY06-07 estimates by 3-7%, to reflect higher landing cost for newsprint on the back of higher oil prices, a more conservative circulation growth estimate, and a lesser degree hike in newstand prices. SPH is trading at P/Es of 19.6x FY06 and 17.4x FY07. Dividend yield of 5.6% and 6.4% in FY06 and FY07 respectively provide downside hedge to the share price. 
  
• We are maintaining our Outperform rating while target price is raised to S$5.40 (from S$5.30), which is pegged to the sum-of-the-parts valuation. We believe that potential catalysts include the sale of Paragon, Times Industrial Building and its stake in M1.

Extracts fm Goldman Sachs report dated 12-Oct-05,

Singapore Press Holdings (SPH) reported fiscal (August) 2005 revenues of S$1,016 mn, up 4% yoy and in line with our forecast. Advertising revenue climbed 2% yoy organically and 6% yoy including acquisitions. Costs fell 1% yoy due to no more TV expenses; operating income rose 13% yoy and was 1% below our estimate. With a lower than expected tax rate offsetting a goodwill write-down, net profit was S$495 mn, down 9% yoy and in line with our forecast. The final dividend of S$0.16 per share was below our forecast S$0.22 per share. We retain an Underperform rating on SPH with a 12 month target price of S$4.4 based on 18X FY2006 publishing free cash flow; risks include loss of advertising share.

• Concerns: (1) Contrary to arguments that SPH is a yield story, the net dividend was lower than widely expected, equating to a prospective yield of 3.3% and a full year yield of 5.0%. We model the FY2006 yield at 3.3%. (2) Contrary to expectations for growth, management guided for FY2006 operating profits to be 'comparable' with FY2005, versus consensus forecasts of a 6% improvement. (3) Contrary to the view of SPH as a restructuring opportunity, the company appeared happy sitting on, rather than immediately selling, its residual property assets.
  
• Print advertising revenues rose 5% yoy in 4Q2005 to S$164 mn (boosted by the consolidation of magazine publisher Blu Inc.), below our forecast of S$169 mn. Display fell 2% yoy while classified rose 6% yoy. Excluding the de-consolidation of Streats, display rose 4% yoy, a deceleration from 9% yoy in 3Q2005 because 3Q2005 benefited from property stimulus measures. Circulation revenue of S$52 mn climbed 4% yoy while circulation volumes were rather flat. SPH is increasing its advertising rate card by 3% for 4 days per week effective on January 2006; we model 5% display advertising growth in FY2006.
  
• 4Q2005 costs were in line with our forecasts, up 10% qoq and down 5% yoy (no more TV or Streats operating expenses) at S$166 mn. Newsprint expenses increased by around 17% yoy as prices rose (charge out cost was US$563 per tonne during the quarter); wages fell 7% yoy due to removing TV headcount (SPH ended the period with 3,443 staff, down 4% yoy). SPH appeared to book catch-up depreciation in the quarter.

Non-operating items

Investment income for the year was S$249 mn (including S$140 mn from StarHub) versus S$258 mn in FY2004 (including S$170.5 mn from Belgacom). Investment income for 4Q2005 dropped to S$13 mn, equating to a ~6% annualized return and consistent with our forecast for lower investment income in FY2006. Associate items moved from a S$3 mn loss to a S$1 mn loss qoq as MediaCorp TV's performance improved. SPH took a S$12 mn writedown in 4Q2005 on its S$33 mn investment in Blu Inc.

SPH declared a final net dividend of S$0.16 per share (S$0.08 recurring, S$0.08 special), taking its full year payment to S$0.24 per share. We believe this was below market expectations of a S$0.22 final distribution; management stated that it had taken the StarHub sale into account in setting FY2004's dividend, so that FY2005 only received a partial benefit. Operating cash flow (S$320 mn) and sales of long term investments (S$198 mn) flowed into capex (S$16 mn), property investments (S$13 mn), investments in subsidiaries and associates (S$57 mn), and dividends (S$382 mn). SPH ended the year with net cash (cash plus short term investments minus borrowings) of S$74 mn, up from a net debt position of S$98 mn a year earlier.

Management commented that it expects advertising revenue "to grow in tandem with the economy", consistent with its comments in prior quarters. Optically, yoy advertising growth rates should suffer by ~3% in 1Q2006 as Blu Inc. enters the base period, and benefit by ~3% from 2Q2006 as Streats drops out of the base period. 1Q2006 advertising revenue growth rates could thus appear weak. Management also commented that it expects FY2006 operating profit to be comparable with FY2005 - that is, around S$380 mn. We model an FY2006 operating profit of ~S$390 mn and we are below consensus, so we see downside risk to earnings estimates. In response to analyst questions, management implied that it is no great hurry to dispose of either the Paragon shopping mall (over 10% ROE, rentals still rising) nor the Times Industrial land bank (waiting for strength in high-end property prices to spread to the middle-market).

Valuation

SPH is trading at 23X our FY2006 forecast EPS and 22X FY2007; at 21X FY2006 forecast EPS excluding non-media assets and 21X FY2007; at 20X FY2006 media free cash flow and 19X FY2007. SPH is at 4.5X our FY2006 book value versus a FY2006 ROE of 19%. US newspaper publishers with similar dominant market positions have derated to around 15X forecast 2006 EPS due to loss of share to online. Our DCF value using a 9% discount rate and 15X free cash exit multiple is S$4.2 per share.

SINGAPORE, Oct 10 (Reuters) - Singapore Press Holdings Ltd, Southeast Asia's largest media group, is expected to report a jump in fourth-quarter profit due to the absence of restructuring charges suffered in the year-ago period, when it operated a loss-making TV business, analysts said. They say the outlook for SPH , which has a near-monopoly on newspaper publishing in the city-state, should see a moderate pick-up in advertising spending in 2006 as the economy improves, but the group continues to face competition from alternative mediums such as online advertisements.

Expectations of special dividend payouts from cash-rich SPH, however, would continue to underpin interest in the company, which has paid out more than 90 percent of its pre-exceptional net profit as dividend in the last three years.

"We are expecting very positive news flow on the dividend front. I am forecasting 28 cents gross for the final dividend, which is one of the highest out there," said Stephanie Wong, analyst at Kim Eng Research, who has a "buy" recommendation on SPH. "I don't think they will disappoint the market too much," she said, adding that the group still had several non-core assets to sell, including the Paragon shopping complex in the heart of Orchard Road, Singapore's prime retail strip.

SPH shares have climbed 4.8 percent in the past week against a 1.4 percent rise in the benchmark Straits Times Index on expectations of a special dividend payout from the group when it announces its results. The stock is up 2.6 percent since the start of the year, underperforming the STI by 8.0 percent over the same period.

The pro-government newspaper group, which recently appointed former deputy prime minister Tony Tan as chairman, will report its earnings for the June to August quarter after the market close on Tuesday. SPH -- which runs 13 newspapers, including the 160-year-old English language Straits Times daily -- is expected to report a consensus net profit of S$54.71 million ($32.33 million) for the final quarter, according to 17 analysts polled by Reuters Estimates. This compares with a S$3.8 million profit in the final quarter of 2004, which included a S$65.3 million restructuring charge which the group took for its loss-making television business that it has since exited. Profit of the full year ended August 31 is expected to come in at S$472.51 million which include investment income of S$152.7 million from the sale of its 8.9 percent stake in mobile and cable operator StarHub in the first quarter. But this was expected to fall to S$376.54 million in 2006 as investment and other income gains normalise. Excluding the one-off gains, 2005 pre-tax profit was expected to rise about 10-12 percent due to the absence of hefty operating losses from TV, analysts said.

SPH, with a market capitalisation of US$4.42 billion, trades at about 19.6 times its estimated 2006 earnings. This compares with Australia's John Fairfax 16.6 times and Hong Kong's SCMP Group 17.5 times.

Extracts fm Goldman Sachs Report dated 7-Oct-05,

SPH will report its 4Q (June to August) results on October 11. For the full year we forecast revenues of S$1,019 mn, +4% yoy; operating profits of S$384 mn, +14% yoy (less TV losses); net profits of S$494 mn, -10% yoy; and recurring net profits of S$377 mn, +9% yoy. For 4Q we forecast print advertising growth of 4% like-for-like yoy (8% including Blu Inc.), consistent with 3Q, with downside risk from a weak August. After an 8 cent interim dividend, we model a 22 cent final dividend: two thirds recurring and one third from the divestment of StarHub and the stock buy-back by MobileOne. We have an Underperform rating and a 12-month target price of S$4.4 based on 18X FY2005 forecast free cash flow. Risks include advertising trends.

• We forecast 4% yoy organic advertising revenue growth against a relatively easy 6% growth base period in 4Q2004, and a further 4% from the consolidation of Blu Inc. We believe that the overall advertising market of ~S$1 bn per annum is growing at ~9% per annum, slightly faster than nominal GDP, but that MediaCorp's free newspaper (revenue +21% in year to March) and TV stations (revenue +18% in year to March) are capturing most of the growth. We assume that circulation revenue, property revenue, and other revenue are broadly flat qoq and yoy, for 1% yoy total revenue growth.
  
• We forecast newsprint costs rising 11% qoq and 28% yoy to S$31 mn on higher charge-out prices. We model other costs as broadly flat qoq and down yoy (no more TV operating expenses), for a 5% yoy decline in total costs. We forecast investment income dropping 61% qoq (SPH booked a S$38 mn gain from its investment portfolio of S$783 mn in 3Q2005) and up 2% yoy to S$15 mn, equivalent to an annualized return of 8% on its portfolio. We assume an associate loss of S$2 mn from SPH's stake in MediaCorp TV. SPH's effective tax rate was only 13% in 4Q2004 and 22% in 3Q2005; we model 21% in 3Q2005. This produces a recurring net profit of S$75 mn, down 29% qoq and up 4% yoy.
  
• The excitement surrounding SPH's dividend payments surprises us; the more SPH distributes, the less cash remains to generate investment income or to buy growth. We believe that yield analysis only makes sense for recurring payments - bond investors do not refer to principal redemption as yield. On this basis we estimate that SPH can distribute ~90% of its recurring EPS as recurring dividend, for a 4.5% recurring yield. SPH ended 2004 in a net debt position.
  
• We expect SPH's net income to decline by 33% in FY2006 on a reported basis (no StarHub divestment), and to decline by 12% in FY2006 on a recurring basis (normalized level of investment income). Investment income accounted for ~25% of earnings in FY2005, equivalent to an 18% return on SPH's investment portfolio.

Valuation
SPH is trading at 19X our recurring FY2005 forecast EPS and 22X FY2006 (less investment income); at 20X FY2005 forecast EPS excluding non-media assets and 19X FY2006; at 23X FY2005 media free cash flow and 19X FY2006. SPH is at 4.5X our FY2005 book value versus a FY2005 ROE of 23%. US newspaper publishers with similar dominant market positions have derated to around 15X forecast 2006 EPS due to loss of share to online. Our DCF value using a 9% discount rate and 15X free cash exit multiple is S$4.2 per share. We model a 6.5% yield in FY2005 due to distribution of StarHub proceeds, but a recurring long-term yield of 4.5% thereafter.

Extracts fm Kim Eng Report,

SPH – FY05 final results preview

• The group will be releasing its FY Aug 05 final results next Tuesday (11Oct).
  
• We expect net profit to decline 5%yoy to $519m (EPS of 32.6cts) with organic earnings growth of 12%yoy to $415m.
  
• Consensus estimate for EPS was 29cts which implied a 6.5%yoy decline.
  
• Newspaper advertising revenue is expected to grow a modest 2.2%yoy to $623.5m while circulation revenue could improve 6.7% to $623.5m.
  
• Rental income from the Paragon is likely to increase by 9% to around $90m, thanks to higher rates for rental renewals.
  
• Based on the historical track record, we are hoping for a final DPS of 28cts (assume a total dividend payout of 90%).
  
• BUY the stock ahead of the results release, as the likelihood of the group announcing a clearer dividend policy is high. Coupled with the potential divestment of the prime retail mall – The Paragon, further re-rating of the stock could be imminent.
  
• Our 6-month price target remains at $5.40, based on FY06 dividend yield of 5.5%.