SPH. Singapore Company Guide

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1 Singapore Company Guide Version 7 Bloomberg: SP Reuters: SPRM.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 20 Mar 2017 HOLD (Upgrade from FULLY VALUED) Last Traded Price ( 17 Mar 2017): S$3.53 (STI : 3,169.38) Price Target 12-mth: S$3.39 (-4% downside) (Prev S$3.32) Potential Catalyst: Special dividends from sale of shares in M1 Where we differ: In line Analyst Alfie YEO alfieyeo@dbs.com Andy SIM CFA andysim@dbs.com What s New Share price corrected by more than 12% since our downgrade 2017 GDP forecast revised to 2.8% from 1.9% last year Downside supported by more positive GDP outlook Upgrade to HOLD, TP revised to S$3.39 Price Relative Forecasts and Valuation FY Aug (S$ m) 2015A 2016A 2017F 2018F Revenue 1,177 1,124 1,105 1,108 EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) 17.8 (1.3) (11.9) (1.7) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) 18 (1) (12) (2) 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 (%): 4 4 Consensus EPS (S cts): Other Broker Recs: B: 0 S: 6 H: 2 Less pessimistic outlook Upgrade to HOLD, TP raised to S$3.39 on better GDP outlook. Since our downgrade from HOLD to FULLY VALUED in April 2016, the stock has fallen by more than 12% to S$3.53 currently. Results had been lackluster on the back of weak adex spend and GDP growth. This has also led to DPS cut from 20 Scts in FY15 to 18 Scts in FY16. We are now less pessimistic on as we believe valuations have largely priced in negatives and see some positives from the possibility of monetising its M1 stake; and GDP acceleration from 2% in 2016 to 2.8% in In addition, the recent relaxation of Total Debt Servicing Ratio (TDSR) framework to allow borrowers to borrow against their properties for additional cash could support private consumption and expenditure in the overall economy. The stock is now trading at 22.7x forward PE with dividend yield decent at 5.1%. Jointly appoints advisor review stake in M1. On Friday 17 March, announced that that the substantial shareholders of M1, comprising, Keppel T&T and Axiata Group Bhd, have appointed Morgan Stanley Asia to conduct a strategic review of their stakes in M1. holds 13.38% stake in M1 valued at S$274m (4% of s market cap) or 15.7 Scts per share. Valuation: TP of S$3.39 based on sum-of-parts. Our target price of S$3.39 is based on sum-of-parts valuation. We value 's core newspaper and magazine operations at S$1.44/share based on discounted cash flow model, s property business at S$1.38, and net cash and investments of SS$0.57 to derive our TP. Key Risks to Our View: Adex reversal, disposal of investment stake and expectations of special dividends. A strong economic recovery and pick-up in consumption will lead to adex improvement, which is a key risk to our view. Sale of its investments, such as M1, could also lead to expectations of higher special DPS. At A Glance Issued Capital (m shrs) 1,599 Mkt. Cap (S$m/US$m) 5,645 / 4,027 Major Shareholders (%) Free Float (%) m Avg. Daily Val (US$m) 10.0 ICB Industry : Consumer Services / Media Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P ed: JS / sa:ym, PY

2 WHAT S NEW Less pessimistic outlook Singapore s GDP growth to accelerate to 2.8% in Our economics desk has upgraded 2017 GDP growth forecast for Singapore to 2.8% (up +0.9 ppt) on the back of a robust 2016 fourth quarter, which registered the strongest quarterly growth in six years at 12.3% on-quarter, based on a seasonally adjusted annual rate. This translates to 2.8% onyear growth, with GDP growth for 2016 coming in at 2.0%, substantially above expectations and backed by significant upward revisions to previous quarters data as well. The key driver in fourth quarter 2016 was an 11.5% on-year surge in manufacturing growth, driven by semiconductor (up 62% onyear) and pharmaceutical (up 34% on-year) manufacturing. The services sector grew by 8.4% on-quarter, seasonally adjusted annual rate, or by 1% on-year, led by financial (up 36.5% on-quarter) and trade-related services transport and storage services rose by 12.4%. Loan growth has bottomed and will likely trend higher. Container throughput and reexport growth have continued to creep higher too. Expect spillover from the manufacturing and services sectors into the rest of the economy. GDP performance from fourth quarter 2016 bodes well for overall GDP and employment growth. We see the positive impact from semiconductor and pharmaceutical clusters spilling over to the rest of the economy, e.g. into the precision engineering cluster, transport and warehousing for exports, financial, other supporting services, and small- to medium-sized enterprises. This should drive more broad-based improvement in the rest of the economy. Adex should see improvement going forward on the back of uptick in GDP growth. As such, we expect consumption to be more robust. Our economists expect private consumption in Singapore to accelerate from 0.6% in 2016 to 1.7% and 2.7% in 2017 and 2018 respectively. This should support adspend going forward, offsetting the lower y-o-y adspend in January and February Review of M1 stake has minimal impact on share price, but could surprise on special dividends if sale is successful. along with Keppel T&T as well as Axiata Group Bhd have appointed a financial adviser to review their stakes in M1. We see minimal impact on s share price as its investment in M1 is only 4% of its market cap. s stake in M1 is worth 15.7 Scts based on M1 s current share price, and s 13.38% stake. This works out to <2% upside to s share price assuming that M1 is sold for up to 35% premium over the current share price. However, we believe there could be support to s share price from expectations of special dividends, post a successful divestment of M1. We raise our DPS slightly in anticipation of better prospects of paying higher dividends. With the improvement in economy, we turn less pessimistic on our adspend assumption. We still expect that adex in FY17F will decline, but at a slower rate, from -7% to -5%. We noted that adex continued to disappoint in January (- 17% y-o-y) and February 2017 (-22%) and hence continue to see adspend growth decline but by a slower rate, offset by more positive economy going forward. We raised earnings for FY17F and FY18F by 4%. Upgrade to HOLD, TP S$3.39. Since our downgrade in April 2016, s share price has corrected by >12% and valuations have also become less lofty. Forward PE and dividend yield as of April 2016 were 24.9x and 4.5% compared to 22.7x forward PE and 5.1% dividend yield currently. Due to better GDP forecast, relatively improved valuations, and anticipation of special dividends, we now see limited downside for the stock. GDP growth to accelerate this year Source: Thomson Reuters, DBS Bank Page 2

3 CRITICAL DATA POINTS TO WATCH Adex growth rate (%) Earnings Drivers: Publication model driven by adspend. s business model is driven by advertising revenue rather than circulation, with advertising receipts accounting for 74% (26% circulation and others) of operating profit in FY16. also has a property business which developed and owns Seletar Mall, and 70% shareholding in REIT (Paragon and Clementi Malls). Rental income from the three malls contributed 21% of revenue for FY16. used to own Paragon and Clementi malls. But it has since spun off the properties to REIT for a 70% stake in the latter. Newprint (US$/mt) Less pessimistic outlook for Singapore adex. A combination of sluggish consumer sentiment, poor GDP growth and increased use of internet advertising in recent years has caused adex to plummet. According to our economics desk, Singapore s GDP growth for 2017 is expected to accelerate to 2.8% from 2.0% in Manufacturing sector, driven by pharmaceutical and semiconductors, and services sector is turning for the better, loan growth has bottomed out and will likely trend higher, container throughput and re-export growth have improved. These will translate into for overall GDP, employment growth, consumption expenditure and better adspend. Avg USD/SGD Rising US dollar. Our FX desk sees the US dollar rising to 1.45 against the SGD by the end of this year. Purchases of primary raw materials for newsprint such as pulp, are denominated in US dollars. Yet publication sales are domestic and denominated in SGD. A rising US dollar presents risks that lead to higher costs and lower margins as selling prices are maintained. Stable outlook for property. Occupancy at Paragon, Seletar and Clementi malls continue to be relatively full with Paragon and Clementi Mall registering record revenue in 1Q17. The average rental reversion for Clementi and Paragon was 4.6%, mostly attributable from a 4.4% reversion rate from the retail tenants at Paragon. Paragon remains the more robust of s properties, delivering higher rents for new and renewed leases. We believe Paragon will continue to deliver higher margins and outperform the other properties along Orchard Road, due to its prime location and prestigious tenant mix. We see longer term driver for the stock coming from the injection of Seletar Mall into REIT. 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Avg Staff # Adex growth (%) Total yoy growth (%) Total yoy growth (%) Source: Nielsen, Company, DBS Bank Page 3

4 Balance Sheet: Strong cash hoard. s business is cash generative, with working capital financed by longer payment periods to creditors for operations. Due to its operating model, the business has amassed a cash hoard of over S$1bn including long-term investments. Even though its balance sheet is in a net debt position, returns generated by excess cash used for investments has enabled it to offset interest costs. The strong cash management has led to an attractive dividend payout of over 80%. However, DPS for FY16 dipped to 18 Scts, down from 20 Scts in FY15. We are expecting FY17F DPS to at least sustain in anticipation of its divestment in M1. Leverage & Asset Turnover (x) Capital Expenditure Share Price Drivers: We believe Seletar Mall's spin-off into REIT will be a share price catalyst. In 2014, securitised its stake in Paragon and Clementi Malls into REIT. However, Seletar Mall remains on its balance sheet, with room for REIT to acquire a stake in Seletar. We estimate Seletar Mall's gross development value to be S$495m. ROE (%) Realising its investment in M1. owns a 13.38% stake in M1. This could be a catalyst to its share price on its ability to pay more dividends if it realises the value of its investment. Weak adex. s earnings are primarily driven by adex. Recovery in general economy and ultimately adex would accelerate top-line and earnings growth. We see less negative adex going forward driven by GDP acceleration, dragged by poor adspend in January (-17% y-o-y) and February 2016 (-22% y-o-y). We continue to project less negative declines in adex for FY17F and FY18F Forward PE Band (x) Key Risks: Improvement in macroeconomic environment and higher dividends from M1 divestment. We believe improvement in economic environment would reverse our view of declining adspend. We are also looking at lower DPS as a result of lower earnings. However, if divests M1, the cash proceeds could boost DPS payout. Company Background PB Band (x) Singapore Press Holdings Limited () publishes, prints, and distributes newspapers and magazines, with a dominant market position in Singapore. It also invests in properties, provides multimedia, broadcasting and event management services, and operates internet portals. It has a 70% stake in REIT. Source: Company, DBS Bank Page 4

5 Key Assumptions FY Aug 2014A 2015A 2016A 2017F 2018F Adex growth rate (%) (6.8) (5.4) (9.2) (5.0) (2.0) Newprint (US$/mt) Avg USD/SGD Avg Staff # 4,204 4,237 4,182 3,982 3,992 Segmental Breakdown FY Aug 2014A 2015A 2016A 2017F 2018F Revenues (S$m) Newspaper ops 1, Rental Property devt Total 1,215 1,177 1,124 1,105 1,108 EBIT (S$m) Newspaper ops Rental Property devt Others Total EBIT Margins (%) Newspaper ops Rental Property devt. N/A N/A N/A N/A N/A Others N/A N/A N/A N/A N/A Total Income Statement (S$m) FY Aug 2014A 2015A 2016A 2017F 2018F Revenue 1,215 1,177 1,124 1,105 1,108 Cost of Goods Sold (693) (665) (643) (630) (636) Gross Profit Other Opng (Exp)/Inc (138) (125) (117) (130) (130) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc (30.7) (11.2) (7.7) (8.0) (8.0) Net Interest (Exp)/Inc Exceptional Gain/(Loss) (16.5) Pre-tax Profit Tax (57.7) (59.8) (54.9) (51.4) (50.8) Minority Interest (66.5) (48.7) (40.9) (39.4) (40.1) Preference Dividend Net Profit Net Profit before Except EBITDA Growth Revenue Gth (%) (2.0) (3.1) (4.5) (1.7) 0.2 EBITDA Gth (%) (10.2) 4.4 (5.6) (5.3) (1.4) Opg Profit Gth (%) (4.3) 0.8 (5.8) (5.5) (1.2) Net Profit Gth (Pre-ex) (%) (24.2) 17.8 (1.3) (11.9) (1.7) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Bank Page 5

6 Quarterly / Interim Income Statement (S$m) FY Aug 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue Cost of Goods Sold (162) (158) (164) (158) (158) Gross Profit Other Oper. (Exp)/Inc (32.5) (25.0) (30.1) (29.3) (41.9) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc (1.8) (0.7) (1.5) (3.7) (1.1) Net Interest (Exp)/Inc 2.56 (0.7) (9.4) Exceptional Gain/(Loss) (28.4) Pre-tax Profit Tax (16.5) (10.9) (15.9) (11.6) (12.1) Minority Interest (9.7) (9.7) (9.3) (12.2) (10.1) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) 1.1 (12.4) 12.3 (5.0) 0.5 EBITDA Gth (%) 20.0 (22.0) 22.8 (8.5) (9.7) Opg Profit Gth (%) 19.2 (25.0) 27.0 (7.4) (12.8) Net Profit Gth (Pre-ex) (%) 58.0 (28.7) 48.8 (13.3) (34.9) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (S$m) FY Aug 2014A 2015A 2016A 2017F 2018F Net Fixed Assets Invts in Associates & JVs Other LT Assets 4,641 4,756 4,747 4,747 4,747 Cash & ST Invts 1, Inventory Debtors Other Current Assets Total Assets 6,651 6,070 5,944 5,933 5,930 ST Debt Creditor Other Current Liab LT Debt ,197 1,197 1,197 Other LT Liabilities Shareholder s Equity 3,687 3,619 3,517 3,478 3,434 Minority Interests Total Cap. & Liab. 6,651 6,070 5,944 5,933 5,930 Non-Cash Wkg. Capital (190) (136) (136) (128) (127) Net Cash/(Debt) (335) (517) (578) (575) (568) 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) Source: Company, DBS Bank Page 6

7 Cash Flow Statement (S$m) FY Aug 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit Dep. & Amort Tax Paid (65.9) (58.3) (63.5) (56.3) (51.4) Assoc. & JV Inc/(loss) Chg in Wkg.Cap (13.6) (3.8) 0.19 Other Operating CF (182) (68.9) (27.4) Net Operating CF Capital Exp.(net) (18.7) (39.2) (16.0) (30.0) (30.0) Other Invts.(net) (122) Invts in Assoc. & JV 70.9 (32.7) (25.5) (10.0) (10.0) Div from Assoc & JV Other Investing CF Net Investing CF (56.4) (40.0) (40.0) Div Paid (355) (339) (323) (288) (288) Chg in Gross Debt 61.6 (524) Capital Issues Other Financing CF (42.2) (58.0) (32.2) Net Financing CF (335) (921) (344) (288) (288) Currency Adjustments Chg in Cash (22.5) (151) Opg CFPS (S cts) Free CFPS (S cts) Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Alfie YEO Andy SIM CFA Page 7

8 DBS Bank 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 Completed Date: 20 Mar :43:50 (SGT) Dissemination Date: 20 Mar :57:11 (SGT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group ) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. Page 8

9 DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests 2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in, M1 recommended in this report as of 28 Feb Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in M1 recommended in this report as of 28 Feb DBS Bank Ltd, DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of M1 as of 28 Feb Compensation for investment banking services: 5. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction 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. Disclosure of previous investment recommendation produced: 6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 9

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