SPH’s print advertising revenue may drop 20% in FY12

Print advertising revenue is the key earnings driver for Singapore Press Holdings and has traditionally been correlated with Singapore GDP growth. In the global financial crisis in 2008, however, its print advertising revenue saw a double‐digit decline by 16% YoY. Nevertheless, the group’s net profit from the newspaper cost control measures.

Currently, the media business makes up about 83% of group operating revenue and the rental income from investment properties contributes the balance. The latter provides SPH with a stable and recurring earnings base.

In stress testing the stock, we have assumed a 20% decline in print advertising revenue in FY12F and a trough PER of 9.8x for the earnings of the media business. We combined both assumptions to arrive at an implied share price of $3.36 for SPH in its worst‐case scenario. This suggests a downside of about 7% from the current level. However, the dividend payout (forward yield of 6.4%) should be sufficient to cushion the impact of any share price weakness.

We view the lack of a property development landbank as a positive for SPH now that the residential property market has become uncertain. The group would be seen in its business strategy.

SPH is one of the few blue chips in Singapore with a strong net cash position of $175m and an investible fund of $1.3b as of May 2011. This should enable the group to fund new investments in the media business and perhaps, pay out special dividends.

We have a BUY recommendation on SPH with a target price of $4.33, based on the sum‐of‐the‐parts valuation. The core media business is valued based on a DCF methodology, which assumes a discount rate of 8.7% and terminal growth rate of 2%.