2 biggest reasons why SPH's newspaper income is getting the jitters

Its circulation has been dropping.

According to OCBC, threats from new media can impact SPH’s newspaper earnings in two ways: 1) lower circulation revenues and 2) lower ad revenues.

While ad revenues form the bulk of earnings, it is reduced circulation that is particularly damaging to a newspaper’s business viability.

With less subscribers and therefore readers, ads have less impact and value. A newspaper with falling circulation becomes increasingly unprofitable and
a negative spiral of declining quality, circulation and ad revenues ensues.

Here's more from OCBC:

Hence we like that SPH management has a clear strategic goal to defend circulation numbers. They have implemented an aggressive subscription drive and introduced digital channels for readers to access SPH material.

While this has had an impact on margins, we believe this strategy is optimal for long term earnings maximization and note a consensus FCF of S$436m for FY13E still supports the case for a 24 S-cents dividend payout (S$387m) in FY13E.

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