Why SPH's media business could fail to impress next year

More pressure on earnings predicted.

According to CIMB, it thinks that SPH's media business is unlikely to grow fast enough to make up for the company's property business shortfall in FY14.

CIMB said that in order for net profit to increase by $45m, newspaper and magazine sales have to increase by S$162m (based on 16% tax and 33% pretax margin) or a 17% rise in FY13 estimated newspaper and magazine sales.

The largest-ever increase was just 13% in FY10 and that was largely the result of a low base due to the global financial crisis.

Here's more from CIMB:

Even if the ad environment picks up, FY14 could see more pressure on earnings given the loss of 30% of net property income (NPI).

SPH effectively sold 30% of its equity stake in Paragon and Clementi Mall by injecting these two assets into SPH REIT and taking up 70% of the REIT’s units.

The loss amounts to about S$36.9m, if we isolate the impact of this transaction alone without accounting for tax savings from interest and other leakages like trustee fees.

Further, SPH will be consolidating the REIT’s accounts, which means that besides the loss of 30% NPI to SPH REIT, interest expense is also set to rise.

In the course of the REIT transaction, SPH effectively replaced cheaper debt on its books with more expensive debt at SPH REIT level.

SPH’s overall cost of borrowing before the transaction was 2.1%. After the transaction, its cost of borrowing increased to 2.3% because the debt at the REIT level cost 2.35% and the term loan that it repaid cost only 1.6%.

The impact of this for SPH shareholders is an estimated S$6.6m decrease in net profit.

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