SPH – UOBKH

A trading opportunity on market anticipation of FY07 final dividend.

It’s that time of the year. SPH’s final FY07 results will be released in the second week of October. We expect share price to see a rally in anticipation of FY07 final dividend. It’s that time of the year. Traditionally, SPH’s share price sees a rally in the one month leading up to the announcement of the company’s final results. With current share price at S$4.32, the lower end of its trading band, SPH is worth a trade for short-term investors. We are forecasting a final tax-exempt DPS of 20 cents (4.6% yield). Including SPH’s interim DPS of 7 cents, FY07’s full-year tax-exempt DPS is forecast at 27 cents (6.2% yield), based on a payout of 85% of our FY07 EPS forecast. Historically, dividend payout averaged about 90-95%.

Signs of sustained higher advertising revenue growth. ACNielsen’s newspaper advertising expenditure data for June and July 07 points to an 8% yoy growth. Our page-counts of The Straits Times for June – Aug 07 also suggest SPH’s newspaper advertising revenue (AR) growth at 8% yoy in 4QFY07. Coupled with 3QFY07’s (Feb-May 07) strong AR growth of 10% yoy, this would suggest SPH’s AR growth has broken out of its weak 1-3% growth. AR growth has benefitted from Singapore’s strong economy, in particular the robust property sentiments, which have now filtered from the high-end to the mass market. This is generating more demand for display ads. Anecdotally, the strong pipeline of residential property launches over the last 1-2 years has also led to a pick-up in the sub-sales of uncompleted residential properties, which in turn has generated more property classifieds. Allowing for the absorption of Singapore’s additional 2% government sales tax effective from Jul 07, we are forecasting SPH’s 4QFY07 AR growth at 6% yoy.

Newsprint prices continue to its downward trend since Aug 06. North America newsprint prices currently trade at US$561/tonne, a decline of 12% from Aug 06’s peak of US$640/tonne. The growing threat of newsprint supply from China entering key US markets and continued weak newsprint consumption in North America have shifted pricing power to the newsprint buyers. The run-up in newsprint prices between 2002 and 2006 had been entirely driven by newsprint capacity shutdowns in North America. Producers have now run out of easy mill shutdowns in North America and future output curtailment will become increasingly difficult.

Potential timing difference in profits from Sky@eleven. We have forecast S$30m net profit (about 8% of Sky@eleven‘s estimated total net profit of S$363m) to be recognised in FY07. SPH’s management has declined to provide guidance on how much profit will be recognised in FY07. We see any variance as a mere timing difference in profit recognition. This should not be a concern.

Earnings forecasts are tweaked upwards to reflect higher AR growth. We raise our FY07, FY08 and FY09 earnings forecasts by 9%, 6% and 5% respectively to S$510.0m, S$565.0m and S$585.0m. We are now assuming SPH’s annual print AR growth at 6% in FY07 and 5% in FY08 and FY09. Our FY07 earnings forecast has also been adjusted to incorporate the stronger-than-

SPH has turned the corner. It is a large cap stock that has been totally forgotten by the market, due to its lacklustre performance over the last three years. SPH’s core fundamentals are now supported by an improved AR growth, falling newsprint prices, Paragon shopping mall’s rising rentals on the back of rising rentals in prime shopping locations in Singapore, maiden earnings contributions from Sky@eleven and a high annual net dividend yield of 7.4% in FY08 and FY09. Maintain BUY and our target price of S$5.00 (based on our
sum-of-the-parts valuation of S$4.99/share).

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