SPH – CIMB

Taking flight with adex growth

Above expectations. This was a strong set of results with FY07 S$506m (+40% yoy) core earnings beating our estimate by 20% and consensus’s by 9%. Key reasons for the surprise were higher investment income (+79% yoy) and a lower tax rate due to adjustments for overprovision. A final DPS of 19cts was announced, bringing full-year DPS to 26cts, ahead of our 25ct expectation.

FY07 operating revenue jumped 13.6% yoy to S$1.2bn. Core print media revenue grew 5.8% yoy to S$959m in FY07, underpinned by strength in classifieds (S$277m, +9% yoy) and display (S$395m, +6% yoy). Printed ad revenue growth accelerated in 2H07 (+11% yoy vs. 1H07’s 3.5% yoy) on the back of a robust domestic economy. Property revenue grew 80% yoy with the help of Sky@eleven’s maiden contribution of S$71.3m (slightly higher than our estimated 10% revenue recognition for FY07) and Paragon’s S$7.8m revenue growth.

Operating margins climbed to 37% (+200bp yoy) on higher contributions from the property segment. Core media operating margins remained stable at 35% as strong topline growth and flattish newsprint costs offset a 12.5% yoy rise in staff costs. Newsprint cost benefited from a weaker US$ and lower newsprint prices. Staff costs were higher on headcount growth and higher variable bonuses.

Raising earnings estimates on positive outlook. Print adex growth is firmly picking up on the back of Singapore’s economic growth. SPH is also benefiting from Sky@eleven contributions and robust rental growth at Paragon. This prompts us to raise our earnings estimates by 9-19% for FY08-09. We also introduce FY10 estimates. DPS estimates have been raised by 3-14% for FY08-09.

Reiterate Outperform, albeit with reduced target price of S$5.10 (S$5.22 previously). Our sum-of-the-parts valuation has been reduced slightly as we switch our valuation methodology for core media operations to DCF (WACC 7.5%, terminal growth 1%) from 16x CY07 P/E. As a laggard consumer stock profiting from Singapore’s economic upcycle, we believe SPH is poised to deliver strong earnings growth over the next few quarters. We like it as the best-in-class proxy for adex growth in Singapore and yields of 6-8% for FY08-10.

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