SPH – UOBKH

1QFY08: Robust 10.2% advertising revenue growth

SPH reported a net profit of S$111.9m (+1%) for 1QFY08. Net profit was flat due to lower income from investments.

Of SPH’s 1Q08 pre-tax profit of S$135.4m (+0.2% yoy), the Newspaper & Magazine and Property segments contributed S$107.0m (+13% yoy) and S$25.2m (+92%) respectively. The Newspaper & magazine segment has made a roaring comeback since 3QFY07. 1QFY08 registered a strong newspaper advertising growth of 10.2%, contributed by 7.9% and 14.3% growth in display and classified ads respectively. 2HFY07’s strong advertising growth momentum was sustained into FY08.

The Property segment benefited from higher contribution from Paragon Shopping Mall and a full-year impact of Sky@eleven in FY08. The former contributed an increase in revenue of S$1.8m whereas the latter S$16.1m. However, SPH’s group PBT was dragged down by lower investment income of S$9.8m compared with S$29.7m previously. This was due to the fair valuation of investments being affected by recent volatility in financial markets. In addition, the previous year’s investment income was boosted by higher dividend income from MobileOne Ltd and profit from a capital reduction
exercise by Starhub Ltd.

On the cost side, newsprint cost declined 3% to S$29.4m in 1QFY08 compared with S$30.3m a year ago. Average newsprint charge-out price was US$587/tonne compared with US$602/tonne previously. However, staff cost rose 15% to S$78.6m due to a higher variable bonus provision in line with continued improved profitability of the newspaper business, increased headcount and annual salary increment. Other operating expenses of S$41.3m were up 13% with increased business activity and inclusion of costs for new subsidiaries.

We raise our print revenue growth assumptions from 5% p.a. for FY08, FY09 and FY10 to 8% for FY08 and 6% each for FY09 and FY10. However, we reduce our FY08 and FY09 net profit forecasts by 8% and 5% to S$513m and S$547m on lower investment income. Our FY10 forecast is relatively unchanged. Despite our reduced FY08 and FY09 earnings forecasts, we raise our target price from S$5.40 to S$5.60, premised on a revised SOP valuation of S$5.58/share, which factors in a higher valuation for SPH’s newspaper & Magazine business.

SPH is a good defensive stock in times of uncertainty. Its core fundamentals are now supported by a healthy AR growth, Paragon’s rising rentals on the back of rising rentals in prime shopping locations in Singapore, a full-year earnings contribution from Sky@eleven and a high annual net dividend yield of 6-7% p.a. Maintain BUY.

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