SPH – CIMB

Still going strong

In line. 2QFY08 earnings of S$99.6m (-6.2% yoy) were led by strong advertising revenues (+11.4% yoy) and a S$17m earnings contribution from sky@eleven. The strong core performance was partially eclipsed by weaker-than-expected investment income (-48% qoq) due to weaker financial markets. 1HFY08 earnings have now met 40% of our full-year forecast and consensus (SPH’s second half is typically stronger). An interim dividend of 8.0 Scts/share (+1.0 Sct yoy) was announced.

Robust 18.9% yoy revenue growth. 2QFY08 core revenue (excluding sky@eleven’s S$24.2m contribution) grew 9.3% yoy, driven by strong advertising revenue (+11.4% yoy). This marked the fourth consecutive quarter of double-digit adex growth as SPH rode the tailwinds of a strong domestic economy. Property rental revenue grew 10% yoy as Paragon enjoyed rental reversions. Circulation revenue was flat (-1.1% yoy).

2QFY08 EBITDA margin expanded to 44.1% (+350bp yoy), benefiting from operating leverage at core operations and contributions from the higher-margin sky@eleven project. Robust topline growth helped SPH stay ahead of staff costs which rose 9.7% yoy on headcount increases and salary increments. SPH also benefited from weaker newsprint costs (US$575/tonne, -5% yoy) during the quarter.

No signs of weakness yet. The impact of slowing global growth has yet to bite into adex demand. SPH continues to benefit from a tight labour market, as can be seen in its strong classifieds performance (+15% yoy). We believe Singapore’s economy remains well-supported by an immigration boom, the rollout of two integrated resorts and Singapore’s rise as a key global destination for business and leisure travellers.

Reducing earnings estimate. Our FY08 earnings estimate has been trimmed by 5.5% to account for lower investment returns amid weakness in the financial markets and an intentional shift towards a more conservative portfolio.

Maintain Outperform and sum-of-the-parts target price of S$5.20. In view of heightened market risk aversion, we continue to expect SPH to outperform the index on reliable earnings from its print-media monopoly, revenue recognition of sky@eleven, exposure to Singapore’s adex growth and a solid CY08 dividend yield of over 7%.

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