SPH – DBS

Core business going strong

Story: SPH reported a good set of operating results as at 1H08, which helped to offset poorer investment income. 1H08 PBT for the core newsprint and magazine business rose by 16% yoy to S$191m, boosted by double-digit ad revenue growth whilst PBT for Treasury and Investment dropped by 76% yoy to S$14.5m, due to a lack of special dividends and a poor equities market. Stronger contribution from the property segment, boosted by contribution from Sky@Eleven also helped offset lower investment income. As at halftime, net earnings for the Group declined by 2% yoy to S$212m. An S 8cts dividend was declared, vs S 7 cts a year ago.

Point: SPH continues to benefit from strong consumer sentiment in Singapore, as evidenced by the double-digit growth in ad spend in 2Q08 and we believe the Group can post double digit earnings growth for the full year for this business even with a slower second half. Meanwhile, we have lowered our investment income projections for FY08 and FY09 and also factored in a delay in construction for Sky@Eleven, which has been affected somewhat by a shortage in manpower and bad weather. These changes have not impacted our sum-of-the-parts valuation for SPH.

Relevance: We continue to like SPH for its attractive valuation and as a defensive stock, backed by a net yield of 7.2% (premised on 90% payout of EBIT; in line with last 6 years), and re-iterate our BUY call. Our 12-month target price is S$5.80, based on SOTP valuation.

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