Defensive yields intact

Core media operations remain sound. Adex remains healthy (12-month moving average of +8% yoy as at end-Apr 08) while newspapers continue to be the ad medium of choice in Singapore (adex share of 40% as at end-Apr 08). Core media operations should contribute 61% to FY08 earnings and 67% to SPH’s sum-of-theparts valuation.

Limited impact from higher newsprint costs. Newsprint accounts for 15% of SPH’s operating expense. SPH has fully hedged its newsprint cost at around US$600/MT till Oct 08. Our sensitivity analysis suggests a potential earnings impact of -5 to -7% for FY09-10 and valuation impact of -7cts/share (-1.3%), assuming newsprint costs of US$830/MT for FY09-10 vs. current assumptions of US$605/MT.

Positive on potential NBN investment. SPH has a 15% stake in the SingTel-led JV which is bidding for Singapore’s National Broadband Network. We believe SPH’s investment stake should be less than S$100m and the investment is likely to generate ROE of more than 20%.

Earnings adjustments. Our earnings estimates have been reduced by 2-11% for FY08-09 but raised by 7% for FY10 as we account for higher newsprint costs in FY2009-10 and push back earnings recognition of sky@eleven towards FY10.

Maintain Outperform with slightly lower sum-of-the-parts target price of S$5.13 (from S$5.20). SPH continues to offer investors defensive earnings and we believe risks-rewards are attractive at current valuations. The recent share-price weakness offers opportunities to accumulate SPH for recurring yields of more than 6.5%.

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