SPH – DBS

A safe haven in uncertain times

Story: 3Q08 earnings were in line with expectations, as EBIT rose by 25% yoy to S$140m on revenue growth of 20% yoy to S$344m. YTD, EBIT is up by 25% yoy to S$388m on top line growth of 18% yoy to S$955m. PBT contribution from the Group’s publishing business was flat in 3Q08 due to higher staff costs but for 9M08, is up by 11% yoy, driven by an 8% increase in display and classified revenues. PBT contribution from the property segment grew by 155% yoy to S$103m as at 9M08, as the development of Sky@Eleven progressed. Meanwhile, treasury and investments saw a substantial decline of 71% yoy but is still ahead of our conservative forecasts.

Point: The Group is on track to meet our full year EBIT growth projection of 23% and whilst we are expecting a slow down in the next 1 or 2 quarters, we remain positive on Singapore’s longer-term growth (DBS Economics is forecasting 6.8% GDP growth in 2009). Even in the event that we are overly optimistic, SPH’s earnings are highly defensive given its monopoly on the publishing sector in Singapore and ownership of a premium retail asset like Paragon. The additional contribution from Sky@Eleven over the next 2 years will also help buffer any earnings downside risk for the Group.

Relevance: We continue to like SPH for its attractive valuation and as a defensive stock, backed by a net yield of >7.5% (premised on 90% payout of EBIT; in line with last 6 years), and re-iterate our BUY call. We have adjusted our sum-of-the-parts target price to S$5.75, as we have raised our forward valuation for Paragon to S$2.1bn (cap rate of 4.5%). The latest valuation for Paragon is S$2bn.

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