SPH – DBS

Pressing on in uncertain times

Story: SPH’s FY08 net profit ended at S$437m, down 12% from FY07, largely due to a 67% drop in investment income, but mitigated slightly by a strong operating profit, which grew 16% – due to its newspaper/magazines and property divisions. Revenue was up by 12.1% to S$1.3bn on higher contributions from all business segments. Excluding an impairment charge of S$26.5m on investment in an associate company, SPH’s FY08 earnings would have been in line with our expectations.

Point: With the recent global economic events, while we expect its newspaper operations to be affected by slower print ad revenues and higher newsprint costs, this should be offset by the progressive recognition of its development property project – Sky@Eleven. We have assumed US$850/mt for newsprint costs in our model. Upside could come from lower newsprint costs as a result of lower global commodity prices. DBS economists revised Singapore’s ’09 GDP growth forecast down to 2.6% from 4.6%.

In line with this, we have also revised our AdEx growth assumption down to –2%, from a flat growth previously. As such, we trimmed our net profit down by 1.7% – 1.9% for FY09F – 10F. Our sensitivity analysis shows that at the last traded price of S$3.50, it is pricing in a c.18% drop in AdEx, assuming other factors constant.

Relevance: Buy, TP: S$4.25. Maintain Buy, TP adjusted down to S$4.25 based on sum-of-parts due to lower newspaper earnings and pegging a lower valuation for Paragon. While the economic outlook seems challenging with Singapore slipping into technical recession and the recent plunge in equities, we believe SPH should be relatively resilient given its defensive newspaper operations, diversified businesses and strong balance sheet.

Risks include sharper than expected drop in print ad revenues, continued surge in newsprint costs, and higher USD/SGD exchange rate.

Declared a dividend of 19 cents (9 cents final; 10 cents special). Coupled with interim dividend of 8 cents, total dividend for the year is 27 cents, amounting to 86% of recurring profit.

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