SPH – JPM

Pressure on SPH’s earnings, but valuations should pull through

Could there be repercussions from not reigning in DPS? We examine the risk of default at the Sky@Eleven property project given that recent sub-sale transactions have started to fall below the original average selling price of S$975psf. Most of the unit sales have been on a Deferred Payment Scheme (DPS) basis and from what we understand, none have been converted to progress payments, hence financing could become difficult later if asset prices fall at an unprecedented rate.

Defaults would hit FY10E earnings but not SOP: If defaults arise when the Temporary Occupation Permit (TOP) is issued in 2010, we do see a significant hit to our FY10 estimates as SPH will have to write back earnings recognized before that point. However, we do not expect a significant impact to our Jun-09 SOP-based S$4.65 PT as the NPV of the project currently accounts for only 7% of our SOP. The bulk of value in SPH is still the publishing business at 60% of the SOP based on a historically resilient 12x trailing P/E. The Paragon mall supports 28% of SOP. Risk to our PT is a perceived de-rating in the publishing business in the form of lower circulation rates; SPH has differentiated itself from Western media which has succumbed to growth of the internet platform.

The biggest hit from Sky@Eleven defaults would be on dividends: If anagement decides not to pay out the related property development earnings on perceived risk of defaults, dividends could be cut by as much as 10 cents per share, or 36%, in FY09 and FY10. A lower dividend yield could affect the stock’s ongoing outperformance. However, we believe it is too early to make such a call as the risk of DPS defaults, if any, will be marginal, in our view. Based on sub-sale transactions to date a substantial amount of capital has been committed by investors in Sky@Eleven and the fact that transactions have not ground to a halt and are taking place at lower levels, suggests there is the propensity for the speculation to clear.

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