SPH – OCBC
Outperforms STI by 23%
Resilient in carnage. Singapore Press Holdings (SPH) has weathered the current financial storm in a better fashion than most of its STI peers. While the STI plunged 36.4% in Oct-Nov, SPH demonstrated resilience by falling only 13.5%, thus outperforming the STI by a credible 22.9%.
Growth looking more elusive. With Singapore falling into the deeper recesses of economic difficulties, we are expecting SPH to suffer in tandem as advert and classified revenues fall while costs edge upwards as it has to push through its new media development strategy. As a recap, SPH delivered 12.3% YoY topline growth to S$1.316b but PATMI still fell 12.4% YoY to S$437.4m. The topline was helped by a stronger recognition of the Sky@Eleven project while the poorer bottomline was due to less investment income and impairment charges.
Lowering expectations. In view of the challenging year ahead, we have lowered our estimates for its core printing business by 4%. While we understand that Paragon is a jewel in Orchard Road, we still lower our upward rental revisions for renewals to a similar level to FY08 to cater to the mounting difficulties faced by luxury goods retailers. We also anticipate a 10% cut in valuation for Paragon in its next exercise in Jun 09. The only foreseeable upside is SPH’s higher ecognition from its Sky@Eleven project for FY09.
Cash preservation mode. We specifically mentioned in our 13 Oct 08 report that while SPH has stepped up its dividend/share to S$0.27 for FY08, we feel that management sent a clear signal when it iterated that it does not have a dividend policy. With our latest earnings revisions, our last estimate of S$0.24/share is further cut to S$0.215/share. Our reason for the dividend cut is not based on the buyer default rates of the Sky@Eleven project but more a function of free cash flow. While SPH continues to recognize revenue via progressive construction stages, there is marginal real cash flow into the company. We expect TOP in 3Q2010 which implies that buyers have till then to obtain appropriate financing. Despite the cut, FY09 still gives a dividend yield of 6.1%.
Maintain BUY but lower valuation. While we have reduced our fair value to S$4.86 (prev. S$5.14) based on our SOTP valuation, we expect SPH to continue its outperformance in this down market. Maintain BUY.