SPH – Kim Eng

Unprecedented Value

Core media business below historical low
We are revising our ad revenue growth assumption to -20.0% from 3.0% given the negative GDP outlook. Historically, ad revenue growth underperforms GDP growth in a market down cycle. In 2002, ad revenue declined 19.8% yoy. Overall revenue is estimated to fall by 1.6% in FY09F, mitigated by the contribution from Sky@Eleven. At 11.8x forward PER, SPH is now trading at its trough valuation. Our implied valuation of the core media business shows a trading PER of 10.6x, which is below the previous low of 11.8x over the last 10 years of trading.

Cutting cost to counter recession
We have reduced our FY09F staff cost estimates by 29% following the cost cutting instituted by the management, with employees’ variable wage component at about 10%. FY09F net profit estimate is reduced to $424.3m, representing a 2.8% decline yoy. The impact of changes to estimates are a lower DPS of 23.8 cts for FY09F and 22.2 cts for FY10F, translating to a yield of 7.6% and 7.1%, respectively. The estimates are based on 90% payout from both media and development income.

Free cash flow to support payout
We expect free cash flow of $408m in FY09F and this should support the dividend payout of $380m. SPH is in a net cash position of $280m as at Aug’08, with $1.1b in investible funds. An additional $150m three-year loan inked recently may be deployed for overseas media joint ventures.

Dividend track record a key attribute
SPH remains one of our most defensive pick, as the company rewards shareholders with dividends even in bad times. Assuming 90% payout of recurring earnings, we are projecting a normalized yield of 5.2% (excluding payout from Sky@Eleven), which depicts more sustainable dividend profile as contribution from property development will cease from FY11.

Lower core media business valuation impacts SOTP target price
Our new SOTP target price of $4.48 is derived from the lower DCF valuation of the core media business of $2.96 (7.4% WACC and 2% terminal growth rate) and further assuming a 10% mark down on investments given the uncertain equity market. Our valuation assumption of $2b for Paragon remains intact as we believe that the opening of competing up-market shopping malls along Orchard Road in 2009 may raise the profile of surrounding properties and lend support to valuation. There is a 43% price upside to the new target price. Maintain Buy.

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