Yields still attractive

• We believe that SPH’s core media earnings are less at risk from the recession than many Asian media stocks, since SPH controls more than 90% of newspaper advertising in Singapore. This mitigates the worst effects of competition in a recession. While industry adex is likely to contract, SPH’s newspaper advertising should benefit from trading down from television advertising. Classified revenue had fallen 6% yoy in the last results, but this was muted compared with most other companies. Retreating commodity prices are also positive for SPH, as newsprint costs are unlikely to rise further.

• Property recognition to shore up earnings; risks not overwhelming. Media earnings contraction is likely to be cushioned by profit recognition for the Sky@eleven residential development project, and Paragon. For Sky@eleven, buyers’ default risk is fairly low, in our opinion, even though SPH has allowed the Deferred Payment Scheme to be transferred to second buyers. For default risks to become real, selling prices would have to fall by more than 20% below the project’s launch price of S$975psf. For Paragon, we are already valuing this property at S$1.5bn, vs. SPH’s latest revaluation of S$2.0bn, in mid-2008.

• Forecasts reduced; sum-of-the-parts target price trimmed to S$4.01 from S$4.50. In view of the weak economic environment, we expect print ad revenue and investment income to decline. We have cut our earnings estimates by 12-14%. Nevertheless, maintain Outperform. We expect SPH to pay S$0.26-0.27/share in FY09-10, with yields of more than 8%.

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