SPH – JPMorgan

1Q09 result preview – eyes on the top lines

1Q09 results preview: eyes on the top lines: SPH will announce its 1Q09 result on 12 Jan 09; our revised estimates for 1Q09 will be about S$100MM, subject to some swings from property development profit and investment income. Key things that we will watch for in the results include: 1) a potentially higher-than-expected newsprint charge-out price given SPH locked in the cost 6 months back during the peak, and 2) the magnitude of decline in revenue from core business, although we believe that 1Q09 revenue for the core business could be the highest of the year.

Operating leverage could magnify the decline in revenue: We estimate that more than 75% of SPH’s cost base is fixed, putting the group at a disadvantage given the operating leverage. We estimate that for every 10% drop in newspaper and magazine revenue, the group’s earnings from core publishing business would decline by about 19%. The lagging growth trend in newsprint price (by about 2 quarters) could also worsen the operating conditions for SPH, in 1H09 in particular.

Revising our earnings estimates downward: We revise our earnings estimates down by 9% and 11% for FY09E and FY10E on the back of lower revenue from newspaper and magazine. We also revise our dividend forecast down to S$0.22/share for both FY09E and FY10E from S$0.27/sh in 2008. Historically, amidst the recession in 2001 SPH has cut its special dividend payout, and we believe a cut this year is possible.

We reduce our Dec-09 price target to S$3.90, based on our SOTP valuation, and we maintain our OW rating. Key risks to our rating and price target include 1) lower than expected revenue from the core business, 2) lower than expected income from investment, and 3) a sudden drop in rental rate for Paragon.

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