SPH – DBS

Get worse before getting better

1Q net profit dropped 32% to $73m due to loss in value of investment. Ad revenues dipped -7% in 1Q09, faster than our expectations. We cut FY09F earnings by -7% as we now assume a -15% drop in ad revenues for FY09F. We expect things to get worse before getting better. Downgrade to Hold, TP: S$3.25.

1Q net profit affected by investment income. SPH’s recurring profit of S$127.8m was within our expectations, which was helped by Sky@Eleven recognition and rental revenue. However, net profit fell to S$73m (-32% y-o-y) largely due to a S$33.7m loss on its investments.

Print ad revenues dropped faster than expected. Newspaper and Magazine division’s revenue dipped by – 4.6% due to lower print advertisement (-7.3% y-o-y), offset by higher circulation revenue (+4.3%). The drop in print advertisement was due to lower display (-3.8%) and classifieds revenue (-17.2%). Higher newsprint costs (+21%) put further pressure on the division. Average charge-out rate rose 31.5% to US$772/mt (vs. US$587/mt in 1Q08).

Cut EPS by -7% (FY09F) and -3% (FY10F). With the deteriorating outlook, the drop in ad revenues looks likely to accelerate in subsequent quarters. We now assume ad revenues to drop 15% in FY09F. This should be offset by lower newsprint, staff and operating costs as the fiscal year progresses. We cut our EPS by -7% and -3% for FY09F and FY10F respectively. We also expect lower dividends of 24 cents versus 27 cents previously in view of the weaker outlook.

Downgrade to Hold; things could get worse before getting better. 1Q is traditionally a strong quarter for print ad revenues. With a slow start and expectations that things could get worse, we downgrade to Hold. Our sumof- parts derived TP is now S$3.25, based on 12x FY09F EPS (from 16x) for its newspaper operations, in line with peers and on more challenging outlook. We believe share price should be supported by its relatively attractive net dividend yield of c.8%.

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