SPH – OCBC

Unexpected investment losses, downgrade to HOLD

Sep-Nov stock market carnage hits SPH. Singapore Press Holdings (SPH) announced its 1Q09 results yesterday with topline growing by 9% YoY to S$343m while PATMI took a 35% YoY nose dive to S$73m. The poor bottomline showing was primarily due to a S$33.7m investment loss (first since 1Q03) as SPH suffered significant Mark-to-Market (MTM) losses on its investment portfolio. While this is non cash in nature, our initial assumption of positive contribution from its investments have been significantly negated. Stripping out the effects of investments, SPH managed a credible flat pre-tax performance of S$127.8m despite rising costs and slowing core print revenue.

External funds under management were hit. While we do not have granularity of its 1Q09 investments, details from its FY08 Annual Report indicated that 35% of its short-term investments were subjected to MTM gains/losses on the income statement. These investments were externally managed funds that were invested in a broad spectrum of bonds and equities that suffered mark downs during the Sep-Nov 08 stock market crash.

Sentiments on print earnings getting heavier. SPH’s print advert revenue has declined but at a greater magnitude than we had expected. We now forecast a 2.5% (prev. 1.6%) fall in FY09F print revenue, as management notes that the Company’s advertising revenue will continue to be affected by the downturn. We remain hopeful that the traditionally stronger advertising efforts during the Dec 08 and Jun 09 sales season may mitigate a free fall in this segment’s revenue.

Earnings revision. While our topline estimates are buffered by Sky@Eleven’s recognition, we have to lower our FY09F bottomline by 14% due to the MTM losses incurred. Dividends are expected to hold at S$0.215/ share (7.1% yield) for FY09F.

Valuation metric change. We have swapped the use of DCF valuation for its core operations with a PER-based one as we think that sentiments of its core print earnings will drive its valuation as compared to a DCFbased approach. As such, we peg its FY09F core ops EBIT at 16x FY09F, a premium when compared to its peers in view of its stronger margins. Our SOTP fair value is moderated to S$3.13 (prev. S$4.86) and we downgrade to HOLD. With our revised forecasts, SPH is trading at 14x PER, above its trough valuation of 12x (12-28x between 2001 and 2008). We will turn buyers at S$2.60-S$2.65 when FY09F PER is ~12x.

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