SPH – DBS

Time to buy the daily

Upgrade to Buy. P/B at 1.8x is at lowest point in the last 20 years. Previous lowest P/B was 1.95x, in 1998. Wage cuts savings will mitigate fall in ad revenues. We believe SPH’s share price (-30% since Jan’09) has already factored in the weaker economic outlook. Dividend yield is attractive at >8%. TP: S$2.93 reflects a potential c.34% total returns upside.

Wage cuts savings… SPH will be cutting wages by 2%- 10% for 3,000 staff from 1 Apr. The savings from this and profit-related bonuses is an estimated 20% in wage bill for its core operations. Wages account for c.25% of revenue and c.40% of the Group’s costs. We view this as positive for the Group, to help mitigate fall in ad revenues.

Offsets drop in ad revenues. According to data from Nelsen Media Research, advertising revenues (AdEx) for the period from Sep’08 to Jan’09 fell by 10% y-o-y. In Jan, it fell by 25% y-o-y, deteriorating from a 14% y-o-y drop in Dec. We trimmed our ad revenue assumption and assumed a -20% yoy drop, from -15% previously. This offsets our estimated savings from the wage cuts.

Expect a weak 2Q. We expect SPH’s 2Q09 results to be weak on a c.20% fall in ad revenues, coupled with a high newsprint costs. However, we have taken this into account in our estimates. Current newsprint spot price is at c.US$680/mt versus our assumption of US$800 for FY09F.

Outlook priced in, lowest P/B in 20 years. We believe the current share price (-30% since Jan’09) has already priced in the weak economic outlook. Valuations are very attractive at 1.8x P/B with a dividend yield of >8%, based on our 20cents DPS assumption.

Upgrade to Buy. Our sum-of-parts derived target price is lowered to $2.93 (from $3.25) as we factor in lower RNAV for Paragon at S$1.69bn (based on a cap rate of 6%). We pegged our newspaper operations at 12x FY09F earnings, a premium to peers’ average, given SPH’s dominant position in Singapore. But, this is still lower than Star Publications’ PER of c.15x.

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