SPH – CIMB

Still in good stead

• In line with our forecast but below consensus. 2Q09 net profit was S$87.0m (- 13% yoy) vs. our forecast of S$88.2m, accounting for 26% of our full-year estimate. While operating revenue was in line with our expectations, operating expenses were higher than expected on high newsprint costs. Net profit was within our expectation thanks to a lower-than-expected tax rate, as deferred tax benefits previously not recognised were utilised. SPH announced an interim dividend of 7cts/share, down from 8cts/share in 1H08.

• Operating revenue down 4% yoy. Newspaper & Magazine revenue, including print ad and circulation revenue, fell 14% yoy to S$204.6m. Property revenue rose 33% yoy to S$72.2m, boosted by S$16.3m from Sky@eleven, which is on track for a temporary occupation permit in 2010.

• Print ad revenue decline approaching previous recessionary levels. Led by a 26% fall in recruitment ad revenue, print ad revenue declined 18.8% yoy to S$145.9m, in line with our expectations. Circulation revenue rose marginally by S$1.5m, thanks to cover-price hikes. Our assumption of a 20% decline for print ad revenue – pegged to previous recessions – for FY09 remains unchanged. However, instead of a 4% decline in circulation revenue for FY09, we now project flat growth. There are also signs that adex is close to bottoming out. In Jan 09, AC Nielsen estimated that newspaper adex declined 23% yoy and 14% mom. However, the latest figures show that while newspaper adex fell by 3% mom in Feb 09, it only fell 1% yoy. As such, we are projecting a faster recovery for print ads in FY10-11.

• Investment income could beat expectations. We now forecast investment losses of S$40m (previously S$60m) for FY09, vs. the 1H09 loss of S$33m. There could be upside to our FY09 earnings estimate, if capital markets continue to rally in 2H09.

• Maintain Outperform. All in all, we have raised our FY09-11 earnings estimates by 6-12% on better-than-expected investment income and higher media earnings. Looking ahead, we believe SPH’s dominant position in newspaper advertising in Singapore will serve it well. While newsprint prices are unlikely to retreat in FY09, SPH guided for a moderation in charge-out rates in FY10. Maintain Outperform with a higher sum-of-the-parts target price of S$3.52 (from S$3.38) following our earnings upgrade.

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