SPH – DBS

Results within expectations

2Q09 results came in 3% lower than our estimate but still within our expectations. This arose from lower revenue recognition at its Sky@Eleven project. As expected, ad revenues were down. Interim dividend of 7 cents was lower than last year. But, management indicated that there is no change to their target of maintaining a high payout ratio for full year. Current price has only c.10% total returns upside, after 25% increase since our upgrade. Downgrade to Hold.

2Q09’s operating profit down 15% y-o-y. 2Q09’s operating profit ended at S$99.4m. This is just 3% below our expected $102.5m, but still within our tolerance. The slight variance is largely due to lower revenue recognition from its property development project (Sky@Eleven). Total revenue for 2Q ended at S$287.2m, down 4% y-o-y. Staff costs were down 14% on lower bonus provisions.

Display and classified ads revenue fell 18% y-o-y in 2Q. Not surprisingly, display ads fell 15.9% y-o-y to S$82.8m. Classified ads revenue fell by a larger 26% y-o-y to $49.3m. Drop in both segments accelerated from 1Q09’s drop (c.4% and 17% y-o-y, respectively). We have assumed a 20% fall in ad revenues for FY09F.

Interim dividend of 7 cents, from 8 cents in 1H08. The cut in interim dividends to 7 cents arose from a lower operating profit. Management, however, indicated their target to maintain a high dividend payout ratio (80% to above 100% of operating profit). Our 20 cents DPS for FY09F is unchanged.

Downgrade to Hold; TP: $2.97. We adjust our TP up slightly as we now assume a lower newsprint costs of US$780/mt vs US$800/mt previously. The positive impact of this on our net profit is however offset by a higher interest expense on a higher debt level. Share price has appreciated by 25% since our upgrade on 13 Mar. This leaves only about 10% total returns upside (to our TP, including dividends). As such, we downgrade to Hold.

Risks. (i) Further significant and protracted deterioration of the economy; (ii) increase in newsprint costs; (iii) significantly lower dividend payout versus our expectations.

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