SPH – DBS
Press is set to spin
• SPH’s valuation premium vs STI narrowed to 8%, vs average of 34% since 1997;
• Implied newspaper ops undervalued by market at 12x PER, -2 std deviation below average;
• Worst fall for newspaper ads seem to be over; Apr down by 9% yoy vs Jan’s drop of c.25%;
• Upgrade to Buy, TP raised to S$3.70.
Newspaper ops valuation should normalise. SPH’s PE valuation to STI has narrowed to 8%, significantly below 10-year average of 34%. Newspaper operations implied PE is now at 12x, -2 standard deviation from its average. We think the market has under valued it; and, this should trend up towards normalized levels (20x PER) as the economy recovers.
Worst fall in AdEx seems over. AdEx fell sharply during past 2 recessions. But, they also recovered shortly thereafter. Latest data from Nielsen media research shows April’s AdEx for newspaper display and classified ads fell by 9%, significantly better than the 25% y-o-y fall in Jan. We also noted that recent pagination for The Straits Times (Saturday edition) is hovering above 210-odd pages, up from Jan’s 100-plus pages.
Lowered newsprint costs. Newsprint spot price is at around US$550/mt. We lowered our average newsprint charge-out rate to US$760/mt for FY09F and US$580/mt for FY10F.
Paragon valuation out soon. The independent valuation for Paragon should be released in mid-Jun. We expect it to stay above our RNAV estimate of S$1.5bn. There should also be nominal defaults at its development property project (Sky@Eleven), in view of the up tick in transactions and stable prices.
Upgrade to Buy, SOP TP raised to S$3.70. We upgrade our recommendation to Buy, from Hold as we believe the worst fall in AdEx is over. We believe valuations should normalize, and we peg our newspaper operations to 16x FY10F earnings, -1 std dev. of its average (20x).