SPH – Kim Eng

Laggard has legs to run
SPH gained 12.1% over the last three months but still underperformed the market by 25.1%. This laggard is closing the gap as the market sees the “green shoots” of an economic recovery. Print ad revenue to-date declined only 12.7% yoy compared to our full-year assumption of a 25% decline. Hence, our earnings estimates have a good potential for upside should the signs of recovery continue into 2H09.

Early signs of recovery in recruitment
The average page count in May for the Saturday editions of The Straits Times showed a robust m-o-m recovery. We also observed an improvement in job ads volume. However, we note that the pick-up is attributable to 2Q and 3Q being seasonally busier hiring periods. Job ads volume, being the key driver of Classified and a leading indicator of Display ad demand, provide insights on the outlook of SPH. Job ads data in the coming months is therefore crucial.

Improving sentiments tell of more news ad demand to come
The recent optimism in the property market is reflected in the Classified as more property ads have surfaced, and big, coloured Display property ads are increasingly being placed. There is hope for more Display property ads to boost revenue as an increasing number of developers are reportedly preparing to launch new projects in view of the positive sentiments in the property market.

Investible fund could get a boost from the rally
The improvement in the performance of the capital markets in the last three months, if it continues, will benefit SPH’s bottomline as its $0.9b investible fund still has sizable exposures to equities (30.6%), bonds (20%) and investment funds (12.5%). The remaining 36.9% is held in cash and deposits.

Dividend yield remains intact; maintain Buy
Our SOTP target price is raised to $3.46, reflecting a lower equity risk premium for its core media business. Our earnings estimates remain intact. At an implied PER valuation of 12.4x, the core media business is still trading close to its ten-year trough. We maintain Buy, based on a potential price upside of 11.6% and dividend yield of 7.2%.

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