SPH – DMG

Sky@eleven fears debunked

Twin DPS fears over Sky@eleven unfounded; Maintain BUY. The market has been worried over the possibility of default over the deferred payment scheme as well as dividend payout beyond Sky@eleven. We believe that such fears are unfounded. The condominium project is a bonus to SPH, and following the project’s TOP, investors will continue to enjoy good yields. Maintain BUY with a SOTP-based price target of S$3.40.

Deferred payment scheme (DPS) to hit this year’s payout? The market is speculating that SPH may hold back on paying out the earnings from Sky@eleven till the money comes in upon TOP, dragging payout ratio down to 70% (90% in FY08). In our view, that is unlikely and we expect payout to be at 90%. SPH has stated that it will pay out a “high percentage of recurring earnings” and not cashflow. It has the capability to do so, given its healthy balance sheet (net gearing of 12%) and low capex requirements. We believe that default risk is low for the project, and have gotten even lower with the revival of the property market. CDL’s The Arte, which is also located in the Thomson area, saw keen interest and units were sold at an average of S$1,000 psf (S$975 psf for Sky@eleven). Should buyers default, SPH actually stands to benefit as it has already collected the first 20% as down payment.

Dividend per share (DPS) beyond Sky@eleven to dive? Contributions from Sky@eleven account for 30-35% of dividends over the next two years. In FY11, there will no longer be any contributions coming through from property development when the project TOPs. We believe that Paragon, which has seen its rental space expand 6% to 700k sq ft after its recent renovation, will partially make up for the vacuum. We have assumed a 10% average rental growth to S$14.9 psf/month by 2011, which we believe to be a conservative figure given the successful remaking of Orchard Road. This will raise rental from Paragon by 17% from FY08. Coupled with its core newspaper business, SPH should be able to dish out at least S$320m in dividends (or S$0.20 per share) post Sky@eleven, and more during good years. At current share price, this works out to a palatable yield of 6.3%.

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