SPH – DBS

Riding on economic recovery

• 9M09 advertising revenues fell YoY (-17%) but expect sequential improvement
• Latest Paragon valuation at $1.98bn, wide margin vs the $1.5bn we imputed in our sum-of-parts TP
• Expect performance to ride on economic recovery
• Reiterate Buy, SOP TP: S$$3.68

3Q09 ad revenues – no surprises. Headline revenue ($327m, -5% yoy) and operating profit ($137m, -2% yoy) were within expectations. At its newspaper division, classifieds revenue dropped slightly more than expected on lower job ads ($55.9m, -30% yoy), but display ads revenue ($90.3m, -17% yoy) was within expectations. Newsprint charge-out rate remains high at US$779/mt (+32% yoy), but down -6% from 2Q’s US$827/mt. We expect newsprint
charge-out rate to trend down further in 4Q.

Property the star. Property division helped prop up operating revenue, with revenue recognition from Sky@Eleven ($64m, +69% yoy) and Paragon’s rental ($30m, +3% yoy). Occupancy at Paragon remains at 98%, while Sky@Eleven is on track for TOP by 2010.

Paragon latest valuation at $1.98bn. This is 4% below the last valuation of $2.07bn done in Jul 08. However, it is still more than 30% higher than the $1.5bn estimate we have imputed in our sum-of-parts target price, implying a huge margin of safety.

Riding on economic recovery. DBS Group economist recently revised up his Singapore GDP forecasts for ’09 to -5.5%, from -6.6% previously. We maintain our view that we should see sequential improvement in the Group’s advertising revenues on the back of the economic recovery.

Buy, TP at S$3.68. Our operating profit forecasts remain intact, but we trimmed FY09F earnings down by 8% as we adjust for a lower return on its investment. We reiterate our Buy recommendation and SOP TP at S$3.68, on our view that the worst is over. Dividend yield at 6.2% also looks reasonable on our conservative DPS assumption of 20cents. Our TP would have been S$3.97, if we peg our TP to Paragon’s latest valuation of $1.98bn.

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