SPH – DMG

Valuations do not appear attractive

Expecting lower contributions from property; Downgrade to NEUTRAL. While SPH had turned in a set of better-than-expected results, we believe that contributions from the property front may decline in FY10 and FY11. Although this may be negated from the improving outlook seen in the core printing segment, valuations do appear fair. Downgrade to NEUTRAL with target price of S$3.86 (from S$3.59 previously) based on SOTP valuations.

Better than forecasted. While FY09 revenue was flat at S$1,301.4m and net profit declined by 3.6% to S$421.9m, this nonetheless exceeded our expectations (top and bottomline at S$1,293.6m and S$370.4m respectively) and had beaten market consensus (top and bottomline at S$1,284.5m and S$384.9m respectively). Reasons for the discrepancy are larger-thanexpected fall in newsprint costs to US$612 per tonne in 4QFY09 (we were gunning for US$700 per tonne) and the absence of the S$26.7m impairment charge that was previously seen in FY08. On a quarterly basis, SPH’s 4QFY09 revenue was S$346.9m (-12.7% YoY, +6.1% QoQ) while net profit was S$135.2m (+46.2% YoY, +6.7% QoQ).

Printing segment to improve. Revenue from ads are forecasted to pick up sequentially as the economy recovers while newsprint costs are expected to be lower on a YoY basis (see Figure 1), thus resulting in higher margins. Nevertheless, as we believe that the bulk of the revenue recognition has already been accounted for the Sky@eleven project during FY08 and FY09, we are expecting lower overall Group revenue in FY10.

Valuations appear fairly priced. At S$3.88, SPH is trading at 14.9x FY10 P/E which is inline with its 6-yr historical average (see Figure 2). Moreover, the Sky@eleven project is also slated to cease earnings contributions in FY11 after it has been completed, thus lowering profitability and dividends for the Group. On the bright side, we have raised our valuations for SPH’s core media business to 14x forward P/E from 12x given its improving outlook – our target price is thus accordingly raised to S$3.86 based on our SOTP valuations. Downgrade to NEUTRAL given the impending downside.

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