SPH – DB

1Q10 exceeds expectations; reiterate Buy

Strong 1Q10 ahead of expectations; reiterate Buy
SPH reported S$145m 1Q10 net profit, significantly ahead of DBe (S$120-125m) and consensus. While 1Q10 revs were generally in-line with DB estimates, the 51.3% 1Q10 EBITDA margin exceeded our expectations largely on lower-thanexpected newsprint costs. Elsewhere, Sky@eleven is on track for 2010 completion while Clementi Mall is expected to be operational in 1H11. We remain positive on SPH given the expected sharp 2010 adex market rebound. In addition, given the strong 1Q10 results and 17% potential upside to our S$4.30 TP, maintain Buy.

Robust performance underpinned by adex recovery and opex savings
SPH’s 1Q10 revs +4% YoY to S$354m and represented 26% of DB10e. Although ad revs were down 3% YoY, they surged 19% QoQ on strong adex market recovery and the S$182m 1Q10 ad revs were in-line with our expectations. Rental income -3% YoY to S$29m, but SPH expects to maintain near 100% Paragon occupancy going forward. Sky@eleven revs recognized-to-date reached S$522m. 1Q10 EBITDA +21% YoY to a S$182m 6-year high as materials, consumables and broadcasting costs -29% YoY (1Q10 newsprint charge-out price -31% YoY to US$531), and core print EBITDA margin reached a 38.9% recent high.

Net profit +98% YoY on margin improvement and higher investment income
SPH booked S$10m 1Q10 investment income vs 1Q09’s S$34m investment loss. This, along with the margin improvement, drove a 98% increase in 1Q10 net profit to S$145m. Cash and deposit’s share of investible funds grew to 37% (vs 4Q09’s 30%) as SPH continued to adopt a “conservative stance” in asset allocation.

Maintain Buy with SOTP-derived S$4.30 target price; risks include adex
Our SOTP TP for SPH is S$4.30. We value the core media business using DCF (6.6% WACC & 1% g), Paragon at discount to book value, M1 at DB TP and investments as at end 4Q09. Key downside risks include adex volatility, economic growth, Sky@eleven construction progress and SPH’s investment income.

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