Investment gain boosted earnings

SPH reported 1QFY10 results, net profit of S$144.7m, up 98.2% YoY (+7.1% QoQ) as a result of the S$10.2m mark-to-market gain from investment, compared to the S$33.7m loss registered in 1QFY09. Stripping out the fluctuation from investment income, recurring income would have risen by
24.7% YoY. Maintain NEUTRAL as valuations appear fair. We derive a target price of S$3.86 based on SOTP valuation.

Recovery in core publishing business? SPH’s newspaper and magazine revenue fell 2.5% YoY as a result of falling advertisement revenue (-3.1% YoY). Circulation revenue also fell by a marginal 1.1% in line with lower circulation copies sold. We, however, believe the partial restoration of pay cuts is a signal of management’s confidence of an earnings recovery in its core publishing business. Management has indicated signs of a gradual recovery and expects advertisement revenue to improve in tandem with the underlying economy.

Cost set to increase following wage restoration. Whilst advertisement revenue is expected to rebound in 2010, we expect an increase in the group’s operating expenses, in particular staff cost, which is projected to increase by 6.3% in FY10. We estimate every 10% increase in staff costs will decrease the group’s earnings by 6%.

Trading at the higher range of its 10-15x P/E trading band. SPH currently trades at 13.9x FY10 P/E, in line with its 2005-08 average. Maintain NEUTRAL rating on SPH with target price of S$3.86. We believe SPH’s attractive FY10 yield of 6.5% would provide support against significant downside risk. We recommend investors to await better entry level.

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