SPH – DBS

Positioning for stronger pick-up

• 1Q10 net profit doubled to S$144.7m on property development, lower newsprint and investment
income; within expectations
• Ad revenues to gather momentum on activities ahead – IR, property launches, recruitment
• Overpayment for Clementi Mall is already priced in
• Upgrade to Buy, TP: S$4.33 (25% total return upside)

1Q10 earnings doubled, within expectations. SPH’s 1Q10 revenue grew by 4% yoy to S$354m driven by recognition of Sky@Eleven, but offset by a 2.5% drop from its Newspaper & Magazine operations. EBIT grew to S$164.7m (+24% yoy, +S$31.8m) contributed largely by property development’s EBIT at S$50.3m (+38% yoy, +S$14m) and lower newsprint chargeout costs at S$22.1m (-38% yoy, -S$13.6m). Net profit surged 98% yoy to S$144.7m largely due to the absence of a S$33.7m investment loss recorded in 1Q09, versus S$10.2m gain in 1Q10.

Ad revenue still down but expect improvement. Although total ad revenue dipped 3.1% yoy to S$182.4m in 1Q10, this was an improvement over 4Q09’s 18.4% yoy drop. Display ads growth turned positive at 2% yoy, not seen since 4Q08. We are now assuming a stronger growth for ad revenues (+8%, vs 4% previously) on expectations that ad revenues will be stronger sequentially on the opening of both IRs, pick up in property launches and employment market. As such, we revised our forecasts up by 3-6%.

Clementi Mall “hiccup” priced in. While we feel SPH has overpaid for Clementi Mall, the market has already priced that in after a knee-jerk reaction to its share price. A write-down in future is possible but impact should be minimal at c.6 Scents per share based on our estimates.

Upgrade to Buy, TP revised to S$4.33. We revised up our TP to S$4.33 (from S$4.00) factoring in higher earnings assumption and as we adjust our sum-of-parts valuation to factor in a potential write-down of Clementi Mall (S$95.9m or S$0.06/share) instead of a 5% discount. Dividend yield at an attractive 6.8% (based on our DPS forecast of 25 Scents) should provide a good support to share price.

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