SPH – DMG

Fall in newsprint cost boosted earnings

Net earnings rose 30%. SPH reported better-than-expected 2QFY10 net profit of S$113.3m (+30.2% YoY; -21.7% QoQ), with higher profits from its Sky@Eleven residential project, investment gains and lower newsprint cost being the key drivers. 1HFY10 net income of S$258m represents 61% of our full year forecast. We raise our advertising growth forecast from 1% to 7% and lower our newsprint cost assumption by 18%. We consequently raise our FY10 PATMI forecast by 11% to S$469m and our SOTP target price to S$3.95 from S$3.86. Maintain NEUTRAL as valuations appear fair. An interim dividend of 7¢/share was declared.

Newsprint rates expected to increase at a moderate level. SPH’s strong 1HFY10 PATMI was largely attributed to the steep fall in charge-out rates for newsprint, which fell 37% YoY to US$521/MT from US$827/MT. Management, however, cautioned that newsprint rates are likely to increase at a moderate level, going forward. We have factored a 12% rise in newsprint rates for FY11. We estimate every 10% increase in newsprint rates over our base case will reduce FY11 PATMI by 3.6%.

More on Sky@Eleven and Clementi Mall. To date, SPH has already recognised about 85% of Sky@Eleven revenue. TOP is expected within the next few months and the remaining revenue (~S$80m) will be recognized progressively over the next 12 months. HDB will handover Clementi mall in August and mall operations are slated to begin operations in 1H2011. Management was confident of leasing the entire mall as over 300 prospective tenants have indicated leasing interests. Management cautioned that the S$18/sqft rental assumption for Clementi Mall is not tenable based on current leasing transactions, but could be achieved in its first lease renewal (i.e. by 2014). We have factored a rental assumption of S$15/sqft into our model.

Trading at the higher range of its 10-15x P/E trading band. SPH trades at 15x FY11 P/E, in line with its 2005-08 average. Maintain NEUTRAL rating with target price of S$3.95. We believe SPH’s attractive FY10 yield of 6.7% would provide support against significant downside risk. Await better entry level.

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