SPH – CIMB

It’s different this time

Maintain Outperform. We have lowered our FY10-12 earnings estimates by 1-4% after factoring in a slower recovery in ad revenue because of a potential slowdown in Europe. Our sum-of-the-parts target price accordingly dips to S$4.43 from S$4.50. Nevertheless, maintain Outperform as SPH’s future earnings should be bolstered by a recovery in ad revenue, in line with Singapore’s improving economy, which we believe, will be held up by resilient Asian economies. We expect stock catalysts from better-than-expected ad demand and lower-than-expected newsprint costs.

Earnings risks mitigated by still-moderate newsprint prices. In 2008-09, SPH’s ad revenue was down 17% yoy. We expect a 5% recovery in ad revenue over 2010-11 from a low base a year ago. furthermore, newsprint prices are unlikely to hit the 2008 peak of US$700/MT because of an expected economic slowdown in the US and Europe. Also, SPH should benefit from US$ weakness as it print-ad revenue is booked in S$ but newsprint is paid in US$. Overall, with a lower cost base, we believe the impact of a potential slowdown on SPH’s earnings will be less muted than in previous recessions.

Defensive, with high dividend yields. For investors looking for defensive names, we recommend SPH for its: 1) near-monopoly of the print-ad industry in Singapore, making it a beneficiary of a domestic economic recovery; 2) print business which is well-positioned to benefit from a raft of events planned for Asia over the next few years; and 3) dividend yields of 6-7%, comparable to average S-REIT yields and higher than the yields of other large caps.

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