SPH – DMG

Strong advertisement revenue boosted earnings

Net earnings rose 30% YoY in 3QFY10. SPH reported better-than-expected 3QFY10 PATMI of S$164.6m (+29.9% YoY; +45.2% QoQ), with higher contributions from its newspaper and magazine segment (+20%) due largely to higher print advertisement revenue (+28%); as well as higher revenue from the property segment (+43%) on the back of higher revenue from Sky@Eleven and Paragon. 9MFY10 net income of S$423m represents 90% of our full year forecast. Paragon’s S$300m revaluation gain works out to an S$0.18 per share increase in its RNAV. We consequently raise our SOTP target price to S$4.31 from S$3.95. Maintain NEUTRAL as valuations appear fair.

Newsprint rates expected to increase at a moderate level. SPH’s strong 3QFY10 PATMI was also attributed to the steep fall in charge-out rates for newsprint, which fell 32% YoY to US$529/MT from US$779/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%. Staff costs rose 17% on higher bonus provision and lower government jobs credit grant.

Paragon gains 14% in value. SPH announced the revaluation of its Paragon building to S$2.28bn (S$3,254/sqft), up 14% from S$1.98bn (S$2,852/sqft). No details pertaining the revaluation methodology was revealed. However, the S$300m revaluation gain translates to an S$0.18 per share increase in its RNAV. Paragon is valued at cost on its books at S$1.17bn.

Maintain NEUTRAL, new TP of S$4.31. We raise our FY10 earnings forecast by 16% to S$545m to account for higher advertising revenue and lower newsprint costs. Maintain NEUTRAL rating. SPH trades at 13.8x FY11 P/E multiple, at its mid-range of 10-15x trading band. We believe SPH’s attractive FY10 yield of 7.8% would provide support against significant downside risk.

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