SPH – CIMB

Persistent cost pressures

Below; maintain Neutral. 2Q11 core net profit of S$78.4m was below our forecast and consensus, forming 19% of our FY11 estimate. 1H11 core net profit forms 45% of our full-year estimate. The variances came from higher-than-expected other operating expenses, as Clementi Mall only partially commenced in the quarter. Higher staff and newsprint costs also eroded margins in SPH’s print business. An interim dividend of 7 Scts was declared. We reduce our FY11-13 EPS estimates by 3-5%, factoring in higher opex and lower rental contributions from Clementi Mall. Accordingly, our SOP target price falls to S$4.29 from S$4.51. Maintain Neutral in view of continued cost pressures and increasingly remote accretive property acquisitions. SPH should, however, be supported by dividend yields of about 6%.

Cost pressures in print business. Excluding S$51.4m of revenue from Sky@eleven in 2Q10, operating revenue rose 7.7% yoy on stronger print ad and rentals. Margins were, however, hit by higher staff and newsprint costs. Staff costs rose 8% on salary increments and in the absence of the Jobs Credit scheme while newsprint costs surged 15% on higher charge-out rates (US$651/MT). Management expects newsprint prices to climb higher though the pace should moderate. Spot prices are just below US$700/MT. SPH will be covered up until Dec 11 and guides for an average charge-out of US$675/MT for FY11.

Clementi Mall yet to contribute fully. Clementi Mall (60% owned) is fully leased. However, with only two levels opened since mid-January, rent-free periods for some tenants and a mismatch with full financial charges and overheads, we believe Clementi Mall lost money in 2Q11. Management expects the mall to be fully operational in 4Q11 and guides for average monthly rentals of S$14 psf, a shade below our previous S$16 psf assumption. We thus lower our rental expectations and valuation of Clementi Mall. Paragon remains 100% occupied with rental income rising 13% yoy on higher rental rates. Management remains on the lookout for acquisitions of retail sites though we believe accretive purchases could become increasingly remote going by developers’ aggressive bids in recent site tenders.

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