SPH – CIMB

Downside risks

While SPH’s 6% yields are fairly attractive, we see downside with streetyet to factor in a sufficient falloff in ad growth momentum and investment income. Balance sheet is however strong, which coupled with recurring cash flows, could prompt us to revisit the stock.

FY11 core profit was in line at 102% of our estimate though final dividend of 17scts beat our expectations on a higher payout. We are however lowering our EPS estimates on reduced ad revenue forecast and investment income. Coupled with lower property valuations, we lower our sum-of-parts target price to S$3.90 from S$4.24. Maintain Neutral.

Falloff in ad growth momentum imminent

While print revenue chalked up a modest 5.7% yoy growth in FY11 on stronger display ad sales, we see downside for growth momentum next year amidst a slowing domestic economy. Print revenue fell by 17% in the last downturn. With slowdown in economic growth next year, we moderate our FY12 print revenue growth estimate to +2%.

Reprieve from moderating cost pressures

Cost pressures could alleviate, given a variable performance component in staff cost and a moderation in newsprint costs (spot: US$680/MT). These could offer some reprieve should top-line growth fall.

Risks from investment portfolio

FY11 earnings were propped up partly by a 28% increase in investment income. With equities (mainly M1 and Starhub holdings) and investment funds (some S-REIT holdings) accounting for 33% and 25% of its investible funds, downside risks could prevail on a deep market correction.

Revisit at lower valuations

While dividend yields of 6% are fairly attractive, we see downside in ad growth, investment and property portfolio. We are lowering our valuations of Paragon and Clementi Mall. Balance sheet is however strong, which coupled with recurring cash flows, could prompt us to revisit the stock at lower valuations.

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