SPH – OCBC

RESILIENT RETAIL MALLS

Retail rentals to be relatively resilient

Growth in retail landlord segment

Further pressure on ad revenues likely

Resilient retail mall landlord business

In the face of an increasingly uncertain macro environment, we expect SPH’s retail landlord business to provide a stable counterweight to its core print business which is expected to face pressure from dipping ad demand. The retail business, comprising of the Paragon and the Clementi Mall, contributed S$47.9m of profits before tax (PBT) in 1HFY12, making up a respectable 22% of total PBT. Given the limited retail pipeline in the Orchard area over FY12-13 (est. 543k sq ft net floor area), we expect rentals at the Paragon to stay relatively resilient. In addition, we expect the strategic location of the Clementi Mall, now fully leased, at Clementi MRT station and strong foot traffic of 60k daily to underpin rental levels.

Expect growth in retail mall segment

Going forward, SPH’s retail landlord business is set to grow with the expected completion of the Sengkang commercial development by 2016. Won in a tender in Jan 2012 for S$328m, the 99-year Sengkang site is expected to yield a retail mall with ~284k sq ft GFA which would add another suburban mall similar to the size of Clementi Mall into SPH’s retail portfolio. We also believe that SPH’s 70:30 partnership with UEL would create considerable synergy between UEL’s property development experience and SPH’s mall management capabilities. Moreover, with group investible funds at S$0.9b as of end Mar 2012, we believe there is sufficient capacity for SPH to allocate additional capital into its retail strategy ahead.

Maintain BUY at unchanged S$4.05 fair value estimate

For the current fiscal year, however, we expect to see sustained downward pressure on SPH’s core print advertisement and circulation business as demand softens in an increasingly uncertain macro environment. In 1HFY12, we saw newspaper ad revenue dip 2.3%, driven mostly by falling classified ad demand which fell 6.5%. On the other hand, newsprint costs are expected to stay relatively stable ahead and we believe SPH has some flexibility in managing staff costs should the top-line weaken further. Maintain BUY with an unchanged fair value estimate of S$4.05.

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