SPH – CIMB

Tread carefully

We think it is still unclear if spinning off its prized property assets into a REIT creates shareholder value. This, coupled with the weak ad environment, suggests that the recent 10% run-up in the share price may be overly optimistic.

 

2QFY13’s earnings came in below expectations at 19% of our and consensus full-year estimates due to weaker-than-expected ad revenue. 1H13 formed 44%. We lower FY13-15 estimates by 5-9% but raise our SOP-based target price to reflect the appraised value of properties likely to be spun off into a REIT. Downgrade from Neutral to Underperform as we think the recent share price gains are unwarranted.

Weaker ad revenues drag down 2Q12

2Q’s ad revenues suffered as a consequence of the government’s cooling measure on both the car and property sectors. We think this situation is unlikely to change for the rest of the year. Property continued to do well, with Paragon registering a 5% increase in rentals. Both malls are 100% occupied.

REIT may not create value

We think it is unclear if there will be a special dividend. That depends on how much management decides to sell down. If management sells a large stake to the REIT, it will take away valuable property earnings when the media earnings are struggling. On the other hand, if SPH sells only a small stake, there might not be special dividends, and investors who bought in anticipation could be disappointed.

Optimistic share price

Our revised SOTP already capture Paragon (S$2.43bn) and Clementi Mall (S$598m) at SPH’s announced valuations. We estimate that these valuations are based on fairly aggressive cap rates of 4% when CMT and FCT’s retail malls are mostly valued at cap rates above 5%. A divestment into a REIT might not add more to our SOTP. Meanwhile, share price had re-rated well above our target price.

SPH – CIMB

Tread carefully

We think it is still unclear if spinning off its prized property assets into a REIT creates shareholder value. This, coupled with the weak ad environment, suggests that the recent 10% run-up in the share price may be overly optimistic.

 

2QFY13’s earnings came in below expectations at 19% of our and consensus full-year estimates due to weaker-than-expected ad revenue. 1H13 formed 44%. We lower FY13-15 estimates by 5-9% but raise our SOP-based target price to reflect the appraised value of properties likely to be spun off into a REIT. Downgrade from Neutral to Underperform as we think the recent share price gains are unwarranted.

Weaker ad revenues drag down 2Q12

2Q’s ad revenues suffered as a consequence of the government’s cooling measure on both the car and property sectors. We think this situation is unlikely to change for the rest of the year. Property continued to do well, with Paragon registering a 5% increase in rentals. Both malls are 100% occupied.

REIT may not create value

We think it is unclear if there will be a special dividend. That depends on how much management decides to sell down. If management sells a large stake to the REIT, it will take away valuable property earnings when the media earnings are struggling. On the other hand, if SPH sells only a small stake, there might not be special dividends, and investors who bought in anticipation could be disappointed.

Optimistic share price

Our revised SOTP already capture Paragon (S$2.43bn) and Clementi Mall (S$598m) at SPH’s announced valuations. We estimate that these valuations are based on fairly aggressive cap rates of 4% when CMT and FCT’s retail malls are mostly valued at cap rates above 5%. A divestment into a REIT might not add more to our SOTP. Meanwhile, share price had re-rated well above our target price.

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