SPH – CIMB

Deflated dividend expectations

SPH’s FY13 dividends could fall short of FY12’s 24 cents due to weak ad revenue and the loss of 30% of its property earnings. But one should not be negative on SPH as the S$757m raised from SPH REIT should compensate if management successfully develops new retail malls.

We reduce FY13-15 EPS by 2-13% for weaker ad revenues and the 30% fall in property earnings following the injection of two assets into the REIT. SPH remains a Neutral as potential dividend headwinds are balanced by S$757m cash proceeds that management is looking to deploy. Our SOP target price falls due to the payout of the 18 ct special dividend and a lower value for the core media operations after the EPS cuts.

Regular dividends may be lower than FY12’s 24 cents

We think there is a strong possibility that FY13-14 dividends (excluding 18cts special dividend) could be cut if management does not raise the payout ratio. FY13 core earnings are likely to come in around 13% lower than FY12 because of weak advertising revenues. 9M13 is already 13% lower yoy and it is unlikely that the seasonally weak 4Q13 can make up for the shortfall.

Even if the climate for advertisers picks up in FY14, it may not be able to offset the fall in earnings from the loss of 30% property income to SPH REIT. Furthermore, interest expense is set to rise as the overall cost of borrowing increases after the REIT transaction. The debt taken on at SPH REIT costs 2.4% and is estimated to increase SPH’s overall funding cost from 2.1% to 2.3%.

S$757m war chest

Dividend headwinds are tempered by the large cash pile that management raised from SPH REIT. It will presumably use the cash to develop new retail malls, which management has a good track record in. Paragon achieved 7% rental CAGR in FY03-12. Furthermore, having a platform to recycle capital allows SPH to bid more aggressively for land sites, knowing that it has a ready buyer.

Staying Neutral

We are keeping our Neutral call. SPH still offers 5.1% yield even if dividends are cut to 21 cents. This compares favourably with FCT’s 6.1% and CMT’s 4.9%, with the added kicker of S$757m of net cash proceeds raised) for SPH compared
to 0.4x net gearing for FCT and CMT.

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