Violation of key support suggests further downside in the near term

– SPH could see more downside pressure in the days ahead following the breach of the lower boundary of the 3-month uptrend channel and the key resistance-turned-support level of $3.10 in the last trading session.

– With the RSI displaying a bearish divergence to the price action over the last 2 months and the MACD breaking under its 3-month uptrend line yesterday, they seem to echo our views that the uptrend momentum is waning and a further correction is likely.

– We expect the stock to find initial support at $2.82 (the next key resistance turned support level), breaking which, the next support is likely at $2.62 (minor troughs in Jan and Feb ‘09)

– Immediate resistance is pegged at $3.10 (key support-turned-resistance level), ahead of $3.29 (Jan ’08 and Jun ’09 peaks).


Risks have declined

• Shift to laggards. Equity markets have been rallying in recent months. As we are expecting a pullback in the near term given expectations of less-positive economic data from the US, we would advocate a return to defensives like SPH. Furthermore, SPH has been a laggard in the recent rally, underperforming the STI by 36% despite gaining 22% since Mar 09.

• Ad demand has bottomed. Our page count indicates that print advertising revenue bottomed out early this year. The page count for the latest Saturday edition was 218 pages, above Jan 09’s low of 169 pages. However, it will take time for SPH’s advertising revenue to recover to boom-time levels. Yoy, the Saturday edition page count was down by 68 pages to 200 in May 09. Even so, with sell-side analysts still adopting the previous recession for forecasting media revenue, we believe there could be upside if ad demand stays resilient.

• Recent rally reduces earnings risks. Concerns over buyers defaulting on Sky@eleven residential units should ease now that property prices have risen. The last transacted price for this project was above the launch price of S$975psf. Also, investment losses booked in 1H09 could turn into gains in 3Q09, given recent market rallies.

• Outperform. We have raised our FY09 earnings estimate by 5% to account for lower investment losses. Our sum-of-the-parts target price remains S$3.52.


Sky@eleven fears debunked

Twin DPS fears over Sky@eleven unfounded; Maintain BUY. The market has been worried over the possibility of default over the deferred payment scheme as well as dividend payout beyond Sky@eleven. We believe that such fears are unfounded. The condominium project is a bonus to SPH, and following the project’s TOP, investors will continue to enjoy good yields. Maintain BUY with a SOTP-based price target of S$3.40.

Deferred payment scheme (DPS) to hit this year’s payout? The market is speculating that SPH may hold back on paying out the earnings from Sky@eleven till the money comes in upon TOP, dragging payout ratio down to 70% (90% in FY08). In our view, that is unlikely and we expect payout to be at 90%. SPH has stated that it will pay out a “high percentage of recurring earnings” and not cashflow. It has the capability to do so, given its healthy balance sheet (net gearing of 12%) and low capex requirements. We believe that default risk is low for the project, and have gotten even lower with the revival of the property market. CDL’s The Arte, which is also located in the Thomson area, saw keen interest and units were sold at an average of S$1,000 psf (S$975 psf for Sky@eleven). Should buyers default, SPH actually stands to benefit as it has already collected the first 20% as down payment.

Dividend per share (DPS) beyond Sky@eleven to dive? Contributions from Sky@eleven account for 30-35% of dividends over the next two years. In FY11, there will no longer be any contributions coming through from property development when the project TOPs. We believe that Paragon, which has seen its rental space expand 6% to 700k sq ft after its recent renovation, will partially make up for the vacuum. We have assumed a 10% average rental growth to S$14.9 psf/month by 2011, which we believe to be a conservative figure given the successful remaking of Orchard Road. This will raise rental from Paragon by 17% from FY08. Coupled with its core newspaper business, SPH should be able to dish out at least S$320m in dividends (or S$0.20 per share) post Sky@eleven, and more during good years. At current share price, this works out to a palatable yield of 6.3%.