Positives priced in

• Downgrade to Neutral from Outperform. We downgrade SPH to Neutral as we believe that positives like an ad-demand recovery and retreating newsprint prices have been priced in. The stock should be held up by prospective yields of 6-7%.

• Results beat expectations. FY09 core net profit was S$421.9m (-9.1% yoy), 8% above our expectations and consensus. The outperformance came from higherthan- expected rental revenue and lower-than-expected investment losses. SPH recommended a final dividend of S$0.18/share (normal dividend and special dividend of S$0.09 each), in line with our forecast. Our FY10-11 earnings estimates have been raised by 4-5% on higher media earnings and investment income assumptions. We also introduce FY12 estimates. Our sum-of-the-parts target price has been raised to S$4.38 from S$4.05 following our earnings upgrade and a lower risk free rate used, in line with declining house forecasts in recent months. We now value the media business using a WACC of 7.5% instead of 8.1%.

• Print ad revenue declined in line with expectations. Print revenue fell 16.9% yoy to S$648.3m mainly due to a 17.5% yoy decline in newspaper ad revenue, which itself was due to lower classified revenue (-23.7% yoy) because of lower recruitment ads. Circulation revenue beat forecasts, rising 4.1% yoy to S$214.2m. Property revenue rose 43.2% yoy to S$365.6m, boosted by a S$138.1m rise in revenue from Sky@eleven and an unexpected S$5.3m rise in Paragon’s rental income. We believe it is due to higher rentals. Other operating revenue also beat expectations, expanding S$12.0m yoy. Investment losses were smaller than expected at S$6.1m.

• Costs under control. Staff costs decreased 10.4% yoy to S$286.9m, in line with our expectations thanks to lower bonus provisions, Jobs Credit grants and wage cuts by SPH. Newsprint charge-out prices were slightly lower than expected at US$747/MT.

• Outlook. SPH expects newsprint prices to moderate in the near time though cautioned that prices may rise in FY10 in line with the economic recovery. SPH has recognised S$451.9m of Sky@eleven revenue to date (69% recognised) and the development is on track to obtain its temporary occupation permit by 2010.

Valuations do not appear attractive

Expecting lower contributions from property; Downgrade to NEUTRAL. While SPH had turned in a set of better-than-expected results, we believe that contributions from the property front may decline in FY10 and FY11. Although this may be negated from the improving outlook seen in the core printing segment, valuations do appear fair. Downgrade to NEUTRAL with target price of S$3.86 (from S$3.59 previously) based on SOTP valuations.

Better than forecasted. While FY09 revenue was flat at S$1,301.4m and net profit declined by 3.6% to S$421.9m, this nonetheless exceeded our expectations (top and bottomline at S$1,293.6m and S$370.4m respectively) and had beaten market consensus (top and bottomline at S$1,284.5m and S$384.9m respectively). Reasons for the discrepancy are larger-thanexpected fall in newsprint costs to US$612 per tonne in 4QFY09 (we were gunning for US$700 per tonne) and the absence of the S$26.7m impairment charge that was previously seen in FY08. On a quarterly basis, SPH’s 4QFY09 revenue was S$346.9m (-12.7% YoY, +6.1% QoQ) while net profit was S$135.2m (+46.2% YoY, +6.7% QoQ).

Printing segment to improve. Revenue from ads are forecasted to pick up sequentially as the economy recovers while newsprint costs are expected to be lower on a YoY basis (see Figure 1), thus resulting in higher margins. Nevertheless, as we believe that the bulk of the revenue recognition has already been accounted for the Sky@eleven project during FY08 and FY09, we are expecting lower overall Group revenue in FY10.

Valuations appear fairly priced. At S$3.88, SPH is trading at 14.9x FY10 P/E which is inline with its 6-yr historical average (see Figure 2). Moreover, the Sky@eleven project is also slated to cease earnings contributions in FY11 after it has been completed, thus lowering profitability and dividends for the Group. On the bright side, we have raised our valuations for SPH’s core media business to 14x forward P/E from 12x given its improving outlook – our target price is thus accordingly raised to S$3.86 based on our SOTP valuations. Downgrade to NEUTRAL given the impending downside.

A X’mas gift in cash

• FY09 results in line; final+special DPS of 18 Scents, above expectations
• Drop in ad revenue (-17% yoy) offset by property gains and lower staff costs
• Expect continued ad revenue improvement inline with economic recovery
• Maintain Buy, TP: S$4.22

18cents DPS on 23 Dec. Final and special dividends (18 Scents) are above consensus and our expectations, bringing full year to 25 Scents DPS (FY08: 27 Scents). Operating profits were within expectations on lower ad revenues (- 17% yoy to S$648.3m), offset by higher property contributions (+43% yoy to S$365.6m) and lower staff costs (-14% yoy, S$286.9m). Dividend ex-date is 9 Dec; and, payable on 23 Dec.

Improvement in ad revenues seen. While total ad revenues registered a 17% yoy fall in FY09, we note that the yoy drop on a quarterly basis has narrowed since earlier this year (see Fig. 2, pg 4). We believe this trend should continue in line with an improving economy, GDP growth and with more media-worthy events in 2010 – IRs, opening of retail space, etc.

Sky11 has >S$200m to be recognized; Paragon occupancy at 99%. Sky@Eleven (Sky11) will contribute at least another S$200m revenue in FY10F, while Paragon rentals are projected to remain stable, with occupancy at 99% currently. TOP for Sky11 is still expected to be in 2010. Management indicated its interest to selectively pursue development of property sites, seen in its recent bid for a tender site in Serangoon.

Maintain Buy, TP: S$4.22. We adjust our earnings forecasts up by 7.7%% in FY10F and 6.2% FY11F on a lower tax rate and higher rental revenue expected from Paragon. We maintain our Buy recommendation, given an improving operating performance, supported by a yield of c.6.4% (DPS: 25 Scents in FY10F). We continue to believe its yield of over 6% and improving operational performance is an attractive investment thesis.