Strong Home Sales & Weak Euro

• The highlight of SPH’s Q3 performance (3 months to May ’10) is the strong rebound in print advertisement revenue and profit, reflecting the launch of:

– several property developments, as seen in strong home sales, especially in April when 2208 units were sold;

– European cars, because of the weak euro.

• Profit from Sky @ 11 continued to play a key role in SPH’s bottom-line, except that with TOP having been obtained, contributions have largely been recognized. As at end May ’10, revenue and profit came to $674 mln and $480 mln respectively.

• The value of Paragon may have risen, to $2.28 bln as at mid July, but upgrading spend will likely continue to rise, given the ever-intense competition along the Orchard road shopping belt.

• Clementi Mall, a 60–40 JV with NTUC Income / Fairprice, will commence operations in H1 2011.

• As at end May ’10, investible funds totaled $1.1 bln (up from $800 mln three months ago), spread among cash 26.2%; equities (23.6%), bonds (31.6%), and investment funds (18.6%). The biggest increase was the allocation to bonds, rising from 19.6% at end Feb ’10, reflecting a cautious stance by management.

• SPH’s main attraction remains its 6.3% yield, assuming unchanged 25 cents dividend per share for ye Aug ’10. (Interim was 7 cents per share.)

• Maintain BUY.

Strong Home Sales & Weak Euro

• The highlight of SPH’s Q3 performance (3 months to May ’10) is the strong rebound in print advertisement revenue and profit, reflecting the launch of:

– several property developments, as seen in strong home sales, especially in April when 2208 units were sold;

– European cars, because of the weak euro.

• Profit from Sky @ 11 continued to play a key role in SPH’s bottom-line, except that with TOP having been obtained, contributions have largely been recognized. As at end May ’10, revenue and profit came to $674 mln and $480 mln respectively.

• The value of Paragon may have risen, to $2.28 bln as at mid July, but upgrading spend will likely continue to rise, given the ever-intense competition along the Orchard road shopping belt.

• Clementi Mall, a 60–40 JV with NTUC Income / Fairprice, will commence operations in H1 2011.

• As at end May ’10, investible funds totaled $1.1 bln (up from $800 mln three months ago), spread among cash 26.2%; equities (23.6%), bonds (31.6%), and investment funds (18.6%). The biggest increase was the allocation to bonds, rising from 19.6% at end Feb ’10, reflecting a cautious stance by management.

• SPH’s main attraction remains its 6.3% yield, assuming unchanged 25 cents dividend per share for ye Aug ’10. (Interim was 7 cents per share.)

• Maintain BUY.

The trade-off between growth and yield

• Competitive environment seems to stabilize in India – welcome news for Bharti and SingTel.

• SingTel increased its stake in Bharti from 30.40% to 32.04%, justifying the lack of special dividends.

• BUY quality blue chip at 12.1x FY11F PE, below historical average of 13.4x. Target price revised to S$3.45, implying over 15% total returns potential.

Bharti surged significantly in the last one week. The worst of tariff cuts in India seem to be over as new entrants face challenges in expanding network coverage and capacity. This can partly be attributed to a recent regulation mandating the pre-approval of telecom infrastructure equipment. The wireless industry added only 16.3m subscribers in May, compared to 16.9m in April and 20.3m in March. Bharti’s share of newly added subscribers improved to 18.4% in May, compared to 17.7% in April and 14.8% in March. New entrants (Unitech, Sistema and Loop) witnessed a decline in their shares in May, vindicating our view that smaller players are less aggressive now.

Management seems to prefer growth to dividends. SingTel has raised its stake in Bharti to 32.04% from 30.4% (in Nov 09), costing about S$600m-S$900m. In the medium term, more M&A activities (preferably higher stake in associates) may lead to higher than expected earnings growth. Else dividend payout should improve to 75% (58% last year), translating to 7% yield in our view.

Slight upward revision in earnings and target price. We have updated our model to reflect higher stake in Bharti. This raised earnings estimates by 1.8%/1.7%. Our SOTP based target price is revised to S$3.45 from S$3.40. Optus continues to ride on incumbent’s dilemma in Australia. Regional associates should keep growing with renewed Bharti. Near term weakness in Singapore (as guided by

management already) is not a big concern as such.

Steady performer

• Maintain Outperform; results above expectations. 3Q10 net profit was S$164.6m (+29.9% yoy), accounting for 33% of our full-year estimate. 9M10 net profit grew 47.4% yoy to S$422.6m on revenue growth of 14.0% yoy to S$1,087.6m. 9M10 results were 7% above our forecast and consensus. The outperformance was due to higher-than-expected print ad revenue. Our earnings estimates have been raised by 4-5% after accounting for the higher print ad revenue with our sum-of-the-parts target price raised from S$4.43 to S$4.47. We see stock catalysts from an improving outlook. For investors looking for defensive names, we recommend SPH for its: 1) near-monopoly of the print-ad industry in Singapore, making it a beneficiary of a domestic economic recovery; 2) print business which is well positioned to benefit from a raft of events planned for Asia over the next few years; and 3) dividend yields of 6-7%, comparable to average S-REIT yields and higher than the yields of other large caps.

• Print ad revenue staged strong rebound. 3Q10 group revenue grew 26.9% yoy to S$415.0m. Print revenue alone rose 28.1% yoy to S$204.3m, above our expectations. Display ad revenue was up across the sectors with strong growth recorded for banking & finance, telecommunications and government while classified ads were boosted by stronger recruitment ads. Property revenue rose 43.4% yoy to S$135.3m, boosted by Sky@eleven (obtained temporary occupation permit in May) and higher rental income from Paragon. Materials, consumables and broadcasting costs were 14.6% lower yoy due to a 27.3% drop in newsprint costs.

• Outlook. SPH continues to expect newsprint prices to rise in line with the economic recovery though we are not overly concerned as prices have been locked in till Mar 11 and remain way below peak levels. 3Q10 newsprint prices were 35% lower yoy and 2% higher qoq at US$529/MT. SPH is guiding for FY10 charge-out rates of around US$550/MT. Paragon’s latest valuation is S$2.28bn and continues to enjoy high occupancy rates. Clementi Mall is supposed to start operations in 1H11.

Strong advertisement revenue boosted earnings

Net earnings rose 30% YoY in 3QFY10. SPH reported better-than-expected 3QFY10 PATMI of S$164.6m (+29.9% YoY; +45.2% QoQ), with higher contributions from its newspaper and magazine segment (+20%) due largely to higher print advertisement revenue (+28%); as well as higher revenue from the property segment (+43%) on the back of higher revenue from Sky@Eleven and Paragon. 9MFY10 net income of S$423m represents 90% of our full year forecast. Paragon’s S$300m revaluation gain works out to an S$0.18 per share increase in its RNAV. We consequently raise our SOTP target price to S$4.31 from S$3.95. Maintain NEUTRAL as valuations appear fair.

Newsprint rates expected to increase at a moderate level. SPH’s strong 3QFY10 PATMI was also attributed to the steep fall in charge-out rates for newsprint, which fell 32% YoY to US$529/MT from US$779/MT. Management, however, cautioned that newsprint rates are likely to increase at a moderate level, going forward. We have factored a 12% rise in newsprint rates for FY11. We estimate every 10% increase in newsprint rates over our base case will reduce FY11 PATMI by 3.6%. Staff costs rose 17% on higher bonus provision and lower government jobs credit grant.

Paragon gains 14% in value. SPH announced the revaluation of its Paragon building to S$2.28bn (S$3,254/sqft), up 14% from S$1.98bn (S$2,852/sqft). No details pertaining the revaluation methodology was revealed. However, the S$300m revaluation gain translates to an S$0.18 per share increase in its RNAV. Paragon is valued at cost on its books at S$1.17bn.

Maintain NEUTRAL, new TP of S$4.31. We raise our FY10 earnings forecast by 16% to S$545m to account for higher advertising revenue and lower newsprint costs. Maintain NEUTRAL rating. SPH trades at 13.8x FY11 P/E multiple, at its mid-range of 10-15x trading band. We believe SPH’s attractive FY10 yield of 7.8% would provide support against significant downside risk.