3Q FY8/08 results preview

Event

Testing support

– SPH has corrected over the last 3 months from a peak at S$4.64. We observed that recently the price decline had been on the back of low volume, suggesting the downtrend could be losing momentum.

– While the price is currently testing the support at the short-term uptrend line (formed by the higher lows between Aug 07 and Jan 08), we do expect it to hold.

– We observed that the stochastic indicator is not only trading within the oversold region but is also displaying a positive divergence – this indicates a possibility of a rebound.

– A rebound from here would result in SPH facing immediate resistance at the moving average convergence region around S$4.38 – 4.42. Should SPH succeed in trading past this region, the next resistance level is at S$4.50.

– If the current support at the uptrend line fails to hold, subsequent support is around S$4.09 – 4.15.

Defensive yields intact

• Core media operations remain sound. Adex remains healthy (12-month moving average of +8% yoy as at end-Apr 08) while newspapers continue to be the ad medium of choice in Singapore (adex share of 40% as at end-Apr 08). Core media operations should contribute 61% to FY08 earnings and 67% to SPH’s sum-of-theparts valuation.

• Limited impact from higher newsprint costs. Newsprint accounts for 15% of SPH’s operating expense. SPH has fully hedged its newsprint cost at around US$600/MT till Oct 08. Our sensitivity analysis suggests a potential earnings impact of -5 to -7% for FY09-10 and valuation impact of -7cts/share (-1.3%), assuming newsprint costs of US$830/MT for FY09-10 vs. current assumptions of US$605/MT.

• Positive on potential NBN investment. SPH has a 15% stake in the SingTel-led JV which is bidding for Singapore’s National Broadband Network. We believe SPH’s investment stake should be less than S$100m and the investment is likely to generate ROE of more than 20%.

• Earnings adjustments. Our earnings estimates have been reduced by 2-11% for FY08-09 but raised by 7% for FY10 as we account for higher newsprint costs in FY2009-10 and push back earnings recognition of sky@eleven towards FY10.

• Maintain Outperform with slightly lower sum-of-the-parts target price of S$5.13 (from S$5.20). SPH continues to offer investors defensive earnings and we believe risks-rewards are attractive at current valuations. The recent share-price weakness offers opportunities to accumulate SPH for recurring yields of more than 6.5%.

Small Victim Of Financial Market Turmoil

Still going strong

• In line. 2QFY08 earnings of S$99.6m (-6.2% yoy) were led by strong advertising revenues (+11.4% yoy) and a S$17m earnings contribution from sky@eleven. The strong core performance was partially eclipsed by weaker-than-expected investment income (-48% qoq) due to weaker financial markets. 1HFY08 earnings have now met 40% of our full-year forecast and consensus (SPH’s second half is typically stronger). An interim dividend of 8.0 Scts/share (+1.0 Sct yoy) was announced.

• Robust 18.9% yoy revenue growth. 2QFY08 core revenue (excluding sky@eleven’s S$24.2m contribution) grew 9.3% yoy, driven by strong advertising revenue (+11.4% yoy). This marked the fourth consecutive quarter of double-digit adex growth as SPH rode the tailwinds of a strong domestic economy. Property rental revenue grew 10% yoy as Paragon enjoyed rental reversions. Circulation revenue was flat (-1.1% yoy).

• 2QFY08 EBITDA margin expanded to 44.1% (+350bp yoy), benefiting from operating leverage at core operations and contributions from the higher-margin sky@eleven project. Robust topline growth helped SPH stay ahead of staff costs which rose 9.7% yoy on headcount increases and salary increments. SPH also benefited from weaker newsprint costs (US$575/tonne, -5% yoy) during the quarter.

• No signs of weakness yet. The impact of slowing global growth has yet to bite into adex demand. SPH continues to benefit from a tight labour market, as can be seen in its strong classifieds performance (+15% yoy). We believe Singapore’s economy remains well-supported by an immigration boom, the rollout of two integrated resorts and Singapore’s rise as a key global destination for business and leisure travellers.

• Reducing earnings estimate. Our FY08 earnings estimate has been trimmed by 5.5% to account for lower investment returns amid weakness in the financial markets and an intentional shift towards a more conservative portfolio.

• Maintain Outperform and sum-of-the-parts target price of S$5.20. In view of heightened market risk aversion, we continue to expect SPH to outperform the index on reliable earnings from its print-media monopoly, revenue recognition of sky@eleven, exposure to Singapore’s adex growth and a solid CY08 dividend yield of over 7%.