SPH – UOBKH

A trading opportunity on market anticipation of FY07 final dividend.

It’s that time of the year. SPH’s final FY07 results will be released in the second week of October. We expect share price to see a rally in anticipation of FY07 final dividend. It’s that time of the year. Traditionally, SPH’s share price sees a rally in the one month leading up to the announcement of the company’s final results. With current share price at S$4.32, the lower end of its trading band, SPH is worth a trade for short-term investors. We are forecasting a final tax-exempt DPS of 20 cents (4.6% yield). Including SPH’s interim DPS of 7 cents, FY07’s full-year tax-exempt DPS is forecast at 27 cents (6.2% yield), based on a payout of 85% of our FY07 EPS forecast. Historically, dividend payout averaged about 90-95%.

Signs of sustained higher advertising revenue growth. ACNielsen’s newspaper advertising expenditure data for June and July 07 points to an 8% yoy growth. Our page-counts of The Straits Times for June – Aug 07 also suggest SPH’s newspaper advertising revenue (AR) growth at 8% yoy in 4QFY07. Coupled with 3QFY07’s (Feb-May 07) strong AR growth of 10% yoy, this would suggest SPH’s AR growth has broken out of its weak 1-3% growth. AR growth has benefitted from Singapore’s strong economy, in particular the robust property sentiments, which have now filtered from the high-end to the mass market. This is generating more demand for display ads. Anecdotally, the strong pipeline of residential property launches over the last 1-2 years has also led to a pick-up in the sub-sales of uncompleted residential properties, which in turn has generated more property classifieds. Allowing for the absorption of Singapore’s additional 2% government sales tax effective from Jul 07, we are forecasting SPH’s 4QFY07 AR growth at 6% yoy.

Newsprint prices continue to its downward trend since Aug 06. North America newsprint prices currently trade at US$561/tonne, a decline of 12% from Aug 06’s peak of US$640/tonne. The growing threat of newsprint supply from China entering key US markets and continued weak newsprint consumption in North America have shifted pricing power to the newsprint buyers. The run-up in newsprint prices between 2002 and 2006 had been entirely driven by newsprint capacity shutdowns in North America. Producers have now run out of easy mill shutdowns in North America and future output curtailment will become increasingly difficult.

Potential timing difference in profits from Sky@eleven. We have forecast S$30m net profit (about 8% of Sky@eleven‘s estimated total net profit of S$363m) to be recognised in FY07. SPH’s management has declined to provide guidance on how much profit will be recognised in FY07. We see any variance as a mere timing difference in profit recognition. This should not be a concern.

Earnings forecasts are tweaked upwards to reflect higher AR growth. We raise our FY07, FY08 and FY09 earnings forecasts by 9%, 6% and 5% respectively to S$510.0m, S$565.0m and S$585.0m. We are now assuming SPH’s annual print AR growth at 6% in FY07 and 5% in FY08 and FY09. Our FY07 earnings forecast has also been adjusted to incorporate the stronger-than-

SPH has turned the corner. It is a large cap stock that has been totally forgotten by the market, due to its lacklustre performance over the last three years. SPH’s core fundamentals are now supported by an improved AR growth, falling newsprint prices, Paragon shopping mall’s rising rentals on the back of rising rentals in prime shopping locations in Singapore, maiden earnings contributions from Sky@eleven and a high annual net dividend yield of 7.4% in FY08 and FY09. Maintain BUY and our target price of S$5.00 (based on our
sum-of-the-parts valuation of S$4.99/share).

SPH – Q307

Financial Data

All the data are extracted from SPH Q307 Results Announcement,

	FY05	Q106	Q206	Q306	FY06	Q107	Q207	Q307
Revenue	1,007,512	263,576	241,723	268,043	1,031,351	274,188	253,653	290,998
Op Profit	351,887	103,059	83,122	94,502	361,086	107,347	83,970	108,822
PBT	558,364	121,872	103,719	194,699	509,420	136,914	117,054	186,137
Net Profit	488,389	98,548	84,453	174,590	428,344	112,365	107,990	159,388
NPM	48.47%	37.39%	34.94%	65.14%	41.53%	40.98%	42.57%	54.77%
Cash	70,192	258,139	130,986	132,460	81,387	365,097	209,887	245,867
Investmt – S/T	653,590	616,053	564,950	540,512	671,196	546,596	536,627	552,328
Investmt – L/T	121,005	390,369	418,425	398,136	403,466	366,827	343,251	332,583
Investmt Prop	1,059,000	1,059,304	1,060,088	1,131,521	1,130,890	1,130,986	1,131,730	1,139,046
Loan – NCL	650,000	650,000	631,111	630,944	610,778	602,681	593,745	583,745
Loan – CL	0	0	667	667	667	667	1,200	1,000
NAV ($)	1.02	1.29	1.21	1.23	1.28	1.36	1.26	1.29
EPS ($)	0.31	0.06	0.05	0.11	0.27	0.07	0.07	0.10
DPS ($)	0.178	0	0.07	0	0.17	0	0.07	0

Notes :

• All figures in S$,000 unless otherwise stated
• FY is end-Aug

Result Highlights

• Revenue
• Group Operating Revenue : +8.4% ($288.1M) Y-on-Y
• Revenue (Newspaper and Magazine) : +7.8% ($195.6M) mainly driven by the 10.4% increase in print advertisement revenue
• Circulation Revenue (after absorption of S$2.6 million in GST) : -0.8% (S$53.8)
• Property : +6.6% ($26.0M) Y-on-Y

• Costs
• Materials, Consumables and Broadcasting : +1.8% ($45.0M) with an increase in production costs of $0.8m (8.6%) mainly from the inclusion of new subsidiaries
• Staff : +12.0% ($76.7M) as a result of variable bonus provision, increased headcount and annual salary increment. Variable bonus provision was in line with the Group’s higher operating profits and the Group’s new performance-based incentive scheme. Total headcount in May 2007 was 3,684 compared to 3,583 a year ago because of the acquisition of new subsidiaries and staffing for new media businesses
• Depreciation : -$0.9 million (-6.8%) mainly due to timing in commissioning of new systems.

Consequently, profit before investment income at $108.8M was $14.3M (15.2%) higher than the corresponding quarter last year.

• Group Investment Income : +139.1% ($75.3M) Y-on-Y arising from net profit on sale of investments and profit from a capital reduction exercise by MobileOne Limited. In addition, last year’s investment income included special dividends from MobileOne Limited

Consequently, net profit was 8.5% lower at $159.8M compared to $174.6M in the corresponding quarter last year.

Forward Statements

• Print Advertisement Performance – Expected to be encouraging on the back of the positive economic outlook for Singapore
• Publications – Continue to enjoy healthy readership levels ; continuing with efforts to sustain its circulation base
• Newsprint prices are expected to remain soft in the near term. The Group will continue with cost management measures to sustain its core newspaper business
• Group is strengthening its presence on various new media platforms with more funding expected to be channelled to spearhead growth in this direction
• Paragon – Generating healthy rental yields amidst the strong sentiments in the property market.
• Sky@eleven – Profits for will be recognised using percentage-of-completion method over the life of the project
• Group expect to perform better than last financial year

Source : SGX