SPH

Recommendation: Buy (Maintained),Target price: $4.48 (from $5.11)

Core media business at below historical low
We are revising our advertising revenue growth assumption to -20.0% from 3.0% in view of the negative GDP outlook for 2009. Historically, advertising revenue growth underperformed GDP growth in a down market. In 2002, advertising revenue declined 19.8% yoy. Our new projection shows newspaper and magazine revenue declining 14.8% while overall revenue is estimated to fall by 1.6% in FY09F, mitigated by the contribution from Sky@Eleven. At 11.8x forward PER, SPH is now trading at the trough valuation of 11.8x. Our implied valuation of the core media business shows a trading PER of 10.6x, which is below the historical low PER of 11.8x.

Cost cutting to counter recession
We reduced our staff cost estimates for FY09F by 29% following the cost cutting measures instituted by the management and given that employees’ variable wage component is about 10%. Our net profit estimate in FY09F is reduced to $425.3m, representing a yoy decline of 2.8%. The impact of changes to earnings estimates are lower DPS of 23.8 cts for FY09F and 22.2 cts for FY10F, translating to a yield of 7.6% and 7.1%, respectively. The DPS estimates are based on a 90% payout from both media and development income.

Free cash flow to support payout
Free cash flow of $408m expected in FY09F should support the dividend payout of $380m. SPH is in a net cash position of $280m as at Aug’08, with $1.1b in investible fund. An additional $150m three-year loan obtained recently may be deployed for investments in overseas media joint ventures.

Dividend track record a key attribute
SPH remains one of our most defensive pick as the company rewards shareholders with dividends even in bad times. Assuming 90% payout of recurring earnings, we are projecting normal yield of 5.2% (excluding payout from Sky@Eleven), which depicts are more sustainable dividend profile as contribution from property development will cease from FY11.

Lower core media business valuation impacts SOTP target price
Our SOTP target price has been reduced to $4.48, mainly due to the lower DCF valuation of the core media business of $2.96 based on a 7.4% WACC and 2% terminal growth rate. We further assumed that the investments will be marked down by 10% due to the uncertain equity market condition. Our valuation assumption of $2b for Paragon remains intact as we believe that the opening of competing up-market shopping malls along Orchard Road in 2009 may raise the profile of surrounding properties and draw new crowds, and hence valuation will find a support. There is a 41% price upside to the new target price. Maintain Buy.