DBS Vickers: SPH

Attractive yield on offer

Story: We like SPH as a defensive play and believe that valuations at this level are attractive for investors to accumulate.

Point: We remain sanguine about SPH’s prospects as it is a good proxy for Singapore’s firm economic outlook. Notwithstanding a recession in the US, DBS Economics is projecting 6% and 6.8% real GDP growth for Singapore in 2008 and 2009 respectively, along with healthy private consumption growth of 4.6% and 4.8% in these 2 years respectively. We believe this should help ensure continuous top line growth for the Group’s core publishing business over the next 2 years. After factoring in higher newsprint costs, a weaker US$, and a quicker delivery of Sky@Eleven in FY09, our forecasts remain largely the same. We have raised our newsprint cost assumption to US$710 per MT for FY09, versus US$615 for our previous assumption. SPH has hedged its newsprint costs up to October 2008, which is currently at over US$800 per MT. We believe that if newsprint costs spiral too high, SPH may look to raise its cover prices (not raised since 2004) and/or its ad rates to maintain operating margins. Nonetheless, with growing contribution from Sky@Eleven,we are projecting 23% and 11% EBIT growth for FY08 and FY09 respectively for SPH. This should translate into higher dividends for shareholders.

Relevance: SPH’s share price has weakened in recent weeks despite posting a strong set of interim results and at current levels, the stock is offering an attractive prospective net yield of 7.4% for FY08 and 8% for FY09. We reiterate our BUY call for SPH, with S$5.65 target price, which is based on sum-of-the-parts valuation.

Sgbluechip says: SPH last traded @ $4.28. This is quite an attractive price. Having paid out $0.08 interim dividend (up $0.01 from FY 07), I expect SPH to pay $0.20 final year dividend (up $0.01 from FY 07) this December. This translates to a healthy yield of 6.54%.