SPH - Buy by DBS Vickers (25 Sep 09)

Go for the cash
• Final dividend (DBSV forecast 13 Scts) could have upside surprise (to 17 Scts) in FY09 results expected to release on 12 Oct.
• Raise FY10F earnings by 10% on higher AdEx growth assumptions, along with revised GDP (+5.2% in 2010)
• Ad revenues to ride on media-worthy activities in 2010.
• Buy, sum-of-parts TP at S$4.21

Upside surprise on cash dividends. Our conservative expectations of a final + special dividend of 13 cents per share could surprise on the upside when the company announces its FY09 results on 12 Oct. Assuming a payout of 76% of operating profits, the final dividend could be 17cents, bringing full year to 24cents vs DBSV current forecast of 20 cents, as SPH has historically paid out around and above 80% of operating profits since FY02. This equates to an immediate yield of 3.5% - 4.5% before the year’s end.

Raise FY10F by 10% on better GDP. Historically, ad revenues track closely to GDP growth. We revised our FY10F earnings up by 10% on a better ad revenues growth rate (+4%, vs +2% previously) along with our economist’s revision of 2010 GDP to 5.2%, as well as adjustment of profit recognition to its property development project, Sky@Eleven, towards FY10F.

Expect more media-worthy events. We expect ad revenues to pick up along with more media-worthy events next year and the lead up to it. The opening of the two Integrated Resorts and Youth Olympics Games (YOG) are just two examples. Furthermore, we saw a slump in ad revenues in early 09 (c. -20% yoy) following the global crisis and this should magnify any reasonable growth next year.

Go for the cash; Buy, TP: S$4.21. Our sum-of-parts TP is raised to S$4.21 as we revised up our FY10F earnings. We believe the prospect of a higher than expected final-cumspecial dividend is an attractive investment thesis, along with improving operational prospect in the near term.