Display ad volumes have also been observed to decline further in 2Q09, having fallen 4% in 1Q09. Display ad revenues account about 56% of ad revenues. We have entered an unprecedented period of recession, with GDP growth likely to be -5% in 2009. Print ad revenue decline could be more severe than during the previous crises as Internet advertising today has emerged as a cheaper alternative for businesses. Consequently, we cut our FY09F print ad revenue growth forecast to -25% from -20%.
Consequently, we cut our net profit estimates for FY09-10 by 3%, after factoring in lower newsprint charge-out price. Our DPS forecasts, based on a payout ratio of 90%, has been reduced to 21.9 cts and 21.3 cts for FY09-10F, representing yields of 8.7% and 8.5% respectively. However, following the TOP of Sky@Eleven expected in 2010, we see no catalysts to fill the earnings void, and expect DPS to fall back to 16cts (6.5% yield).
With its core business facing unprecedented challenges, including falling readership which may not recover in tandem with the economy, SPH may have to entice shareholders with higher dividend payout. We expect mounting pressure for management to return its hefty $1.2b investment portfolio to shareholders.
We cut our SOTP target price from $4.30 due to the lower DCF valuation of its core media business, and further assuming 20% declines in the value of Paragon and investments. Risks to core business and lack of catalysts after the completion of Sky@Eleven undermine the defensive quality of SPH. However, the implied valuation of its media business (8.2x PER) is at a steep discount to its ten-year trough of 11x. We maintain our Buy recommendation.
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