Operating margin to improve in earnest in 2010: The spot newsprint price has fallen to US$500/ton, a 75% drop from the peak of US$875/ton. As SPH locks in newsprint on a rolling basis, we expect low newsprint prices to kick in during FY10. In addition, the S$ has appreciated 5% in the past three months, further helping SPH to reduce raw material costs. In view of this and the staff cost cuts earlier in the year, we estimate operating costs to fall 11% YoY and operating margin to improve to 39% in FY10.
Reduced risks associated with property division: With the strong pick-up in the property market, and as secondary prices for the Sky@Eleven project have increased to S$1,100psf on average since May, the concerns about potential default upon completion should be alleviated. In addition, the stronger-than-expected take-up rate for the upcoming retail space along Orchard Road should also help to reduce the pressure on rental renegotiations for Paragon.
We reiterate our OW rating, and raise our SOTP-based PT to S$3.90 from S$3.15: The increase is a result of our higher earnings estimates, change in valuation methodology for the core business, and rolling forward our timeframe to Jun-2010 from Dec-09. Key risks to our rating and price target include a later-than-expected recovery in ad revenues and a quicker-than-expected pick up in raw material costs.
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