SPH - Valuation gap should narrow

Newspaper ops valuation should normalise. SPH PE valuation to STI has narrowed to 8%, significantly below the 10-year average of 34%. Newspaper operations implied PE is now at 12x, -2 standard deviation from its average. We think the market has undervalued it; and, this should trend up towards normalized levels (20x PER) as the economy recovers.

Worst fall in AdEx seems over. AdEx fell sharply during past 2 recessions. But, they also recover shortly thereafter. Latest data from Nielsen media research shows Apr AdEx for SPH’s newspaper display and classified ads fell by c.9%, significantly better than the 25% y-o-y fall in Jan. We also noted that recent pagination for The Straits Times (Saturday edition) is hovering above 200 pages, up from Jan’s 100-plus pages.

Lowered newsprint costs. Newsprint spot price is at around US$550/mt. This is positive for SPH from a cost aspect and we should see this positive impact flowing through for SPH is subsequent quarters.

Maintain BUY, SOP TP remains at S$3.70. We maintain our Buy recommendation as we believe the worst fall in AdEx is over. We believe valuations should normalize, and we peg our newspaper operations to 16x FY10F earnings, -1 standard deviation to its average (20x). Dividend yield is also attractive at c.6.6% based on our conservative assumption of 20cents/share.

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