BUY: Merrill Lynch

MERRILL LYNCH, Feb 17

REINSTATING coverage of SPH with 'buy' rating: Our sum-of-the-parts price objective of $4.90 would imply a return of 19 per cent in a 12-month period, including a 5.2 per cent dividend yield. We see SPH as a laggard play, as its price has underperformed the Singapore market by 14 per cent in the past year.

Upside surprise of GDP growth fuels stronger ad spending: A broader ad market recovery would be supported by robust nominal GDP growth in 2006 (Merrill Lynch estimate : 8.8 per cent; consensus: 6-7 per cent). We see SPH as the main beneficiary of ad spending increases in finance, property and retail, and project ad revenue growth of 5.7 per cent in FY06 (7 per cent excluding Streats).

Market overly concerned about competition: TV no longer looks excessively cheap versus newspapers, as TV ad rates have reverted to previous levels. During FY02-04, TV rates were depressed because of MediaCorp's pre-emptive pricing strategy.

We do not believe the tabloid Today and the Internet will significantly threaten SPH's print franchise in the near term.

Special returns from divestment of non-core assets: In FY01-05, the group paid back $1.9 billion in cash to shareholders. We see the possibility of further special cash returns from:

• its strong free cash flow;
• divestment of other non-core assets - Times Industrial Building, the 14 per cent M1 stake and Paragon - if carried out, would free up cash equivalent to a 20 per cent dividend yield, by our estimates.

With limited growth prospects domestically, overseas or cross-media investment could present execution risks. Longer term, we also flag the loss of future earnings streams if SPH sells its non-core assets.

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