BUY: DBS Vickers Research - May 22, 2004 (BT)

BackMay 22, 2004

Brokers' Take

BUY: DBS Vickers Research

SPH, May 21 close : $20.60

May 22, 2004
The Business Times


DBS Vickers Research, May 21

NIELSEN Media's April data indicates that SPH newspaper advertising volume is showing signs of a modest recovery. The year-on-year comparisons seem very good, but this could be due to the Sars-affected low base period last year. Advertising is finally showing signs of a cyclical rebound. We continue to recommend that investors BUY SPH ahead of the full recovery and before cash is paid out to shareholders within a few months.

SPH's April adex rose 28.8 per cent yoy in April. Year-to-date adex was up 3.2 per cent and should easily reach our estimates of 4 per cent. In absolute terms, the April adex of $51.7 million was better than 1999 and 2002 but below 2000 and 2001.

SPH stock still trades with $2.865 per share in proposed dividends that should be paid some time around June/July. Ex-dividend shares should trade at 18.2x FY05 PE - a fairly decent price for a 35 per cent ROE company. Once the dividend is paid, we believe shareholders will start to look forward to the next payout pledged within three to four years. This balance should be large and potentially includes proceeds from Paragon, M1, StarHub, Belgacom and Times House, plus about $200 million in free cash flow per year - roughly $2 billion. This does not include dividends of around 4 per cent per year. In other words, we expect over 40 per cent of the company's market cap to be returned to shareholders by 2008.

We see about 14 per cent upside to our target price of $23.20. Excluding the $3 billion in estimated returned capital, SPH trades at about 12.4x current ex-exceptional PE, which already includes assumed higher newsprint costs. Our target price is based on a market multiple for the core business, given the bellwether status of SPH, plus the present value of the lump sum payments, discounted between 14 and 25 per cent.