BUY: DBS Vickers Research - Apr 08, 2004 (BT)

BackApr 08, 2004

Brokers' Take

BUY: DBS Vickers Research

Apr 08, 2004
The Business Times

DBS Vickers Research, April 7

SPH stock should re-rate on the back of a capital restructuring exercise. Current shareholders would receive $2.865 per share in cash in June, the promise of another $3 per share or so in potential future cash payouts, a fairly high dividend yield and a bellwether stock. We upgrade the stock to BUY as we see a 20 per cent upside to our new target price of $23.20, which is based on the sum-of-the-parts valuation.

As a side note, the Q2 04 results were in line with expectations and the current ad trends are showing signs of a promising advertising recovery.

In a surprise move, the SPH board of directors proposed a four-step capital restructuring. First, SPH will split all shares 5:1. Secondly, SPH will cancel 15 per cent of all shares (that is, effective 4.25:1 split). Thirdly, SPH will pay $1,085.7 million, equal to net $2.865 per pre-split share (67.4 cents per post-restructuring share). Fourthly, almost all of the cash payment is subject to Section 44 reclamation whereby investors can claim back some refunds on the taxes withheld. This exercise is subject to SGX, shareholders and High Court approval with potential conclusion near late June.

SPH reported a relatively flat revenue growth of 6.3 per cent, about half of the growth from the re-launched Paragon extension and the rest mostly coming from the core newspaper and magazine segment, presumably from higher advertising volumes.

Bottomline fell by 53 per cent due to some distorting effects of exceptional gains in the previous year. Operating profits rose 12 per cent, thanks to cost controls. We expect future advertising volumes to rise and indeed March page counts indicate volumes are up over 20+ per cent year on year.

Return of capital should help propel the stock upwards, especially when SPH has hinted at more. In the press release, SPH attached a three to four-year time horizon for divesting non-core assets, which implies that there may be $1 billion or so locked up in Paragon and $400 million from Belgacom and M1 plus another $200 million a year in free cash flows may also be returned. Our new target price of $23.20 reflects that potential, representing a 20 per cent upside and a BUY recommendation.