BUY: DMG & Partners Securities (BT)

BackJun 13, 2009

Singapore Press Holdings


DMG & Partners Securities

June 12

Close: $3.12

THE market has been worried over the possibility of default over the deferred payment scheme as well as dividend payout beyond Sky@eleven. We believe that such fears are unfounded. The condominium project is a bonus to Singapore Press Holdings (SPH), and following the project's temporary occupancy permit (TOP), investors will continue to enjoy good yields. Maintain "buy" with a price target of S$3.40.

The market is speculating that SPH may hold back on paying out the earnings from Sky@eleven till the money comes in upon TOP, dragging the payout ratio down to 70 per cent (from 90 per cent in FY 2008, the year to Aug 31, 2008). In our view, that is unlikely and we expect payout to be at 90 per cent.

SPH has stated that it will pay out a "high percentage of recurring earnings" and not cash flow. It has the capability to do so, given its healthy balance sheet (net gearing of 12 per cent) and low capital expenditure requirements. We believe that default risk is low for the project, and has gotten even lower with the revival of the property market.

City Developments' The Arte, which is also located in the Thomson area, saw keen interest and units were sold at an average of S$1,000 per square foot (compared to S$975 psf for Sky@eleven). Should buyers default, SPH actually stands to benefit as it has already collected the first 20 per cent as downpayment.

Contributions from Sky@eleven account for 30-35 per cent of dividends over the next two years. In FY 2011, there will no longer be any contributions coming through from property development when the project receives its TOP. We believe that Paragon, which has seen its rental space expand 6 per cent to 700,000 sq ft after its recent renovation, will partially make up for the vacuum. We have assumed a 10 per cent average rental growth to S$14.90 psf/month by 2011, which we believe to be a conservative figure given the successful remaking of Orchard Road. This will raise rental from Paragon by 17 per cent from FY 2008. Coupled with its core newspaper business, SPH should be able to dish out at least S$320 million in dividends (or S$0.20 per share) post Sky@eleven, and more during good years. At the current share price, this works out to a palatable yield of 6.3 per cent.