BUY: OCBC Investment Research (BT)

BackJun 15, 2011

Singapore Press Holdings
June 15 close: $3.83
OCBC Investment Research, June 15

A CONSORTIUM, made up of Singapore Press Holdings (SPH) and United Engineers Ltd, recently bid $917 million for a site beside Jurong East MRT station, only 5.4 per cent below the winning bid. This outcome was similar to a Bedok site auction in September 2010. We think these strong tenders from SPH underline its desire to expand the retail business. As of Q2 FY11, we estimate SPH to have a sizeable acquisition war-chest of $1.27 billion, assuming a net gearing ceiling of 70 per cent.

We think there are three sites in the H2 2011 government land sales supply that could be of interest to SPH. The commercial site beside Paya Lebar MRT, with a large gross floor area (GFA) of 86,940 sq m, could have a significant retail component after setting aside the minimum office and hotel requirements. In addition, the commercial site beside Fernvale LRT could house a retail development with 26,400 sq m GFA - around the size of Clementi Mall. There is also a white site on the reserve list beside Novena MRT with potentially 19,400 sq m retail GFA after taking out the estimated minimum hotel requirement.

Market talk is that TripleOne Somerset is on the market for about $1.2 billion ($2,132 psf NLA) and that 313@Somerset could be up for sale as well. These may be interesting targets for SPH which could derive operational synergies between managing Paragon and any one of these assets, particularly 313@Somerset. Given the sizes of these assets, however, it is more likely for SPH to consider acquiring a stake or participating in a joint venture instead of acquiring these assets wholly.

Clementi Mall is operating smoothly. The mall is fully leased with an average monthly rent of $14 psf. Clementi Mall highlights SPH's retail management capabilities in a suburban location and the market would likely view similar acquisitions favourably. We forecast annual revenue at around $30 million from Clementi Mall after Q4 FY11.

The current price of $3.83 indicates an upside of 13.3 per cent against our $4.32 fair value. In addition, the downside is limited by an attractive dividend yield of 7.1 per cent, which is underpinned by a core newspaper segment yielding solid recurrent cash. Look for accretive acquisitions to be positive catalysts in FY11-12. We are upgrading SPH (from 'hold') to 'buy' with a fair value estimate of $4.32.