Could there be repercussions from not reigning in DPS? We examinethe risk of default at the Sky@Eleven property project given that recentsub-sale transactions have started to fall below the original averageselling price of S$975psf. Most of the unit sales have been on a DeferredPayment Scheme (DPS) basis and from what we understand, none havebeen converted to progress payments, hence financing could becomedifficult later if asset prices fall at an unprecedented rate.

Defaults would hit FY10E earnings but not SOP: If defaults arisewhen the Temporary Occupation Permit (TOP) is issued in 2010, we dosee a significant hit to our FY10 estimates as SPH will have to writeback earnings recognized before that point. However, we do not expect asignificant impact to our Jun-09 SOP-based S$4.65 PT as the NPV ofthe project currently accounts for only 7% of our SOP. The bulk of valuein SPH is still the publishing business at 60% of the SOP based on ahistorically resilient 12x trailing P/E. The Paragon mall supports 28% ofSOP. Risk to our PT is a perceived de-rating in the publishing businessin the form of lower circulation rates; SPH has differentiated itself fromWestern media which has succumbed to growth of the internet platform.

The biggest hit from Sky@Eleven defaults would be on dividends: Ifmanagement decides not to pay out the related property developmentearnings on perceived risk of defaults, dividends could be cut by as muchas 10 cents per share, or 36%, in FY09 and FY10. A lower dividendyield could affect the stock’s ongoing outperformance. However, webelieve it is too early to make such a call as the risk of DPS defaults, ifany, will be marginal, in our view. Based on sub-sale transactions to datea substantial amount of capital has been committed by investors inSky@Eleven and the fact that transactions have not ground to a halt andare taking place at lower levels, suggests there is the propensity for thespeculation to clear