SPH announced weak 1H09 results, net profit of S$160mil, lower than J.P. Morgan and consensus estimates on the back of weaker than expected earnings from core publishing business, losses from investments and lower-than-expected profit recognized for Sky@Eleven in 1H09. The group declared S$0.07/share interim dividend, 12.5% down YoY and implies 2.4% yield. We revised down our full-year dividend forecast to S$0.15/share, implying 70% payout ratio.

Margin improvement likely in 4Q09. Operating margin for the group (ex property development) has fallen below 30% due to a rather sticky cost base in the first half and the operating losses from new media initiatives. While revenue outlook for the group remains challenging, raw material costs - newsprint price in particular - have fallen substantially. We expect the lower cost base to kick in by 4Q09, which would help to improve the group’s operating margin.

Underperformed YTD, we reiterate J.P. Morgan’s preference for SPH over STE. Based on our revised earnings estimates, SPH is trading at 12.4x FY10E earnings, at the lower end of its forward P/E trading range of 10.4-17.8x for the last 6 years, an undemanding valuation, in our view. The stock has underperformed FTSE STI by c13% and its defensive peers, ST Engineering in particular. We reiterate the preference expressed for SPH over STE by J.P. Morgan’s Singapore market strategist Christopher Gee in his April 8 report, Relative value trades: Moving up the risk curve. We note that we expect SPH’s underperformance to reverse from here on.

We maintain our OW rating on SPH, with our Dec-09 price target of S$3.15/share (S$3.90 previously) based on our SOTP valuation. Key risks to our rating and price target include: 1) unexpected further deterioration of adex spending; 2) high operating leverage, which could swing both ways; and 3) more proactive capital management.