SPH earnings likely to plummet 9% over next three years

We attempt to paint scenarios for SPH’s retail REIT (SPH REIT). We estimate our  SOTP valuation could be enhanced marginally by 21 cents/share (+3.7%) on divestment gains. The real boost to share price would be a large special dividend as SPH could reap cash proceeds of up to S$1.46b (90 cents/share) if its stake in SPH REIT is reduced to 30%. As details are still lacking at this juncture, we maintain our HOLD call and target price of S$4.30, with an entry price of S$4.00.

Potential gains of S$1.520b. We estimate potential divestment gains totalling S$1.520b (94 cents/share) - a) S$1.276b from the injection of Paragon and Clementi Mall into SPH REIT, and b) S$244m from divestment of a 70% stake in SPH REIT on the assumption that SPH would hold a 30% stake in the REIT.

Could reap cash proceeds of up to S$1.46b (90 cents/share). The amount of cash proceeds received by SPH from the divestment of 70% of SPH REIT would depend on whether it would undertake: a) an offer for sale (OS), b) a  distribution in specie (DS) to its shareholders, or c) a combination of an OS and a DS. We estimate total cash proceeds of: a) S$1.46b for an OS of the entire 70% stake, b) S$730m for a 50:50 OS and DS, and c) zero cash if the entire divestment is by DS to SPH’s shareholders.

FY13-15 earnings likely to fall 9%. Paragon posted a net profit of S$64.3m while Clementi Mall made a net loss of S$2.4m in FY12. Factoring in a net fee of S$10m from REIT property management to partially offset a 70% decline in earnings contributions from Paragon and Clementi Mall, SPH’s FY13-15 net profit would likely fall by about S$30m (-9%) with our annual projected DPS correspondingly shrinking from 22 cents to 19 cents. Dividend yield would fall from 5.1% to 4.4%.

A good chance of a special dividend. We believe SPH would likely utilise part of its divestment gains (94 cents/share) for a special cash dividend. This would also be a capital reduction exercise to partially restore ROE.

Maintain HOLD and target price of S$4.30. Our target price of S$4.30 is set at a 20% discount to our SOTP valuation of S$5.39/share. Divestment gains could enhance our SOTP valuation/share by 21 cents, but the main attraction lies in a special dividend payout which should boost share price 

As management has announced REIT spin-off on the cards, but not likely in the near future.  SPH has commented that it will spin off its property segment into a REIT but did not indicate a timeframe. Maybank Kim Eng  believe this could take place when its property segment is operating on a more scalable level. 

But I think can keep for its attractive annual dividends of 24S¢ a share which was paid out over the past two years,  amounted to a payout ratio of above 90%. It is likely  to issue  dividends of 24S¢ a share for FY13 as well, which translates to a 5.9% yield.