Mastering the Art of Prepaid

Prepay it forward. M1′s new prepaid MasterCard offering looks attractive enough to help it regrow its prepaid mobile segment, which has seen negative net-adds for the past two quarters. We maintain our BUY call on M1 and target price of SGD2.85, based on implied yield of 5% on FY12F DPS of SGD0.145.

Pioneers new prepaid MasterCard. The M1 Prepaid MasterCard is a multi-purpose debit card that allows users to top up M1′s prepaid cards, pay public transit fares, ERP and car park charges and make contactless purchases. We think it is an interesting product that should help M1 increase customer stickiness and reverse negative net-adds in prepaid. The main selling point is that it offers a simple way to pay for goods and services but without the complexity of owning a credit card.

Aimed at the young, the old and everyone in-between. M1 is targeting this card at any consumer who values convenience in general; in other words, the majority of its customer base can benefit. We think there are wide applications for the young, the elderly, migrant workers as well as professionals. For example, parents can charge the card with a fixed mobile allowance as well as their monthly allowances. Spending can be tracked online for better budgeting and financial management. There are no age or income restrictions to obtain this card.

Spotlight on StarHub. We took a look at the prepaid plans that are available on the market today and concluded that StarHub appears to be vulnerable to this new product from M1. We would not be surprised if it runs a negative prepaid net-add number in 2Q12 and 3Q12. Our comparison shows that StarHub currently is the least competitive in mobile voice calls, both locally and internationally. A 20-minute voice call costs SGD1.74 for StarHub versus SGD1.60 for M1 and SingTel, and its IDD rates to Indonesia and the Philippines are 2-4 times higher.

Maintain BUY on M1 with target price of SGD2.85. M1 has guided a stable outlook for FY12, driven by both its mobile data and fixed services segments. We expect its new product to drive higher-quality prepaid net-adds as well. Maintain BUY and target price of SGD2.85, based on implied yield of 5% on FY12F DPS of SGD0.145.

ST Engg unit wraps up stake in EcoServices

VT Aerospace acquires 50.1% equity interest

SINGAPORE Technologies Engineering (ST Engineering) has completed the acquisition of a 50.1 per cent stake in US-based engine wash services provider EcoServices LLC, with a restructuring of the original investment terms.

The completion of the investment makes EcoServices a subsidiary of Vision Technologies Aerospace Incorporated (VT Aerospace). VT Aerospace holds the aerospace companies of Vision Technologies Systems Inc (VT Systems), the US headquarters of ST Engineering.

Under the restructured terms, VT Aerospace acquired the 50.1 per cent equity interest for US$20 million, instead of US$33.3 million as announced last December.

But Pratt & Whitney – which retains the remaining 49.9 per cent stake – contributed all the assets of the EcoServices business to EcoServices except the business' intellectual property.

Results Announcement

• 4 May 12 : StarHub (Q112) – EPS 5.15ct ; Div 5ct
  
• 7 May 12 : SIAEC (Q412) – EPS 6.04ct (todate 24.56ct) ; Div 15ct (todate 21ct)
  
• 9 May 12 (AM) : MIIF (Q112) – (Updated on NAV)
  
• 9 May 12 : STEng (Q112) – EPS 4.39ct
  
• 10 May 12 (AM) : SingTel (Q412) – EPS 8.09ct (todate 25.04ct) ; Div 9ct (todate 15.8ct)
  
• 11 May 12 : SBSTransit (Q112) – EPS 1.57ct
  
• 14 May 12 (AM) : SATS (Q412) – EPS 4.5ct (todate 15.4ct) ; Div 6ct + 15ct Special (todate 26ct)
  
• 14 May 12 : ComfortDelgro (Q112) – EPS 2.56ct
  
• 16 May 12 (AM) : SPAusNet (2H12) – Div A4ct (Gross)
  

STI = 2779.10 (-43.51)

Aviation Services

Note : SATS Special Div are Observed to be Non-Recurring


Transport

TELCO

Note : SingTel Special Div is Observed to be Non-Recurring


Funds / Infrastructure

* SPAus DPU in A$. Yield is Calculated Using Latest Exchange Rate (1.2535) fm Yahoo

NOTES :

• Mkt Price is as on 18-May-12
  
• SPAus : 2H12 (Mar12) – A4ct = A1.333ct (Franked) + A2.159ct (Interest) + A0.508ct (Capital Returns) ; FY12 Guidance = A8.2ct ; 3-for-20 @ S$1.25 (A$1)
  
• SATSvcs : Q412 (Mar12) – Final 6ct + Special 15ct ; Q212 (Sep11) – Interim 5ct
  
• SingTel : 2H12 (Mar12) – Final 9ct ; 1H12 (Sep11) – Interim 6.8ct ; Includes Exceptional Net Tax Credit S$270M
  
• SIAEC : Q412 (Mar12) – Final 15ct ; Q212 (Sep11) – Interim 6ct
  
• StarHub : Q112 (Mar) – 5ct
  
• SMRT : Q412 (Mar12) – Final 5.7ct ; Q212 (Sep11) – Interim 1.75ct
  
• SingPost : Q412 (Mar12) – 2.5ct ; Q312 (Dec11) – 1.25ct ; Q212 (Sep11) – 1.25ct ; Q112 (Jun11) – 1.25ct
  
• SPH : 1H12 (Feb) – 7ct
  
• ST Engg : 1H11 (Jun) – 3ct ; 2H11 (Dec) – 4ct (Final) + 8.5ct (Special)
  
• MIIF : 1H11 (Jun) – 2.75ct ; 2H11 (Dec) – 2.75ct
  
• ComfortDelgro : Q411 (Dec) – 3.3ct ; Q211 (Jun) – 2.7ct
  
• SBSTransit : Q411 (Dec) – 2.8ct ; Q211 (Jun) – 3.1ct
  
• StarHub : FY12 Div Guidance – 5ct/Q
  
• M1 : 2H11 (Dec) – Final 7.9ct ; 1H11 (Jun) – Interim 6.6ct
  

HOLDING FIRM DESPITE NEW DEVELOPMENTS

•LTA directs SMRT to start replacing third rail

•Slight increases in capex to come

•Share price remains stable and resilient

SMRT to start replacing third rail

Following a directive issued by the Land Transport Authority (LTA) yesterday, SMRT will begin replacing, with immediate effect, the power supplying third rail at locations where hairline cracks on some parts of the third rail joints are more visible. Although the presence of hairline cracks does not pose any immediate concerns, the move is more of a precautionary measure and the LTA has also reiterated the need for SMRT to closely monitor the condition of the third rail joints across its entire rail network.

Additional capex not accounted for

SMRT had previously disclosed a S$500m capital expenditure plan for FY13 with the excess from its usual annual budget (~S$100m-S$140m) related to a portion of the S$900m, seven-year plan to upgrade and renew aging MRT assets. According to SMRT’s work and time-line projections, the cost of the third rail replacement has not been included in this year’s estimates. While the final amount will only be known pending the outcome of its third rail checks, we expect to see a slight uptick in this year’s capital expenditure with the increase coming from an acceleration of costs from later years.

Share price has held steady since results

As for SMRT’s share price, it has held steady despite initial selling pressure following its weak FY12 results, and has managed to outperform the FTSE STI Index over the past two and a half weeks (-0.9% vs. -5.3%). While the COI continues its public hearings, we deem the possibility of further sharp sell-offs to be remote as SMRT services and its operational cash flows remain in demand and resilient.

Maintain HOLD

We reiterate our belief that SMRT will not have difficulty addressing its higher capital outlay requirements given its existing net cash position and available MTN programme, and leave our conservative 60% PATMI dividend payout ratio estimates unchanged. Maintain HOLD with a fair value estimate of S$1.71.

Results Season Takeaways

Sector Overview

The Telecommunications Sector under our coverage consists of SingTel, Starhub & M1. Starhub (STH) and M1 are pure plays to the Singapore market, while SingTel (ST) has exposure to the Asia-Pacific region through its regional mobile associates.

• Positive earnings for SingTel & Starhub

• Starhub is still the highest yielding Telco counter

• SingTel dominates fibre market share

• Neutral on SingTel & Starhub, Reduce on M1

Earnings Surprise?

Starhub’s results beat our expectations for the second consecutive quarter with profit increase of 28% y-y. While revenue increased by merely 6%, better cost control due to lower marketing and promotion expenses improved Starhub’s profitability. M1′s net income declined by 5% y-y as operating expenses outpaced the relatively stagnant top line growth. Adjusting for the effects of a one off gain from an exceptional S$270mn tax credit received, SingTel’s results were in line.

Operational Trends

Starhub & M1 reported stagnant Postpaid Mobile subscriber base in the quarter. SingTel added 30k subscribers, but reported a dip in Postpaid ARPU in the quarter. For the PayTV market, SingTel added 15k subscribers and increased its market share to c.40%. By our estimate, SingTel dominated the fibre broadband space with a market share of 60%, with M1 ranking second with a 23% share. While Starhub does not disclose its fibre base, the company probably has a lower fibre subscriber count as it could still offer high speed MaxOnline plans on its cable network.

Recommendation

Fundamentally, we rate SingTel & Starhub as Neutral and have a Reduce rating on M1. We continue to prefer SingTel for its growth potential outside of Singapore and cheaper valuation over its local peers.