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.

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.

• 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
  

•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.

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.

Qualcomm Inc is asking Bharti Airtel Ltd, India's largest mobile-phone operator, to pay about 50 billion rupees (S$1.16 billion) for its Indian unit as the two companies seek to conclude talks in the next two weeks, according to two people with knowledge of the matter.

Bharti may purchase the unit in instalments over two years, the people said, declining to be identified as the details are private. Under the plan, Bharti would initially purchase a 26 per cent stake in the unit, currently held by Tulip Telecom Ltd and Global Holding Corp, and Qualcomm will own 51 per cent of the division for at least two years after that, the people said.

Qualcomm, the biggest maker of mobile-phone chips, bought frequency licences in cities including New Delhi and Mumbai in June 2010, paying 49.1 billion rupees for spectrum that allows handset users to download video at greater speeds. The San Diego, California-based company was allocated spectrum this month, two years after paying for the airwaves, people with knowledge of the matter said on May 8.

Mobile-phone operators in India including Bharti Airtel and Vodafone Group Plc are trying to boost revenue by selling services such as video streaming as incomes rise. The number of smartphones sold in India almost doubled last year to 11 million, according to data compiled by Bloomberg.

SP AusNet, the Australian electricity distributor 51 per cent owned by Singapore Power, will raise A$434 million (S$547.2 million) in a share offer to existing investors to help fund expansion, Bloomberg reported.

Separately, the company also said that the Supreme Court of Victoria has formally approved the compensation offered in a bushfire class action in Australia.

As for the share offer, Bloomberg reported that SP AusNet will offer investors three shares for every 20 that they hold at A$1 apiece. That is an 11 per cent discount to yesterday's closing price of A$1.125.

SingPower will take its 51 per cent entitlement with the balance to be underwritten by Macquarie Group and UBS AG.

The authorities are investigating top mobile phone carrier Bharti Airtel under its money laundering and foreign exchange rules in a probe related to the grant of airwaves a decade ago.

Bharti shares fell as much as 5.1 per cent during trade yesterday after Minister of State for Finance S S Palanimanickam told Parliament that the Directorate of Enforcement was investigating the company. The shares pared most losses to close 1.2 per cent down.

Indian mobile market leaders Bharti and Vodafone’s local unit are not involved in a massive scandal over alleged below-market-price sale of lucrative telecoms licences in 2008 that has rocked the once-booming sector. They are, however, being investigated over airwave grants during 2001 and 2002.

Bharti, controlled by India’s fifth-richest man Sunil Mittal, said in a statement it was cooperating with investigators. It did not give the reason for the investigation, but a company source told Reuters that it was related to the probe over airwave grants.

“Bharti Airtel maintains the highest standards of corporate governance and regulatory compliance. We have already provided all relevant details asked for by the relevant authorities in this matter and will be happy to cooperate further,” the company said in the statement.

The Minister, who was replying to questions from a lawmaker through a written statement, declined to give further details.

Bharti, nearly one-third owned by South-east Asia’s top phone company, SingTel, operates in 20 countries across Asia and Africa and is the world’s fifth-biggest mobile phone carrier by subscribers. India is its biggest market.

Shares in Bharti, valued at more than US$21 billion (S$26 billion), lost 3.6 rupees (S$0.08) to close at 304.15 rupees, after hitting an intra-day low of 292.05 rupees.

A series of corruption scandals during Prime Minister Manmohan Singh’s second term have rocked the government and businesses, sparking street protests by anti-graft activists and spurring a flurry of investigations of companies.

The scandal over the 2008 licence grant has ensnared prominent politicians and high-profile corporate executives. The police have charged a total 19 people and six companies in the scandal, which the CAG has estimated has cost the exchequer as much as US$34 billion in lost revenue.

Last November, the police conducted searches at offices of Bharti and Vodafone India seeking details of airwaves allocated to them in 2001 and 2002 by a government then led by the Bharatiya Janata Party (BJP), now in opposition.

The investigation is continuing and police are yet to file any formal charge against the companies. Both Bharti and Vodafone India have denied any wrongdoing.

The BJP had attacked the Congress-led government over the corruption scandals and forced a near-shutdown of Parliament for much of last year. The BJP had alleged that the government was trying to “divert the attention” by probing spectrum grants during its term in power. REUTERS

1Q12 results in-line with our expectations. ComfortDelGro’s (CD) 1Q12 PATMI came in within our expectations at S$54m (-5% QoQ, +7% YoY) on the back of higher revenue of S$855m (-4% QoQ; +7% YoY) with operating margins flat at 10.9% (versus 10.8% EBIT margin for both 4Q11 and 1Q11 period). 1Q12 PATMI made up 21.3% of our full year estimate. Amidst this difficult period for domestic bus and rail operators that are facing cost pressures, we continue to favour CD who has displayed strength in its overseas business, with 1Q12 overseas EBIT up 27% YoY to S$46m and contributing 49% to total EBIT. Maintain BUY with TP of S$1.75 based on DCF (WACC: 9.3%; TGR: 1.5%).

Growth in bus business came from overseas. 1Q12 Singapore (SG) bus EBIT fell 63% YoY to S$2.8m. Performance remained lacklustre as high fuel, staff, and repair and maintenance costs continue to compress margins. CD has commented that 40% of its FY12 fuel costs for SG and UK have been hedged. Despite SG bus ridership growth of 4.2% YoY in 1Q12, we continue to foresee a difficult domestic bus operating environment should cost pressures persist while average fares remain depressed. On the other hand we remain positive on CD’s overseas bus operations in which 1Q12 EBIT grew 41% YoY to S$30m.

DTL costs start creeping in, but not the key concern for rail. 1Q12 rail EBIT fell 49% YoY to S$3.9m due to higher repair and maintenance, and electricity costs. Stage 1 of Downtown Line (DTL) is expected to be completed by 4Q13, and CD has since hired additional 40-50 staff for DTL. Headcount for DTL is expected to increase throughout the year and is targeted to hit additional c.180-200 staff before DTL commences operations. However, DTL staff cost increases are not a major concern for us given that the new hires will largely be lower level staff. Moreover rail operations accounted for just 7% of overall FY11 EBIT.

Valuations attractive. At FY12 P/E of 12x, CD remains relatively more attractive than SMRT’s 16x FY13 P/E (FYE Mar). CD’s widespread overseas network allows it better overseas growth prospects which we view as a strong advantage.

Company Overview

SATS Ltd is a provider of Airport Services & Food Solutions with a dominant presence in Singapore’s Changi Airport. The Group also has a network of JVs across Asia and holds a majority stake in TFK Corp, an inflight catering business based in Japan.

• Stronger than expected end to the year

• B/S still below optimal capital structure, paving the way for higher dividend distributions in the future

• Final & Special DPS of 21.0cents

• Maintain Buy with revised TP of S$2.80

What is the news?

SATS announced a 10.7% decline in net income for the year, mainly due to the lack of contributions from Daniels Group that was divested in the year. After adjusting for the effects of one off items, underlying profits from continuing operations declined by 4.3%. EBITDA margin declined by 2.3ppt as a result of slight margin compression at its core business in Singapore and lower profitability at TFK Corp. SATS announced special dividend of 15.0cents and final dividend of 6.0cents, taking full year payout to 26.0cents per share.

How do we view this?

SATS’s result for FY12 was stronger than our expectations, mainly due to lower than expected staff cost incurred in 4QFY12. Even after accounting for the special dividend payout, SATS is still expected to have a healthy balance sheet with a net cash position. The company’s capital structure would also be significantly below management’s long term net gearing target of 30%. Hence, we believe that SATS have the capacity to pay and would likely increase its long term dividend payouts, in the absence of suitable M&A opportunities.

Investment Actions?

We maintain our Buy recommendation on SATS and revised our target price to S$2.80 as we roll forward our valuation basis and account for the special dividend payout. At the current price, SATS offers a yield of >10% over the next 12 months.