SGX Yield Stocks

M1 posts 4.8% fall in Q4 net profit to $37.9m

Full-year 2007 net profit up 4.4% to $171.8m; final dividend of 8.3 cents

MOBILEONE yesterday reported a 4.8 per cent fall in net profit to $37.9 million for the fourth quarter of 2007 as it spent more on keeping its customers and on higher staff costs.

The smallest of three telcos here said that full 2007 net profit was up 4.4 per cent to $171.8 million.

The fourth-quarter net profit missed the $41.3 million median estimate of six analysts surveyed by Bloomberg.

Q4 revenues rose 2.9 per cent to $206.9 million.

M1 announced a final dividend of 8.3 cents, bringing the total payout (including a capital distribution) to 15.4 cents for the year, representing an 8 per cent yield based on the $1.92 closing price yesterday.

Chief executive Neil Montefiore said that it had been a tough quarter, and 2008 would be even more challenging.

Although its customer base rose 14.8 per cent to 1.54 million, market share fell to 27.4 per cent at the end of November from 28.3 per cent in August and 28.5 per cent in November 2006.

Singapore’s mobile phone penetration rate stood at 116.1 per cent at end-November according to official data – meaning more than one phone per person.

Operating expenses rose 7.8 per cent to $160.7 million during the quarter while the average acquisition cost for each customer jumped 39 per cent to $209. Retention cost rose 4.3 per cent to $147.

In order to retain customers, M1 cut its handset prices. Money from handset sales was 25.9 per cent lower year-on-year at $19.7 million, though it was 22.4 per cent higher than in the third quarter of the year.

Staff costs increased 5.6 per cent to $22.6 million.

Mr Montefiore said that full mobile number portability – where customers can keep the same number when they change operators – due to be introduced in May, would be a challenge for all telcos, although he expects the impact to be neutral on M1. Much bigger rival Singapore Telecommunications, which has the largest customer base, is expected to feel the most impact when number portability is introduced.

M1 will continue to work at reducing costs this year. Initiatives include building its own circuit network, which so far is leased from SingTel. It has already moved its call centre to Kuala Lumpur and expects staff savings of 30-40 per cent.

M1 said that capital expenditure for 2008 will be between $100 million and $120 million. It expects operations to remain stable.

Free cash flow fell 28.8 per cent to $172.7 million at end-2007.

M1 will continue to look at returning excess cash to shareholders every quarter. It also will retain some flexibility for investment opportunities, Mr Montefiore said.

As for the impact of an economic slowdown, Mr Montefiore said that in his experience, telcos are a ‘recession proof’ business.

Rail And Bus Ridership Growth A Boon

Rising rail and bus ridership will drive earnings. Anecdotal accounts indicate the mid-Dec 07 taxi fare hikes have led to increased ridership for both rail lines and buses. 81% of SMRT’s revenue and 76% of operating profit are derived from rail and bus operations. We have conservatively factored in a 3% rise in rail and bus ridership (over our earlier forecasts) and this will bring significant earnings enhancement. By 2010, the running of the Circle Line will bring forth a quantum leap in rail revenue.

Retail rental earnings continue to expand. Rental of retail space accounts for only a 5% revenue share, but a significant 18% operating profit share. As more retail space is added to Mass Rapid Transit stations and rented out, rental income will rise, accompanied by expanding operating margin. Taxi operations are now in the black. SMRT recorded a taxi operating profit of S$0.2m in 2QFY08, a reversal from 4QFY07′s S$0.4m loss. This was due to a higher hired-out rate of 90.2% in 2QFY08, vs only 79.2% in 4QFY07. We believe taxi operations can continue to record positive operating profits in the quarters ahead.

S$1.81 target price comprises two components: a) S$1.71 for existing operations, and b) S$0.10 for the Circle Line. Based on an 85% payout ratio, dividend yield is also attractive at 5%.

Earnings To Be Driven By Overseas Operations

Overseas operations to drive earnings in the long term. CD recorded 46% of its revenue from overseas operations for 9M07. Management is targetting to raise this to 50% over the next two years. China may account for a relatively small 7% revenue share currently, but both organic and inorganic expansion could raise this share significantly. In addition, China taxi operations offer an operating margin of 31%, almost treble CD’s overall operating margin. As China revenue share increases, margins should also widen.

Singapore bus and rail ridership rising. Anecdotal accounts indicate the mid-Dec 07 hike in taxi fares has led to increased ridership for both bus and rail lines. We have factored in greater economies of scale, wider margins and higher earnings.

Strong operating cash flow to keep dividend high. CD has consistently generated operating cash flow in excess of S$500m p.a. for the past few years. As earnings expand, cash flow generation could strengthen. We are forecasting 2007 dividends of 10.5¢, which gives a 7% yield.

BUY with a S$2.46 target price based on our sum-of-the-parts valuation model, comprising the following: a) S$0.30 discounted cash flow valuation for Singapore bus and rail operations, and b) S$2.16 from 2009 PE valuation for other businesses.

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