Month: August 2007
SingTel – OCBC
Operationally better
Mixed results. Singapore Telecommunications Limited (SingTel) reported its 1Q08 results with revenue of S$3.6b, +10.5% YoY and +7.2% QoQ. Net profit was reported at S$927.2m, +10.4% YoY but fell 6.3% QoQ. The underlying profit (excluding one-off items) trend was similar with annual growth at +3.7% but fell 2.1% sequentially. The sequential decline in profitability is due mainly to a high base effect as the result of the recognition of tax credit in the previous quarter. Excluding this item (i.e. at the pre-tax level), SingTel’s numbers would have grown 5.0% QoQ. As in previous results, the key earnings driver remains SingTel’s regional mobile associates. This segment grew 29.0% YoY and 11.5% QoQ. In terms of the two key operating units, Singapore operations margins improved on the back of better cost control whilst the reverse is true in Australia. The overall effect is a slight deterioration of group sequential EBITDA margin to 31.3% (from 32.9% in 4Q07).
Singapore margins improved. In Singapore, even though revenue grew by marginal 0.4% QoQ to S$1,161m, this was offset by a much stronger drop in operating expenses of 6.3% QoQ. This led to EBITDA improving to S$507m, +8.9% QoQ. This is clearly reflected in the sequential margin expansion from 42.3% to 43.7%. The good cost containment was almost across all segments. However going forward, with the recent introduction of IPTV and aggressive marketing, costs are expected to rise, hence we expect the 2H08 margins to come off. In Australia, the scene is a total opposite. Revenue grew 2.5% QoQ to A$1,898m, but was offset by increases in operating expenses of 6.6% QoQ. This led to EBITDA deteriorating 8.2% QoQ, with margins falling from 28.3% to 25.4%. The reason for the poor matrix is due to aggressive acquisition activity which increased 37% QoQ to A$159/sub.
Associates retain star status. The star performers in the quarter were again SingTel’s associates. Collectively they contributed about S$463m or by about 50% to group PATMI (from 42% in 4Q07). More importantly, with the current rate of growth, the associates are likely to dominate future earnings. In terms of importance of individual associates, Telkomsel remains dominant – making up 43% of associate contribution, followed closely by Bharti (34%).
Maintain HOLD. SingTel is a fairly defensive play with generous payout and we do not expect the trend to change. As for earnings, SingTel has guided that it expects revenue and EBITDA to continue to grow. However in terms of ratings, as SingTel is trading close to fair value of S$3.32, we maintain our HOLD rating.
ComfortDelgro – BT
ComfortDelGro’s Q2 profit up 22.4% to $58.5m
THE two-percentage-point cut in Singapore’s corporate tax rate helped to boost ComfortDelGro’s net profit for the second quarter ended June 30 by 22.4 per cent to $58.5 million. The tax cut brought a $6.3 million reversal in deferred tax.
The land transport corporation’s Q2 revenue rose 8.1 per cent to $746.7 million compared to the same period a year ago on the back of strong contributions from its overseas operations.
The world’s second-largest land transport company said bus operations in Australia, the UK and China were responsible for most of the increase in turnover, along with taxi operations in the UK and China. As a result, overseas turnover now accounts for 47 per cent of the group’s total income – up from 45 per cent a year ago. Operating profit for Q2 rose by 8.4 per cent to $81.7 million.
‘Over the last few years, we have moved quickly to seize investment opportunities overseas while exercising financial prudence,’ said managing director and group CEO Kua Hong Pak. ‘Certainly, much of the growth going forward will come from our overseas operations.’
Energy and fuel costs for Q2 rose one per cent to $51.5 million. The group said this amount was lower than expected because of hedging.
But staff costs rose 12.6 per cent to $238 million as more staff were recruited for its expanding overseas operations.
For the first half, the group’s net profit increased 10.5 per cent to $113.9 million. Revenue rose 8.6 per cent to $1.46 billion.
An interim gross dividend of 3.35 cents – from 3.125 cents previously – has been declared. Together with a special gross dividend of 4.15 cents, the combined total interim gross dividend is 7.5 cents.
Earnings per share in H1 rose from 4.98 cents to 5.49 cents.
The group’s listed unit, SBS Transit, posted a 25.2 per cent jump in second quarter net profit to $14.5 million, mainly on rising rail ridership and advertisement revenue. SBST operates the North-east MRT Line. Q2 turnover also rose 9.5 per cent to $166.2 million on higher bus and rail fare revenue.
For the first half, SBST’s net profit grew 20.4 per cent to $31.6 million, while revenue increased 8.3 per cent to $329.1 million.
MIIF – BT
Macquarie fund’s Q2 adjusted net income up
MACQUARIE International Infrastructure Fund (MIIF) has reported a 22.2 per cent rise in adjusted net income to $48.17 million for the three months ended June 30, 2007.
Total investment revenue for the second quarter rose 44 per cent to $60 million, while earning per share was 11.38 cents.
For the half-year period, adjusted net income stood at $52.81 million while total investment revenue reached $70.4 million.
MIIF said the strong results came from solid performances across its portfolio, with the businesses in which MIIF had invested directly performing particularly well. MIIF’s direct investments include stakes in Taiwan Broadband Communications, Changsu Xinghua Port and UK-broadcaster Arqiva.
MIIF will pay a dividend of 4.15 cents per share – an increase of 5.1 per cent on the previous corresponding six-month period – representing an annualised trading yield of 7.9 per cent per annum.
The fund said it expects to sustain and grow the current level of dividend payout over time.
In line with the commitment to focus the portfolio on Asia, MIIF recently divested its stakes in DUET Group, Macquarie Communications Infrastructure Group and Macquarie Infrastructure Company.
The divestments collectively earned MIIF total gross proceeds of about $271.8 million and a combined return of 14.4 per cent per annum against the combined cost of acquisition. The proceeds were used to repay part of the drawn balance on MIIF’s debt facilities.
In April, MIIF took up its share of the Arqiva rights issue for £pounds;87 million (S$266 million) in support of the acquisition of National Grid Wireless for £pounds;2.5 billion by Arqiva’s parent, Macquarie UK Broadcast Ventures Limited.
In July, Arqiva, which makes up more than a quarter of MIIF’s portfolio by value, signed a long-term contract with SDN Ltd to design, build and operate a new high-power national digital terrestrial TV network in preparation for digital switchover in the UK. The contract signed is worth about £pounds;500 million and will run until 2034, the fund added.
The fund said Asia remains attractive as an investment destination for infrastructure due to factors like rising populations and sustainable economic growth which requires investment in new infrastructure and maintenance of existing ones. Plus, ‘the Asian Development Bank estimates that in East Asia alone, the expected infrastructure service needs will be US$165billion annually over the next five years’.
To meet these needs, it is estimated that some 65 per cent of the expenditure would have to be new investment.
ST Engg – BT
STE Q2 earnings rise 12% to $122.8m
HELPED by strong performance in the aerospace and land systems divisions, Singapore Technologies Engineering (STE) yesterday posted a 12 per cent year-on-year increase in second-quarter net profits to $122.8 million. Revenue for the three months to June 30 grew 22 per cent to $1.3 billion, helped by growth in all four divisions.
First-half net profit was 16.8 per cent higher at $231.6 million and revenue rose 21.7 per cent to $2.52 billion. H1 earnings per share was 7.84 cents, up from 6.78, and the board approved an interim dividend of 2 cents per share.
The group’s net profit margin for the second quarter declined due to a fall in investment and other income, according to acting chief financial officer Raphael Chin. Earnings before interest and tax (Ebit) actually rose by 39 per cent.
STE’s order book stood at $9.56 billion at the end of June 2007, slightly lower than a quarter ago. About $1.88 billion of this will be delivered in 2H07.
‘We are in a very strong position at this point,’ said chief executive Tan Pheng Hock. ‘You should be surprised that despite us having no major contract announcements last quarter the order book went down only marginally.’
STE’s aerospace unit saw second-quarter revenue rise 11 per cent year-on-year to $490 million, while net profit rose 14 per cent to $69.5 million.
SAS Component, a Denmark-based aircraft components unit acquired almost two years ago, turned profitable in 2Q07, said Mr Tan. It is the last of STE’s recent acquisitions to do so. The division also started expanding facilities and services – it is adding three hangars at Pudong International Airport in Shanghai and one at Seletar in Singapore.
The electronics arm saw revenues rise 29 per cent to $270 million, while net profits rose 2 per cent to $19.9 million. However, Mr Tan said this was due to a gain on investment last year – the unit’s Ebit actually rose by over 50 per cent.
Land Systems saw revenue rise 37 per cent to $285 million, while net profit more than doubled to $22 million. This was thanks to stronger deliveries of defence vehicles like the Bionix II and Bronco and of specialty vehicles like construction equipment and trucks.
ST Marine grew revenue 32 per cent to $220 million, while net profit declined 11 per cent to $13.9 million.
The group maintains its guidance of higher full-year turnover and pre-tax profit. It also expects revenue and profit before tax for the second half to be higher than those in the first.
Mr Tan said the group plans to invest in research and development on products, which will raise expenses.
He also said the US’ sub-prime worries do not directly affect STE’s operations there, except VT LeeBoy, which sells vehicles used to pave peripheral roads in housing estates. ‘It will definitely impact the LeeBoy business, but not a lot.’
But the credit crunch also means STE’s triple-A credit rating is ‘especially valuable’, he said. ‘It is a card not many people carry and means that we can borrow very cheap.’
Singapore TELCOs – CS
Go counter-consensus: hold M1 not StarHub
■ Event: We are assuming coverage of StarHub with an UNDERPERFORM rating relative to the Singapore market and a target price of S$2.92. While there is 0.7% upside to our target price, FY08 earnings growth is set to be considerably slower than the Singapore market (led by banks, property stocks and industrials). In contrast, we are assuming coverage of M1, consensus’ least preferred Singapore telco, with a NEUTRAL rating and a target price of S$2.40; 14.3% potential upside. Unlike StarHub, we believe that M1 is already priced for the low growth available in the industry.
■ View: After what we expect to be a brief reacceleration in revenue growth in FY07, growth rates are expected to resume a downward trend from FY08. With cellular penetration at 111.2%, we expect a revenue CAGR of only 1.8% from FY07-10. StarHub’s exciting brand and successful bundling strategy are expected to deliver 3.3% compound cellular revenue growth from FY07-10, versus only 0.7% growth from M1. However, this differential is sharply lower than the 12.6% CAGR StarHub achieved from FY04-07, versus M1’s 2.3% compound growth over the same period.
■ Catalyst: As M1 fights back in the cellular market, the 2Q07 results saw an upward revision in its guidance, StarHub’s remained unchanged. While StarHub enjoys dominance in Pay TV, SingTel has now entered the market and, if nothing else, is driving up content costs faster than StarHub’s Pay TV revenues. A significant downside shock could occur to StarHub and SingTel if the next generation network’s (NGN) plans result in new fixed lines being built; M1 can only gain if NGN is genuinely opened to resellers.
■ Valuation: As the sector growth rates slow, becoming increasingly “bondlike”, cash flow yield should become the key metric. StarHub is trading at an FY07 cash flow yield of 6.7%, while M1 is trading at 9.8%. On capital management, a target net-debt-to-EBITDA ratio of 2.0x in FY08 would allow a 13.4% additional yield from StarHub, but 23.3% from M1. We find this divergence too wide, given the converging (and slowing) growth rates.