Month: July 2008
TELCOs – OCBC
Defensive bet in these uncertain times
Frenzy over MNP. The introduction of true mobile number portability (MNP) on 13 June in Singapore was greeted with a big bash, with both SingTel and StarHub holding roadshows on 12-15 June, in conjunction with the PC Show 2008. Also evident were the blitz of full page advertisements from all three telcos, dangling attractive sign-up freebies and discounts, both in a bid to retain their existing subscribers and attract new subscribers. In addition, the telcos have taken to slashing prices for even the latest and hottest mobile phones by as much as S$600, versus the typical subsidy of around S$300-400/handset previously. This is expected to further increase the acquisition cost per subscriber, which has already seen significant increases in the previous quarter; for example, SingTel’s postpaid customer cost jumped 40% YoY to S$313 in the March quarter; StarHub’s acquisition cost rose 35% to S$124 in the same quarter.
Churn rate likely to rise. Although the churn rates are likely to increase in the next few months after the start of MNP, from about 0.8% for SingTel, 1.1% for StarHub and 1.3% for M1 in the March quarter, we do not expect any large migration of users. First, there is not much to choose between the operators in terms of services; secondly, the majority of subscribers are already locked-in to two-year contracts. More importantly, none of the telcos has actually made any price adjustments to their subscription plans, thus reducing the risk of a debilitating price war. Nevertheless, we are looking for some margin compression for the next few quarters, and will be adjusting our estimates accordingly after we see the June quarter results.
Defensive bet in these uncertain times. Going forward, we continue to expect flat to steady topline growth for the three telcos, even if there is a slowdown in the economy, as the usage of mobile phones has become an integral part of our daily lives. This can be seen in the high penetration rate that Singapore has achieved over the past few years, where it has been hovering above 100% since Sep 2006. And with their strong cashflow generating abilities, we believe their good dividend yields, at least for both M1 and StarHub, would be a good defensive bet in these uncertain times. We maintain our Overweight rating on the sector.
STEng – BT
ST Engg sees new period of growth
Aviation industry slowdown could provide growth opportunities, it says
THE aviation industry slowdown could well turn out to be a blessing in disguise for Singapore Technologies Engineering (ST Engg).
In an interview with BT yesterday, the group’s president and chief executive officer, Tan Pheng Hock, said the impact of a slowdown in the aviation industry on the company was ‘minimal’ at worst and could even provide growth opportunities.
‘Today is the best time to look at acquisitions to get access to markets and technology,’ he said. ‘For the last four years we have been buying companies, and this period may well be a good opportunity to accelerate the plan.’
Mr Tan’s words came amid a fall in the share price of ST Engg, which at $2.77 yesterday was a dollar lower than at the beginning of the year. The price drop, which came amid market turmoil over the US sub-prime crisis, saw the stock shed 15 per cent in value in June alone.
Mr Tan said the slump in ST Engg’s share price could also be due to investor concern about the impact of a slowdown in the US aviation industry on its aerospace arm, ST Aerospace, which does third-party maintenance, repair and overhaul (MRO) work for airlines in Asia and the United States.
ST Aero contributes roughly half of ST Engg’s revenues and slightly more than half its profit.
But Mr Tan pointed out that fleet reductions in the US by ST Aero customers such as Delta and Northwest would have little impact on ST Aero.
He said the cutbacks were mostly in old fuel guzzlers, rather than the modern more efficient planes ST Aero was mostly servicing.
‘The impact, if any, is minimal if at all,’ Mr Tan said, adding that as the existing fleets get worked more heavily, maintenance needs may actually increase.
Another ST Aero customer, Federal Express, recently reported a quarterly loss and issued a profit warning, but Mr Tan said this could even be positive for ST Aero as FedEx is in the process of converting old Boeing 757s to freight carriers, meaning that ST Aero could book higher revenues from such conversion projects.
Mr Tan said he saw 20 per cent of the company’s revenue in future coming from converting passenger aircraft for freight purposes, citing an Airbus study predicting that freighter fleets will almost triple in the next 20 years.
And in the longer term, ST Aero will benefit as carriers find it more cost-efficient to outsource MRO work, he said.
MRO outsourcing is projected to grow from 52 per cent of the market last year to 73 per cent in 2017.
ST Aero has been linked with a US$1 billion deal to service Lion Air’s new fleet of Boeings.
Mr Tan confirmed ST Aero was interested and said it would be a good partnership. ‘We think they are very strong in this market, and they can leverage on our safety record.’
Analysts have lowered target prices and in one case downgraded the stock of ST Engg.
DBS Vickers analyst Janice Chua said in a research note that the company was fully valued with a 12-month target of $2.80, down from $3.50.
‘ST Aerospace’s earnings can be a key indicator on the group’s overall performance and share price tends to be more vulnerable to bad news in the aviation sector,’ she noted.
ComfortDelgro – CIMB
Growth from overseas
• Fuel concerns. While costly fuel is a concern for regulated public-transport companies like CD in Singapore, CD is able to pass through higher fuel costs in its overseas bus operations. Domestically, an application for a fare hike has been made. We also expect a review of diesel subsidies for its Singapore taxi operations.
• Public transport ridership is up. Escalating petrol and diesel prices, more ERP gantries as well as increased ERP charges are forcing more private cars owners to take public transport. Monthly ridership for both rail and bus is encouraging, reflecting a positive shift in commuter behaviour towards public transport.
• Overseas business to drive the group. Management aims to raise its overseas revenue from 50% to 70% within the next 5-7 years. With this new target, we could reasonably expect growth to be spurred by possible M&As, as well as organic growth of its bus operations in the UK, Australia and China, supported by taxi operations in the UK and China.
• Forecasts and target price cut; but maintain Outperform. We lower our FY08-10 core net profit forecasts by 6-17% to factor in much higher diesel prices. However, dividend yield is attractive at 6% and valuations appear reasonable. Our DCF valuation prices the stock at S$2.09 (previously S$2.32) using an unchanged WACC of 9.3% and terminal growth rate of 2%.