Month: October 2008
MIIF, MPS – BT
Three property, infrastructure funds allay fears
Two MacarthurCook funds and one Macquarie fund update financial positions
THREE property and infrastructure funds yesterday issued statements in a bid to allay market concerns about tighter credit, and to provide updates on their financial positions.
Facing a possible rating downgrade by Moody’s Investors Service, MacarthurCook Industrial Reit (MI-Reit) reassured investors that it is ‘advanced in negotiations’ to refinance a $220 million facility maturing in April 2009. Discussions should be finalised in January next year.
Moody’s said on Tuesday that MI-Reit, with a Baa3 corporate family rating, ‘faces significant refinancing risks’ as this amount of debt is not covered by available committed facilities.
Moody’s review also reflected concerns over MI-Reit’s asset and tenant concentration, which could be ‘much greater…than is consistent with a Baa3 rating.’
To this, MI-Reit said that its income is protected by a long lease expiry profile. For instance, only 3.6 per cent of the trust’s rental income will be subject to lease expiry in FY2010.
Head lease arrangements and a diversified portfolio of quality tenants also contribute to income security, it added. Around 36 per cent of rental income comes from manufacturing facilities which ‘tend to have higher tenant retention rates in an economic downturn’.
MI-Reit ended trading yesterday with an unchanged unit price of 33 cents.
Another fund, the MacarthurCook Property Securities Fund, also updated investors on its operations yesterday.
‘While interest rates around the world are now trending down, the ability to source competitively priced debt, combined with the anticipated slowing in economic growth, continues to be a concern for the market,’ said Richard Haddock, chairman of fund parent MacarthurCook Fund Management Ltd.
A priority is to further reduce debt and prudently manage its underlying portfolios, said the MacarthurCook Property Securities Fund. One strategy is to cut its weightings on unlisted property and use those funds to reduce debt.
A third fund, the Macquarie International Infrastructure Fund Limited (MIIF), said yesterday that it has no bilateral dealings with known troubled financial institutions.
According to the fund, borrowings held by its underlying businesses have remaining maturities of three to 14 years, and most of its interest exposures are also hedged for the medium to long term.
MIIF also said that its businesses are performing strongly in line with management’s expectations. It therefore expects income this year to be comparable with that received last year.
The unit price for MIIF rose 2.5 cents yesterday to close at 37.5 cents.
M1 – DBS
Competition takes its toll
Story: Net profit fell 21% y-o-y to S$34.4m, significantly lower than our estimate of S$40m. Service revenue fell for the first time (-1.8% y-o-y, -5.2% q-o-q) this year, as M1 struggled to keep churn rate under control. Management has lowered its guidance from “stable operations” to “single digit decline in core earnings” for FY08.
Point: We want to highlight two key points.
1. Post-paid mobile competition stronger than expected.
Handset subsidies are coming down, evident in lower handset sales. But free 3-6 months subscription plans offered by competitors have led to higher churn rate and weaker ARPU. M1’s monthly churn rate reached 1.8% from 1.5% in the previous quarter. SingTel and StarHub seem to be benefiting from high churn at M1.
2. Pre-paid mobile subscriber growth slowing sharply.
Although M1 managed to increase its pre-paid market share slightly, the sector pre-paid subscriber base has contracted 2.3% q-o-q. The slowing Singapore economy could have resulted in a net outflow of workers and tourists, who are typical pre-paid subscribers. We would like to highlight that with aggressive pricing of international direct dialing (IDD) service, traffic has increased significantly but IDD revenue has fallen by 15% q-o-q.
Relevance: We lowered FY08F and FY09F earnings by 8.6% and 12%, respectively, after imputing lower revenue assumptions. Based on M1’s historical trading range (8x-13x), we applied 10x average FY08-FY09F EPS (instead of 12x) to derive a revised target price of S$1.65. The stock has performed well compared to the broader market, and could see a de-rating after this set of dismal results. We downgrade M1 to FULLY VALUED.
M1 – OCBC
Eyes lower FY08 earnings after poor 3Q08
Disappointing 3Q08 results. MobileOne (M1) reported a slightly disappointing set of 3Q08 results on Friday, with operating revenue down 1.7% YoY and also 4.2% QoQ to S$196.7m, which was much steeper than the 1.5% QoQ decline that we had expected, hit by lower service revenue. On the other hand, net profit tumbled 20.9% YoY and 16.1% QoQ to S$34.5m, below our S$40.6m estimate. The telco blamed it on higher acquisition and retention costs, although in absolute numbers, acquisition cost eased from S$218 to S$162, while retention cost fell from S$167 to S$155. For 9M08, operating revenue came up to S$605.9m, up 1.6% YoY, meeting 75.6% of our FY08 forecast, while net profit fell 15.2% to S$113.6m, or 70.0% of our FY08 estimate.
Lowest net add since 2Q06. M1 also posted the lowest net add of just 10k subscribers in 3Q08 – the lowest since 2Q06. Management explained that it was still feeling the impact of full MNP (mobile number portability), despite saying during its 2Q08 announcement that it had minimal impact and competition was easing. As a result, its monthly churn rate rose further to 1.8% – again the highest since 2Q06. M1’s inability to offer “bundling” of services was another reason for the higher churn. Also worrying, the easing of its post-paid ARPU (average revenue per user) from S$61.9 in 2Q08 to S$59.2 in 3Q08 – management cited its MNP promotion which offered free six-month mobile subscription upfront as compared to those offered by its competitors which gave them towards the end of the two-year contract period.
Defensive but earnings likely lower. Although we continue to believe that M1’s business is fairly defensive in an economic downturn, we believe M1’s earnings are likely to be lower, especially if the recent ARPU and margin trends continue. M1 has also guided for a single-digit decline in net profit in 2008, versus one of a stable operation earlier. For our estimates, we have eased FY08 operating revenue by 0.7% and earnings by 9.3%; FY09 operating revenue by 3.6% and earnings by 13.3%. This in turn pares our fair value from S$2.33 to S$2.12. With M1 still committed to paying out at least 80% of its underlying net profit this year and likely next year as well, we maintain our BUY rating.
M1 – BT
M1’s Q3 net dives 21% to $34m
Higher customer acquisition and retention costs dent profitability
The curtain raiser for the quarterly results of local telcos got off to a gloomy start yesterday, with MobileOne reporting a 21.1 per cent drop in third-quarter net profit and warning of a drop in full-year earnings.
Net income for the three months ended Sept 30 slid to $34.4 million from $43.6 million last year, as higher customer acquisition and retention costs dented profitability, M1 said.
Earnings per share dropped 22.4 per cent to 3.8 cents, while revenue eased 1.7 per cent to $196.7 million. M1’s gearing – debt-to-equity – ratio for the quarter was 128.2 per cent, down from 132.8 per cent last year.
‘Increased competitive activity prior to the launch of full mobile number portability on June 13, 2008 continued into Q3,’ said chief executive Neil Montefiore. ‘The combination of an increased take-up of new competitive tariff plans and continuing high acquisition and retention costs caused a decline in profitability in the quarter.’
Local telcos have seen profits suffer as a result of a full-blown marketing war to attract new customers and lock in existing subscribers in the wake of number portability.
M1’s customer retention cost soared 30.3 per cent in the third quarter to $155, while acquisition cost declined 6.9 per cent to $164, with the advertising and promotional blitz starting to show signs of cooling down.
Singapore’s smallest telco added 10,000 customers in Q3 to lift its total customer base to 1.621 million. Despite the increase, its overall market share had slipped to 26.1 per cent at end-July from 28.3 per cent a year earlier, as competitors chalked up bigger customer gains.
During Q3, M1 finally branched into the market for fixed-line broadband services by launching four new high-speed Internet access packages, thanks to an infrastructure leasing deal with rival StarHub.
The two companies also joined hands to bid for a government tender to build Singapore’s upcoming ultra-fast fibre-optic broadband highway, but the authorities awarded the contract last month to a rival consortium involving Singapore Telecom.
For the first nine months of this year, M1’s net profit dropped 15.2 per cent to $113.5 million, though sales edged up 1.6 per cent to $605.9 million.
With the worsening economic climate, the company is predicting a ‘single-digit’ decline in full-year earnings. However, it still expects its total cash distribution for 2008 to be at least 80 per cent of net profit. M1 shares closed six cents lower yesterday at $1.70.
Rivals StarHub and SingTel are expected to report their quarterly results in the coming weeks.
However, SingTel has already hinted of a possible slowdown for some parts of its Singapore business and has responded with cost-cutting measures such as a hiring freeze and advertising cutbacks.
SPH – DBS
Pressing on in uncertain times
Story: SPH’s FY08 net profit ended at S$437m, down 12% from FY07, largely due to a 67% drop in investment income, but mitigated slightly by a strong operating profit, which grew 16% – due to its newspaper/magazines and property divisions. Revenue was up by 12.1% to S$1.3bn on higher contributions from all business segments. Excluding an impairment charge of S$26.5m on investment in an associate company, SPH’s FY08 earnings would have been in line with our expectations.
Point: With the recent global economic events, while we expect its newspaper operations to be affected by slower print ad revenues and higher newsprint costs, this should be offset by the progressive recognition of its development property project – Sky@Eleven. We have assumed US$850/mt for newsprint costs in our model. Upside could come from lower newsprint costs as a result of lower global commodity prices. DBS economists revised Singapore’s ’09 GDP growth forecast down to 2.6% from 4.6%.
In line with this, we have also revised our AdEx growth assumption down to –2%, from a flat growth previously. As such, we trimmed our net profit down by 1.7% – 1.9% for FY09F – 10F. Our sensitivity analysis shows that at the last traded price of S$3.50, it is pricing in a c.18% drop in AdEx, assuming other factors constant.
Relevance: Buy, TP: S$4.25. Maintain Buy, TP adjusted down to S$4.25 based on sum-of-parts due to lower newspaper earnings and pegging a lower valuation for Paragon. While the economic outlook seems challenging with Singapore slipping into technical recession and the recent plunge in equities, we believe SPH should be relatively resilient given its defensive newspaper operations, diversified businesses and strong balance sheet.
Risks include sharper than expected drop in print ad revenues, continued surge in newsprint costs, and higher USD/SGD exchange rate.
Declared a dividend of 19 cents (9 cents final; 10 cents special). Coupled with interim dividend of 8 cents, total dividend for the year is 27 cents, amounting to 86% of recurring profit.