Month: October 2008
SPH – OCBC
Slowing core business in 2009
Slowing growth. Singapore Press Holdings (SPH) reported its 4Q08 results last Friday with flat operating revenue of S$351.6m while net profit dove 26.3% YoY to S$92.5m. The bad bottomline performance was primarily due to a non-cash impairment write-down of S$26.7m for SPH’s 35% owned associate, TOM Outdoor Media Group (TOM). On a full year basis, SPH delivered 12.3% YoY topline growth to S$1.316b but PATMI still fell 12.4% YoY to S$437.4m. The topline was helped by a stronger recognition of the Sky@Eleven project while the poorer bottomline was due to less investment income and the impairment charge.
Less adverts expected with a technical recession. MAS stated that “Looking ahead, the outlook for the global economy has deteriorated amidst heightened risk aversion and de-leveraging in the financial sector”. The official forecast of GDP growth projection was down to 3.00% (prev. 4-5%), adding that “the growth of the Singapore economy is expected to remain below potential in the period ahead”. Management has indicated that advert requests have been slowing in view of the macro environment.
Rise in print costs in next 3 quarters. Management has again highlighted rising newsprint costs. As such, we raise our newsprint costs by between 18-35% (ref recent quarter’s price) for the next 3 quarters in view of supply curtailment (lines shutting down) and escalating production costs on the back of high paper demand, partly due to the US elections. We will re-jig our costs estimates if we see a strong and sustained correction in prices. Cash preservation. While SPH has stepped up its dividend/share to S$0.27 for FY08, management has iterated that it does not have a dividend policy. We discount Sky@Eleven’s stronger revenue recognition as it is non-cash in nature in view of its deferred payment scheme. With the gloomy outlook, we have assumed that SPH will cut its dividend/share to S$0.24 in an effort to preserve capital. Despite the lowered assumption, yield continues at 6.9% in view of the massive correction in share price.
Maintain BUY. While the STI has deteriorated 31.9% YTD, SPH has demonstrated its resilience with a smaller fall of 11.6% YTD. We tweaked our FY09 estimates slightly as we gain more clarity on segmental revenue prospects (stronger non-cash revenue recognition of Sky@Eleven but slower Adex) as well as cost projections. Our SOTP is now S$5.14 (prev S$5.25). Maintain BUY.
SingTel – DBS
Domestic and regional woes
Story: SingTel is facing challenges on both the domestic and regional fronts.
Point: We want to highlight four key points.
1. Possibly disappointing growth at Bharti next year. The market seems to underestimate the impact of mobile number portability (MNP), to be implemented June 2009. We trimmed our FY10F and FY11F earnings for Bharti by 5% and 6%, respectively. Using higher equity risk premium, we lowered Bharti’s target price to Rs850. Bharti remains the most expensive telco in Asia-Pacific at 16x FY09F PER.
2. Revised forex assumptions. We lowered the AUD/SGD exchange rate assumption by 10% to 1.15, and expect it to average 1.10 in 2HFY09. We raised our SGD/INR rate by 5% and expect it to average 31.5 in 2HFY09. A 10% decline in the AUD, INR or IDR would lower group earnings by c.2% each.
3. Lower corporate spending in Singapore. The slowing economy could result in businesses postponing their expansion plans. SingTel has more exposure to corporate spending relative to other local telcos. We trimmed revenue growth for Singapore to 5% (from 6% earlier) for FY09F, and to 2% (from 4%) for FY10F.
4. Impact of National Broadband Network (NBN). NBN could result in some loss of revenue from leasing of local circuits, where SingTel currently has virtual monopoly. We estimate overall loss of earnings arising from the NBN at S$100-150m, or 2-3% of group earnings in FY11 and beyond.
Relevance: We lowered our FY09F and FY10F earnings by 5.5% and 7.5%, respectively; they are now 5% and 8% below consensus estimates. Maintain HOLD for SingTel, with SOTPbased target price of S$3.10. Our stress test indicates a bear case target price of S$2.58 if associates de-rate to their historical low valuations.
M1 – CIMB
Rising to the top
• Upgrade to OUTPERFORM from Neutral. We are upgrading M1 to OUTPERFORM from Neutral as we believe the worst from mobile number portability is over. The stock offers fairly strong dividends and an upgrade in its backhaul could conservatively save it S$20m p.a. starting end-FY09. M1 is the top pick in our sector for the above reasons and the fact that surplus cash could be released.
• Could return excess cash. The possibility of this is contingent on whether it bids for OpCo but assuming it loses/does not bid, we estimate that M1 could return up to an additional 17.8cts/share for a 9.3% yield by end-2009, if it pursues a net debt/EBITDA of 1.0x, the lower end of its 1.0-1.5x target. This is in addition to a recurring dividend yield of 8%.
• Earnings adjustments. We downgrade our FY08 earnings estimate by 2.7% after reducing revenue expectations for its mobile and handset divisions, partially offset by higher IDD expectations. For FY09-10, we raise our estimates by 0.9-14.1% on account of lower capex and depreciation as well as a conservative S$20m p.a. M1 could save on its network.
• Raising target price. Our target price rises to S$2.31 from S$2.15 following our earnings adjustments, still based on DCF valuation (unchanged WACC of 7.9%). Rerating catalysts could include capital-management initiatives and stronger-thanexpected earnings.
Transport – CIMB
Sheltered stations
• Strong outperformance. Since our last sector update in Sep 08, Singapore’s public transportation stocks continue to outperform as investors seek safe havens in the current market turmoil. On average, these stocks have outperformed the FSSTI by 29% and 43% over one and three months respectively. As a unique asset class, both CD and SMRT have operations that should remain quite insulated from weak demand and rising cost of operations. There is also relatively good earnings visibility while the continued decline in energy prices should improve profitability.
• Declining energy prices. Demand for energy has fallen in tandem with a slowing global economy. Crude oil prices are now below US$90/bbl, a 9-month low. While there were concerns earlier in the year about pressures from higher fuel prices for both CD and SMRT, these fears have now been put to rest. Lower fuel prices are positive as both CD and SMRT do not hedge their diesel fuel requirements.
• Ridership growth to boost revenues. Again, we reiterate the success of the Singapore government’s initiatives in inducing motorists to switch to public transport. Recent rises in electronic road pricing (ERP) charges, high fuel prices and a looming recession have all been boosting ridership. Even with the recent 0.7% hike in fares, public transport is still the most economical way to travel in Singapore. Rail ridership growth has been in the double digits for most of the year, despite high base figures.
• Maintain Overweight. We reiterate our Overweight position on the sector on the back of defensive qualities with limited downside risks in the current risk-averse environment. We maintain Outperform with an unchanged DCF (WACC 9.2%, TG 2%) target price of S$2.28 for CD, supported by prospective dividend yields of over 5%. SMRT remains a Neutral with an unchanged DCF target price of S$2.09 (WACC 8.5%, TG 2%) due to the limited upside to our target price.
StarHub – DBS
Negatives priced in
Story: The recent sharp decline in the stock prices have brought Starhub valuations to a more reasonable level given its stable earnings outlook and attractive 8% dividend yield. Margin pressure in broadband and cable TV is a concern, but that would be mainly felt in FY10 and is adequately captured in our below-consensus earnings estimates.
Point: We have three key points to highlight here.
(i) Competitive intensity to ease with SingTel signaling cost cutting. Competition seems to have eased, based on lower handset subsidies, which have come down from peak of about S$300 per handset in 1H08 to about S$100-150 currently. StarHub had won a handsome share of post-paid mobile subscribers in 2Q08. This should benefit the company over the next two years due to its policy of expensing handset subsidies in the same quarter rather than amortizing over a two-year contract period. Recently SingTel’s Singapore CEO Mr. Allen Lew said SingTel would freeze headcount and cut marketing expenses to focus on costs savings, which supports our view of easing competition. This may also imply that festive promotions in 4Q08, can be absent this year, leading to better margins.
(ii) StarHub could benefit marginally from price hike by SingTel. StarHub has extended its fixed line service for free to its pay TV customers after SingTel raised its fixed line service charges by c. 14%. Since this is a VoIP phone service, costs are minimal for StarHub, and it will gain from (i) one-time activation fee of close to S$40 (ii) more revenue from its international direct dialing (IDD) service and (iii) higher value proposition for its pay TV business and up-selling of more services.
(iii) Telcos are relatively immune to economic slowdown. Amid a slowing Singapore economy, telecom players like StarHub should continue to report stable earnings as consumers and business continue to spend on communications needs.
Relevance: We peg our target price to 14x average FY08-09F EPS, implying 20% premium to our target PER of 12x for M1, and at the lower end of Starhub’s historical PER range (13.3x-19.4x). Upgrade to HOLD with target price of S$2.50.