Month: October 2008
M1 – OCBC
Likely stable 3Q08 showing
Infinity consortium loses NetCo bid. Recently, MobileOne (M1) and its partners (StarHub, Qatar Investment Authority) from the Infinity consortium lost out on the NetCo (Network Company) tender to OpenNet (Axia, SingTel, SPH, SP Telecoms) consortium. Given that OpenNet can leverage on SingTel’s existing extensive ducting network and deliver the NGNBN at least 2.5 years ahead of the iN2015 vision schedule, the smart money was always on OpenNet winning the two-horse race, even before the surprise pullout of City Telecoms from the Infinity consortium in late August. Nevertheless, the decision will pave the way for M1 to concentrate on the Operating Company (OpCo) tender, whose deadline has been again delayed to 14 November. And we believe that M1 stands to benefit the most from this as it can broaden its service offering into the broadband space. We note that M1 has already started to make some headway in this area with its mobile and cable broadband services.
Slowing economy but earnings relatively resilient. But the greatest challenge facing the company is an economic slowdown, which the government expects to last for several quarters. While M1 is still expecting stable operations for this year, we believe that the pace of new additions in both the pre-paid and post-paid segments could slow in 2009. In addition, we can also expect some deterioration in ARPUs (Average Revenue per User) in both segments. However, we are not expecting a serious drop given that mobile communication has become well entrenched as a part of our daily lives. Hence earnings would remain relatively resilient even in an economic downturn. Furthermore, margins are likely to remain intact as we expect retention and acquisition costs to normalise as the MNP (true mobile number portability) has largely been a non-event for most subscribers.
3Q08 results likely stable. M1 will be announcing its 3Q08 results on 17 Oct after market closes. We are expecting revenue to be down 1.5% QoQ at S$202.2m, as subscribers wait for the usual year-end promotions, especially for the Apple iPhone 3G, before committing to a new contract. Net profit is likely to ease by a smaller 1.2% to S$40.6m as margins recover slightly. No dividend is likely to be declared in 3Q, but we continue to expect a final dividend of S$0.074 in 4Q, bringing the total payout to S$0.136/share (yield: 7%). We maintain our BUY rating and S$2.33 fair value.
SingTel – CIMB
Raising fixed line rates
SingTel will raise both residential and business fixed line voice: a) subscription rates and b) call charges from 1 Jan 09, as summarised below. Subscription fee is raised by 7-10% and call charges by 14%. ‘For us (in Singapore), it’s no longer business as usual.
Separately, SingTel Singapore CEO Allen Lew said, “We are already starting to see the impact of the global financial crisis on some parts of the business. We are adopting a (cost-cutting) framework that is customised for what we see as a 12 to 18 month period of uncertainty and difficult economic environment.” SingTel will also rein in “discretionary costs” such as its advertising expenses. “Until our revenue starts flowing back like the old days, we will definitely have to cut back.”
Comments
Small positive. Fixed line voice revenue contribute to 5-6% of FY10-12 SingTel Singapore’s revenue and only 2% of group revenue. Assuming a weighted average 10% increase in fixed voice revenue, with zero marginal cost and 18% corporate tax, SingTel’s FY10-12 core net profit is boosted by 0.5-0.7%. Hence, we maintain our forecast.
Fixed-to-mobile migration is unlikely to be hastened significantly as fixed line tariffs are substantially cheaper than that of mobile. Fixed line charges will be 1.6 cts/min vs mobile of tariff of 8-25 cts/min.
Valuation and recommendation
Maintain UNDERPERFORM, on SingTel with a SOP-based target price of S$3.50 over: 1) concerns over expected stiff competition between SingTel and StarHub for the exclusive rights for the 2010-2012 seasons for the Barclays Premier League and 2010 World Cup; 2) a cautious outlook. We gather that corporate users are cutting back on telco services; and 3) the appreciation of the S$ vis-à-vis currencies where it has major holdings in, namely the Australian dollar, Indian rupee and Indonesian rupiah. We are reviewing our target price given that sharp depreciation of the regional currencies vs the S$.
Our top pick in the sector is M1, which we recommend a Neutral with a target price of S$2.15 for its attractive dividend of 8%, lower risk to earnings and cash flow as it averts a costly bidding warfare over content.
SPH – BT
SPH to sell stake in Hong Kong publisher
SINGAPORE Press Holdings said yesterday it will sell most of its stake in a Hong Kong publisher. Through its wholly owned indirect subsidiary Magazines Incorporated, SPH will sell 80 per cent of its stake in MI Publishing (MIHK) to Sing Tao Holdings (BVI). Magazines Inc is a wholly owned subsidiary of SPH Magazines.
SPH did not say how much it will be paid for the stake. ‘The consideration will be 80 per cent of the net asset value of the entire share capital and will be determined in the completion accounts to be finalised on or around Nov 15,’ it said.
The shares will be transferred to Sing Tao Holdings, which owns media company Sing Tao News Corp, when conditions under a sale-and-purchase agreement are fulfilled, SPH said. MIHK will no longer be a subsidiary of SPH but will remain an associate. After completion of the transaction, MIHK will continue to publish The Peak Hong Kong under a publishing licence arrangement with SPH Magazines, SPH said.
The divestment is not expected to have a material impact on SPH’s earnings or net tangible assets per share for the financial year ending Aug 31, 2009.
As it hives off its stake, SPH is getting into the book publishing business in Singapore. It said last month it will set up a book publishing business under its subsidiary Straits Times Press. It has taken over the contracts and intellectual property rights of SNP International Publishing, the book publishing arm of SNP Corp.
SPAusNet – CIMB
New long-term agreements benefit shareholders
Improved revenue, reduced expenses
SPN has announced a number of new operational arrangements with the Singapore Power Group. The arrangements are expected to strengthen SPN’s operational model, enhance its focus on niche asset services and provide immediate benefits to security holders through reduced management-performance fees.
Revenue enhancements for non-regulated services. SPN will provide end-to-end network metering services, technical services and vegetation management services to electricity and gas networks owned and managed by Jemena (formerly a part of the Alinta Group and now a member of the SP Group). SPN will also deliver contestable metering services to Jemena’s existing customers. These services are expected to contribute annual revenue of A$75m-85m to SPN. To ensure continued capital investment and deliver network growth, Jemena has been appointed an SPN preferred supplier, for the delivery of A$35m-40m of annual capex to SPN, or an estimated 10% of its annual capex. Each arrangement is for an initial 5-year term and
is on arms-length terms.
Expanded scope of work for SPN. Agreement has also been reached with a whollyowned subsidiary of SPI Management Services (SPIMS), SPN’s management company, for it to be the exclusive provider of IT services to SPN and Jemena. These services include applications management, and infrastructure and service delivery, at agreed allocations of costs with no profit margin accruing to SPIMS’ subsidiary. The agreement is for an initial term of seven years. SPN will retain its core asset-owner functions of IT strategy and policy, information security and real-time systems. The shared IT services will provide SPN with best-practice IT solutions and access to a wider pool of skilled IT resources.
Reduced expenses. With an expanded scope of work and opportunity for Jemena to participate in synergies, SPIMS has agreed to reduce performance fees payable under the Management Services Agreement. The reductions, effective 1 Oct 08 and for the duration of the IT service agreement, involve the waiver of base incentive fees, being 0.1% of market capitalisation, and the reduction of the performance-fee cap from 0.75% to 0.50% of market capitalisation. The fee reductions will be an immediate benefit for SPN security holders.
Valuation and recommendation
Positive impact on forecasts. As a result of the arrangements and expense reductions, we have raised our net profit forecasts by 9-20% for FY09-11. Our revenue forecasts have also been raised by 2.7-6.0% to account for increased revenue in the non-regulated services segment. While there are reduced expenses from management-fee reductions, we expect other expenses to rise, from providing a greater scope of services to Jemena. As such, EBITDA margins are forecast to remain at 61-62% in FY09-10.
Maintain Outperform; higher target price. We continue to like SPN’s excellent earnings visibility and predictability as well as attractive yields per stapled security. With our forecast upgrade, our DCF target price (WACC 10%, terminal growth 3%) rises to A$1.44 or S$1.71, from A$1.34 or S$1.59, supported by distribution yields of over 11%.