Month: November 2008
StarHub – OCBC
Sustainable dividend policy
Hubbing as a value proposition. StarHub, while it is not immune to the economic slowdown, should not see any drastic cutback in demand for its services (mobile, Internet broadband and cable TV). If anything, we believe that customers searching for “value” may be enticed by the relatively attractive cost savings offered by its “Hubbing” strategy from subscribing to all three of its services. However, it may face some competition from SingTel, as its rival also has similar bundling abilities. Nevertheless, we note that the Hubbing strategy has been fairly successfully thus far, and has helped to keep StarHub’s monthly churn around 1% versus the 1.8% for M1 which has no bundling ability; SingTel’s churn continues to be the lowest at 0.8%. However, as StarHub is unable to offer the new Apple iPhone 3G this year, versus earlier comments that it would have it by yearend, we may see an increase in churn as customers defect to SingTel.
Not chasing after subscriber growth. In any case, StarHub stated that it is not keen to chase after subscriber growth, especially in the highly competitive pre-paid segment. As can be seen from its 3Q08 results, the telco was willing to further reduce its pre-paid customer base by another 7.6% QoQ (-4.1% QoQ in 2Q08) to stabilize the ARPU (Average Revenue per User), which recovered to S$22 from S$20 in the previous quarter. On the other hand, it added about 17k new post-paid customers (+2.0% QoQ) but its 3Q08 ARPU has eased from S$77 in 2Q08 to S$74. While management noted that 50% of the S$3 drop was due to data-only subscribers and the rest coming from drop in minutes used from 515 in 2Q08 (523 in 1Q08) to 492 per month, it added that it would be keeping a close watch on this as it could be a precursor to further drops as the recession deepens.
Sustainable dividend policy. While earnings are expected to take a slight knock next year due to the recession, we do not anticipate much of an impact on its healthy operating cashflows. In fact, we expect more prudent capex spending and other cost-reduction measures to further improve operating cashflows and in turn, sustain the already attractive dividend policy. StarHub has committed itself to paying out at least S$0.18 of dividend (S$0.045 per quarter) this year and we expect the same, if not better, dividends next year. Maintain BUY and S$2.81 fair value.
SingTel – OCBC
Most negatives priced in
Recent sell-down brings value. SingTel, hit by concerns about the slowing growth prospects of its associates and the adverse forex impact on its earnings, was among one of the biggest losers among the telcos during the October sell-off. The stock lost about 25.2% of its value in that month alone, while M1 lost about 28.6%, StarHub about 7.8%, versus the STI’s 23.9% tumble. Although SingTel recovered slightly in November, it is still down over 38% Year-to-Date (YTD), bringing its valuation down to around 12.3x FY10F PER, which is below its 5-year average of 13.4x. In the aftermath of the sell-down, we believe that most of the negatives have been factored in.
Forex remains main concern. Nevertheless, we see the still-volatile forex swings as the main risk to SingTel’s earnings, given that it derives a significant portion of its earnings from overseas. Optus accounts for nearly 66% of 2Q09 revenue and associates account for 43% of its 2Q09 pre-tax earnings. In its recent 2Q09 results, adverse forex movements led to a 16.8% YoY and 8.9% QoQ fall in net contributions from associates. However, we note that forex impacts can also be positive, should the regional currencies strengthen against the SGD. In any case, SingTel has slashed the guidance for associates from low double-digit growth to lower overall YoY pre-tax contributions, citing slower economic growth in the countries as well as working into the lower guidance from key associates like Telkomsel as well as losses from Warid.
More cautious regional expansion strategy. In view of the more uncertain global economic outlook and the relatively tight credit market, we believe that SingTel may adopt a more cautious approach to its regional expansion strategy. By doing so, we see a higher chance of a special dividend – this was something that SingTel has consistently done in the past to return excess cash to shareholders. However, it is unlikely to be large as SingTel may need to conserve cash for its higher capex spending on the Next Generation National Broadband Network (NBN). It may also need to set aside cash in case Optus is successfully in its bid to build the NBN-equivalent in Australia. Maintain BUY with S$3.09 fair value.
M1 – OCBC
Defensive but expect lower earnings
Defensive but earnings likely lower. MobileOne (M1) is likely to see its business remain fairly defensive in an economic downturn. However, we believe earnings are likely to be lower, especially if the recent ARPU and margin trends continue. As a recap, M1 posted a slightly disappointing set of 3Q08 results, with operating revenue down 1.7% YoY and also 4.2% QoQ to S$196.7m, while net profit tumbled 20.9% YoY and 16.1% QoQ to S$34.5m. 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. M1 has also guided for a single-digit decline in net profit in 2008, versus one of a stable operation earlier.
Most vulnerable to higher churn. From its 3Q08 results, we see that M1 has the highest monthly churn of 1.8% among its peers (1% for StarHub and 0.8% for SingTel), mainly due to its lack of bundling abilities; StarHub has been able to offer relatively attractive cost savings for customers who subscribe to all three of its services – mobile, broadband Internet and cable TV; SingTel also has its Mio plan that offers a bundling of similar services at slightly lower price points. And as the recession deepens, the search for value may see some of its customers switching over to StarHub and SingTel, especially since subscribers can retain their existing numbers with the launch of true MNP (Mobile Number Portability) in June.
Retention cost to remain high. As such, M1 may have to work harder than the other two telcos in retaining customers, but we do not believe that this would entail an all-out price war. Instead, M1 is likely to offer more freebies and premiums to retain customers, thus keeping its retention cost high. But continuous internal cost control measures should help balance out the squeeze on its EBITDA margin. We are also expecting M1 to adopt a more prudent capex approach, ensuring that it has ample free cashflows to support its attractive dividend payout ratio of at least 80% of recurring income. Meanwhile, we are also upbeat about its prospects of getting a slice of the fixed line broadband market when the Next-Generation National Broadband Network fully takes off in 2012. Maintain BUY with S$2.12 fair value.
TELCOs – OCBC
Still key defensive stocks
Macroeconomic issues in 2009. Going into 2009, the whole stock market will continue to face many challenges, most of them coming from the macroeconomic front. Besides having to contend with a global economic slowdown, investors will also encounter continued uncertainty brought on by the financial meltdown and credit crunch, currency instability, and increased volatility in the stock markets. In such a highly unpredictable climate, we believe that a flight to quality is not enough – investors should also focus on defensiveness of earnings as well as sustainable dividend payout abilities and most of the Singapore telcos meet these criteria. As such, we continue to maintain our OVERWEIGHT rating on the sector.
Oct sell down brings value. Telco stocks have managed to hold their own for most part of the year, outperforming the STI index admirably. Since the start of the year to end-September, the STI index fell about 31.9%, but in comparison, SingTel was only down 18.8%, StarHub down 8.2% and M1 just 4.2%. However, following a chain of unfortunate events in October, both SingTel and M1 were sold down along with the overall market – SingTel lost about 25.2% of its value in that month alone, while M1 lost about 28.6%, versus the STI’s 23.9% fall. While most of them have recovered somewhat in November, SingTel is still trading around 38.3% lower YTD (Year-to-Date), StarHub is about 27.8% down, and 34.2% off for M1.
Healthy operating cashflows support dividends. While earnings are expected to take a slightly knock next year due to the recession, the slowdown should not have much of an impact, if any, on the telcos’ healthy operating cashflows. If anything, we expect more prudent capex spending and other cost-reduction measures to further improve operating cashflows and in turn, sustain the already attractive dividend policies. StarHub has committed itself to paying out at least S$0.18 of dividend (S$0.045 per quarter) this year and we expect the same, if not better, dividends next year. M1 has guided that it will pay out at least 80% of its recurring income as dividend – we believe this policy is sustainable in 2009. As for SingTel, it is seen as less of a dividend play but with its regional expansion strategy likely to adopt a more cautious approach, we see a higher chance of a special dividend – this was something that SingTel has consistently done in the past to return excess cash to shareholders.
ComfortDelgro – DBS
Taking comfort in our numbers
Story: Post 3Q08, we revisit our assumptions on ComfortDelGro arising from: (i) lower crude oil price; (ii) its A$149m acquisition of Kefford Group in Victoria, Australia (iii) changes to our forex assumptions (GBP and AUD, against SGD).
Point: Our revisions are as follows:
1. Crude oil price assumption lowered to US$60/bbl and US$70/bbl in 2009-10, from US$80/bbl. The net positive change is S$38.5m and S$21.8m.
2. Kefford Group acquisition. The A$149m acquisition was announced on 20 Nov. Our estimate of the net profit contribution to CDG is S$5.7m in FY09 and S$5.9m in FY10. We view this acquisition as positive and are in line with the Group’s strategy to achieve 70% revenue contribution from overseas by 2012. Its existing operational experience in Australia reduces operating risks for this venture, in our view.
3. Lower forex assumption. We revised our GBP and AUD (against SGD) down to S$2.30/GBP and S$0.98/AUD. These change our forecast by -S$41.5m and -S$45.5m for FY09F
and FY10F respectively.
The net impact is minimal on our FY09F earnings but our FY10F has been trimmed down by 8%, largely due to a smaller revision in oil price (to US$70/bbl vs US$60 for ‘09F).
Singapore bus/train ridership remain robust. Bus and train (NEL) ridership grew 4% and 16% y-o-y in Oct. YTD, ridership growth of 6% (bus) and 16% (train) is in line with our FY08F assumption.
Relevance: Despite the downturn, we believe the Group’s business will be relatively less affected given its exposure in the public transport. We also like CDG for its strong balance
sheet and healthy operating cashflow. Maintain Buy. Our TP is maintained at S$1.59, still pegged to 15x on FY09F.