Month: November 2008
SPH – JPM
Pressure on SPH’s earnings, but valuations should pull through
• Could there be repercussions from not reigning in DPS? We examine the risk of default at the Sky@Eleven property project given that recent sub-sale transactions have started to fall below the original average selling price of S$975psf. Most of the unit sales have been on a Deferred Payment Scheme (DPS) basis and from what we understand, none have been converted to progress payments, hence financing could become difficult later if asset prices fall at an unprecedented rate.
• Defaults would hit FY10E earnings but not SOP: If defaults arise when the Temporary Occupation Permit (TOP) is issued in 2010, we do see a significant hit to our FY10 estimates as SPH will have to write back earnings recognized before that point. However, we do not expect a significant impact to our Jun-09 SOP-based S$4.65 PT as the NPV of the project currently accounts for only 7% of our SOP. The bulk of value in SPH is still the publishing business at 60% of the SOP based on a historically resilient 12x trailing P/E. The Paragon mall supports 28% of SOP. Risk to our PT is a perceived de-rating in the publishing business in the form of lower circulation rates; SPH has differentiated itself from Western media which has succumbed to growth of the internet platform.
• The biggest hit from Sky@Eleven defaults would be on dividends: If anagement decides not to pay out the related property development earnings on perceived risk of defaults, dividends could be cut by as much as 10 cents per share, or 36%, in FY09 and FY10. A lower dividend yield could affect the stock’s ongoing outperformance. However, we believe it is too early to make such a call as the risk of DPS defaults, if any, will be marginal, in our view. Based on sub-sale transactions to date a substantial amount of capital has been committed by investors in Sky@Eleven and the fact that transactions have not ground to a halt and are taking place at lower levels, suggests there is the propensity for the speculation to clear.
M1 – DMG
Value emerges
Stock slides. Since our last note on M1 on 20 Oct 08, the stock has dived 26% on the back of weak sentiments in the market, as well as negative newsflow from the telecommunications industry. The other two telcos, particularly SingTel, painted a bleak outlook for the next few quarters. Consequently, despite the fact that the industry is largely seen to be defensive, the telco index FSTTC fell by 8% in the past month. Before the recent slump, M1 has been one of the most resilient stocks. It only fell 4% for the first nine months of the year, far outperforming the STI’s 32% slump.
Recapping results. While M1’s revenue fell a mere 1.7% to S$196.7m in 3Q08, earnings took a bigger 21.1% knock to S$34.4m due to higher acquisition and retention costs, following the introduction of mobile number portability in Jun 08. EBITDA margin came in at 42.5%, down from last year’s 45.2%. Gearing, at 128.2%, is seemingly high for M1. But this is not very much of an issue, considering that it has strong operating cash flows that will enable it to comfortably pay off its debts and reward shareholders. It has a Net debt/EBITDA of 0.8x (SingTel 1.1x, StarHub 1.2x), while its EBITDA/Interest stands at 40.6, an improvement over the previous year’s 33.1.
Recession’s not the main curse. Looking back at the past recessions, management revealed that the bad debts are quite insignificant – less than 0.5% of revenue. What investors need to be more worried about is competition. The aggressive marketing by all three telcos have led to surging subscriber acquisition and retention costs, and consequently margins being driven down. Our recent discussions with the telcos suggest that this intense competition will be dying down, at least for now.
Churn rate eased. In 3Q08, M1 was hit with a high churn rate of 1.8%, a jump from 1.2% in the previous corresponding period due primarily to SingTel’s launch of the iPhone. This should be reduced to the 1.5% level as competition tames.
Target price down, but value emerges. We have left our earnings estimates at S$160.1m for FY08 (-6.8% YoY) and S$149.1m for FY09 (-6.9% YoY). At S$1.25, it is trading at 7.0x FY08 and 7.5x FY09 P/E, which compares favourably against the industry average of 9.4x. The yields, at 12.2% for FY08 and 11.4% for FY09, are also the best among the three telcos. We have downgraded our target price for M1 from S$1.89 to S$1.58, based on our revised DDM model. We are upgrading the stock to a BUY despite cutting the target price, as it is looking attractive after the recent fall with a potential upside of 26% from current levels.
SPAusNet – CIMB
Steady as she goes
• Core within expectations. 1H09 core net profit of A$122.5m (+2.4% yoy) constitutes 66% of our FY09 forecast and 68% of consensus. This is within expectations as 1H is seasonally stronger. Revenue grew 8.9% yoy to A$636m, driven by favourable price changes with recent regulatory price resets, higher volumes on increased customer connections and higher usage stimulated by favourable weather. EBITDA margins rose to 47.7% from 45.7% a year ago on improved cost management. An interim distribution per stapled security of 5.927 A cts (+2.6% yoy) was declared, payable on 18 Dec 08.
• One-off adjustment. 1H09 accounts include a one-off non-cash impairment adjustment of S$30.3m after tax. This was due to a revised timetable by the Victorian government for the rollout of smart electricity meters by end-2013. Management has prudently taken an impairment charge for existing meters, as well as accelerated depreciation for these meters of A$7m per year until Mar 2014.
• No debt refinancing obligations until 2011. SPN had refinanced its obligations in early 2008, and will not have further refinancing obligations until 2011. While it may potentially miss out on benefits should interest rates fall, management’s long-term objective is to manage its long-term cost of debt, rather than be opportunistic.
• Outlook. SPN has locked in 100% of its regulated revenue until 2011, representing over 90% of group revenue and providing highly predictable cash flows. So far, it has not detected any weakness despite the bleak economic situation. Meanwhile, reductions in management performance fees, a new relationship with Jemena (100% owned by Singapore Power Int’l) should improve profitability from 2H09 onwards. Another potential growth area is SPN’s non-regulated services like testing, metering and communications support.
• Core forecasts maintained; maintain Outperform. We have adjusted our forecasts for the one-off impairment charge but maintained our core net profit forecasts. With the volatility of the A$-S$ rates in past months, we now peg A$-S$ at parity, which translates to a new DCF-derived target price of S$1.44 (WACC 10%), from S$1.71 previously. SPN is well supported by an attractive yield of over 10%.
ComfortDelgro – BT
ComfortDelGro buys Aussie bus company
It will pay A$149.2m for Kefford Group, fourth largest bus operator in Victoria
ComfortDelGro will pay A$149.2 million (S$143.6 million) for the fourth largest bus operator in Victoria, Australia as the group moves steadily towards its goal of becoming a ‘significant operator’ in the Australian bus sector
The land transport giant acquired the Kefford Group through its 51 per cent-owned subsidiary ComfortDelGro Cabcharge Pty Ltd (CDC) after a four-month closed tender that attracted Australian and international operators.
Kefford is one of the oldest bus operators in Victoria state. It has a 16 per cent market share with a fleet of 328 buses and six depots.
It operates 66 route services under long-term government contracts in four main regions under brands such as Westrans and Eastrans in Melbourne, Benders Busways Lines in Geelong and Davis Bus Services in Ballarat.
ComfortDelGro said as the largest provider of bus routes in Melbourne’s western suburbs, Kefford stands to benefit from the Victorian government’s announcement of a A$10.5 billion plan to improve the public transport system over 10 years.
‘Kefford gives us a firm foothold in Victoria and together with our operations in New South Wales we now have a strong presence in the two most populous cities in Australia – Sydney and Melbourne – and major regional areas in both states,’ said ComfortDelGro managing director and group CEO Kua Hong Pak.
In terms of material impact, ComfortDelGro’s group corporate communications officer Tammy Tan said: ‘Kefford is a profitable business and should be able to contribute to the group’s bottom line from the word go.’
The acquisition of Kefford, which is subject to regulatory approvals, will cement CDC’s position as the largest private bus operator in Australia with a fleet of 1,198 buses.
For the first nine months of 2008, ComfortDelGro’s turnover in Australia increased 25.7 per cent to $156.9 million.
In a sign that there could be more Australian purchases to come, Mr Kua said: ‘Our intentions are clear – we want to become a significant operator in the Australian bus sector.’
When asked whether ComfortDelGro would pick up the pace of its acquisitions because of the falling Australian dollar, Ms Tan replied: ‘Certainly the weaker Aussie dollar has worked to our benefit where this acquisition is concerned.’
But she emphasised that ComfortDelGro makes investments not just based on exchange rate movements.
‘Rather, we base them on the strength of the investment opportunities themselves,’ she said.
Overseas ventures now account for 42 per cent of group turnover, which for the third quarter ended Sept 30 was up 5.2 per cent to $803.5 million.
The group aims to derive 70 per cent of its turnover from overseas within the next five to seven years.
SPH – BT
SPH completes takeover of financial portal
SINGAPORE Press Holdings (SPH) has completed the acquisition of financial portal Shareinvestor.com to broaden its online media play.
SPH, which publishes The Business Times among other publications, will pay up to $18 million for Shareinvestor.com.
An amount of $12 million is payable to the portal’s owners upon completion of the transaction. The remainder will be paid in two equal instalments in 2009 and 2010 if Shareinvestor.com meets its financial targets.
Local magazine publisher Lexicon Group owned 27.7 per cent of Shareinvestor.com. The other owners were individuals, including company founder and chairman Michael Leong, CEO Christopher Lee and IT director Lim Dau Hee.
‘SPH will retain the entire management and staff of Shareinvestor.com,’ SPH said yesterday, adding that the portal would continue to operate independently. Mr Leong has been appointed a consultant and director to the company. Mr Lee and Mr Lim will retain their current positions.
The purchase, made through SPH’s wholly owned unit, SPH Interactive, will give the publishing giant a ready foothold in the growing market for online financial tools and applications. Shareinvestor.com has more than 350 institutional and retail investor clients.
‘The acquisition will enable SPH to provide online financial services as part of its growing portfolio of Internet services, with substantial synergies to be derived with various SPH online entities, in particular The Business Times and its website businesstimes.com,’ SPH said.
In addition, the buyout also will strengthen SPH’s portfolio of other Internet offerings. This is because Shareinvestor.com has an established investor relations network in Asia and also offers other value-added services such as corporate website design and technology solutions.