Month: November 2008
StarHub – DBS
Margins improve, market share declines
Story: 3Q08 net profit came in at S$79.5m (-2% y-o-y, +24%q-oq). Excluding S$3m one-off gains, net profit was within our expectation of S$77m. However, revenue of S$524m was just short of our S$535m estimate, and service EBITDA margin at 32.9% was slightly ahead of our 32% forecast. As expected, an interim 4.5 cents DPS was announced with the results.
Point: Result highlights are as follows:
Positives. (i) Mobile EBITDA margin improved significantly to 39.5% from 32.6% in 2Q08 after StarHub offered lower handset subsidies and free six-months subscriptions. (ii) Cable & broadband EBITDA margins improved to 21.5% from 19.4% in 2Q08, due to absence of one-time cost for Euro Cup content.
Negatives. (i) Third consecutive quarter of revenue contraction. (ii) Mobile market share declined to 28.1% from 29.1% in 2Q08, mainly due to the loss of pre-paid subscribers. (iii) Post-paid mobile ARPU declined further to S$74 from S$77m in 2Q08 due to lower usage and free 6-month subscription plan.
No major risks to FY08 estimates. Management opined that 4Q08 was unlikely to see traditional festive promotions, as Telcos remain cautious of a slowing demand environment. As such, we think StarHub can meet our FY08 forecast, in line with its own guidance.
Downside risks to FY09 estimates. Potential outflow of workers and tourists, lower roaming revenues from corporates and tourists and lower broadband ARPU could lead to a weak FY09 guidance by management at the end of FY08. Although our FY09F earnings are 9% below consensus estimates, we believe there are still downside risks as topline growth can potentially disappoint.
Relevance: We maintain a FULLY VALUED rating for StarHub with a target price of S$2.34 pegged to 13x FY09F PER. This is the low end of its historical PER range of 13x-19x. Our trough valuation is S$1.67 based on 10x worst-case FY09F earnings, assuming Singapore GDP declines 2.2% in 2009. We prefer M1 (BUY, TP S$1.57) for its cheap valuations, low expectations and over 9% dividend yield.
SingTel – BT
SingTel to hang on to iPhone monopoly
SINGAPORE Telecommunications will continue to be the only local telco to be given a bite at the iPhone 3G as a change in Apple’s distribution strategy has thwarted the year-end launch plans of rivals StarHub and MobileOne.
‘As we have been advised that there has been a change in the distribution schedule of the iPhone in Asia, this is likely to affect M1’s plans to sell the device by the end of the year,’ a company spokesman told BT.
Similarly, StarHub also confirmed that it will not be able to bring in the second-generation Apple touch-screen handset by 2008.
‘It appears the launch (of the iPhone) will not take place this year. They (Apple) have their priorities for signing on distributors,’ StarHub CEO Terry Clontz told reporters during a phone briefing for the firm’s third-quarter results yesterday.
With Singapore’s small mobile customer base and the existing SingTel agreement, Apple is focusing its efforts on other countries where the iPhone has yet to make its debut, he explained.
Despite this development, Mr Clontz maintained that the iPhone deal is ‘non-exclusive’ here and the coveted gadget will be carried by other operators in future, a move which is consistent with other countries such as Australia and the United States.
Apple ditched its once-exclusive partnership approach when it unveiled the iPhone 3G and started working with multiple players to drive mass consumer take-up of the new device.
When SingTel launched the iPhone locally on Aug 22, both StarHub and M1 said they were confident of breaking the product monopoly by the end of the year and advised consumers to hold out for better deals.
Mr Clontz admitted that StarHub ‘did see an impact’ on its mobile business shortly after SingTel’s iPhone introduction but claims the pent-up demand for the handset has since subsided.
To forestall the competition, SingTel is halving the monthly fees for its iPhone subscription plans in Singapore for three months to draw a second wave of buyers and encourage more defections from rival camps.
StarHub – BT
StarHub Q3 net profit dips 2.1% to $79.5m
Growth strongest for pay-TV business, flat for mobile and broadband units
STARHUB’S third-quarter net profit fell 2.1 per cent to $79.5 million due to higher content costs for its pay-TV business and a flat showing by its mobile and broadband units.
Revenue for the three months ended Sept 30 was 2.3 per cent higher year on year at $524.6 million, but earnings per share slipped to 4.65 cents from 4.78 cents.
StarHub yesterday declared a quarterly dividend of 4.5 cents, unchanged from Q2, and reaffirmed its commitment to pay at least 18 cents in 2008. This translates to a minimum dividend payout of 4.5 cents for the final quarter.
Singapore’s second-largest teleco continues to bear the brunt of soaring content prices for pay-TV, with the cost of services rising 21 per cent year on year to $73.1 million in Q3, which raised operating expenses 3 per cent to $417.6 million.
On the mobile phone front, the promotional frenzy sparked by the introduction of True Mobile Number Portability in the second quarter is easing, according to StarHub CEO Terry Clontz. This led to lower handset subsidies, which consequently reduced the cost of equipment sold by 19 per cent sequentially to $51.7 million.
The pay-TV business registered the strongest growth in Q3, with sales rising 14.7 per cent to $98.4 million. This was largely helped by an increase in subscription prices for basic and sports packages which kicked in late last year. StarHub added 9,000 pay-TV subscribers in Q3 to bring its customer base to 520,000.
Revenue from the mobile phone business slipped 0.7 per cent to $264.4 million during the quarter, with the arrival of the iPhone 3G triggering some customer defections in September, Mr Clontz said. Despite the migration and lower handset subsidies, StarHub added 17,000 post-paid subscribers in the quarter.
It now has 1.74 million mobile customers and a market share of 28.9 per cent, down from 31.9 per cent a year earlier.
StarHub’s broadband revenue rose one per cent in Q3 to $62.6 million, while its fixed network service sales edged up 2.4 per cent to $75.1 million.
The company’s bid for the right to build Singapore’s future Internet highway fell through during the quarter, as the consortium it was spearheading lost out to a rival group involving SingTel.
StarHub’s closing cash and cash equivalents balance at end-September was $126.9 million. After netting this cash balance, the company’s debt was 4 per cent lower at $786.8 million. Its gearing as a ratio of 2007 Ebitda – earnings before interest, tax, depreciation and amortisation – has improved from 1.3 times last year to 1.2 times.
For the first nine months of this year, StarHub recorded a 3.5 per cent drop in net income to $223.9 million, although revenue increased 7.9 per cent to $1.59 billion.
The company is keeping to its full-year sales growth projection of 7 per cent and expects Ebitda to be 31 per cent of revenue.
Despite economic headwinds, StarHub has no plans to introduce new cost-cutting measures. ‘If you look at the past six years, we’ve not increased headcount at all. We’re pretty lean as it is,’ Mr Clontz said.
StarHub shares climbed 3.2 per cent to close at $2.29 yesterday.
STEng – DBS
Learning costs proving costly
Story: Though net profit of S$129m (up 2.7% y-o-y) was in line with our expectations, PBT (-6% y-o-y) was below. Net profit was buoyed by a one-time deferred tax credit of S$16.8m. A dip in investment income, higher depreciation costs and prototyping losses from Passenger-to-Freighter (“PTF”) conversions (loss of S$15m in 9M08) in the aerospace segment led to the underperformance.
Point: Aerospace margins continued to slide (-4.4 ppts to 14.5%) and apart from the PTF learning cycle losses, the recent bankruptcy of European customer Sterling Airlines is likely to affect PBT further by at least S$10m over the next 2 years. Revenue from the Marine segment was also down 20% owing to lower shipbuilding revenue. However, both the Electronics and Land Systems segments delivered strong y-o-y revenue growth (+25%), lifting overall 3Q08 revenue by 12%. Profit from Land Systems was impacted, though, by slow auto sales in the US and impairment of a long-term investment. Carrying value of investments at Group level were marked down about 50% to S$22m from S$41m at end-FY07.
Relevance: The outlook for the MRO sector, especially in the US, remains gloomy in the wake of an aviation slowdown and shipbuilding/ shiprepair revenue growth is also likely to be stymied in FY09. We expect the other segments to register decent growth on the back of government spending in transport projects, infrastructure and defence. Overall, we cut FY08 earnings by 3% and FY09 earnings by 5%, as management further lowered guidance to “lower PBT in FY08” vs. “flat PBT growth” previously. Given its defensive reputation, the stock has held up well amidst the recent market turmoil and upside is limited at our unchanged target price of S$2.80.
Maintain HOLD. A robust orderbook of S$9.5b and 7% FY09 dividend yield backed by S$1b cash equivalents, limits downside risks.
STEng – CIMB
Lacklustre; more weakness ahead
• Largely in line, lifted by tax write-back. 3Q08 net profit of S$129m (+3% yoy) was largely in line with our estimate and consensus. Results were lifted by a S$17m tax write-back of deferred tax asset adjustments during the quarter. Without the tax reversal, net profit would have been S$111m, only 22% of our full-year forecast mainly due to Aerospace weakness. 9M08 net profit of S$371m (+4% yoy) represents 72% of our FY08 forecast.
• PBT dragged down by weaker Aerospace. 3Q08 PBT of S$144m (-6% yoy) was mainly affected by lower contributions from Aerospace. The weakness in Aerospace was due to: 1) a depreciating US$; 2) learning-curve costs for PTF conversions of B757-300 and B767-300; and 3) higher depreciation from increased capex. Aerospace PBT margins dropped to 15% (3Q07: 19%) as a result.
• Profit guidance lowered; more bankruptcy filings by customers. Management now flags a weaker PBT and marginally weaker PATMI for FY08 (previous quarter’s guidance was for a comparable FY08). Separately, STE announced that its customers, Sterling Airlines and Essential Aircraft Maintenance Services, had filed for bankruptcy. STE estimates the earnings impact from these customers at S$10m.
• Earnings estimates cut by 4-16% for FY08-10. Reflecting the disappointing 3Q08 results and weaker guidance, we have cut our FY08 earnings by 4% as we lower our margin expectations for the Aerospace division. We also cut our FY10-11 earnings by 16%, with slower growth assumed for all divisions.
• Balance sheet healthy but weak near-term growth prospects. Fundamentally, STE remains in excellent health with net cash of about S$600m. Order book is S$9.5bn (up from S$9.3bn in 2Q08). However, trading at 15x CY09 P/E given its muted earnings growth and uncertainties from the global economy, the stock is not cheap.
• Downgrade to Underperform from Outperform; target price reduced to S$2.61 from S$3.39, taking into account our earnings downgrade and rolling forward our target to CY10 in our blended valuation. A share price re-rating is likely only in 2H09, probably triggered by an improved Aerospace performance.