Month: December 2008
SPH – CIMB
Yields still attractive
• We believe that SPH’s core media earnings are less at risk from the recession than many Asian media stocks, since SPH controls more than 90% of newspaper advertising in Singapore. This mitigates the worst effects of competition in a recession. While industry adex is likely to contract, SPH’s newspaper advertising should benefit from trading down from television advertising. Classified revenue had fallen 6% yoy in the last results, but this was muted compared with most other companies. Retreating commodity prices are also positive for SPH, as newsprint costs are unlikely to rise further.
• Property recognition to shore up earnings; risks not overwhelming. Media earnings contraction is likely to be cushioned by profit recognition for the Sky@eleven residential development project, and Paragon. For Sky@eleven, buyers’ default risk is fairly low, in our opinion, even though SPH has allowed the Deferred Payment Scheme to be transferred to second buyers. For default risks to become real, selling prices would have to fall by more than 20% below the project’s launch price of S$975psf. For Paragon, we are already valuing this property at S$1.5bn, vs. SPH’s latest revaluation of S$2.0bn, in mid-2008.
• Forecasts reduced; sum-of-the-parts target price trimmed to S$4.01 from S$4.50. In view of the weak economic environment, we expect print ad revenue and investment income to decline. We have cut our earnings estimates by 12-14%. Nevertheless, maintain Outperform. We expect SPH to pay S$0.26-0.27/share in FY09-10, with yields of more than 8%.
SPH – Kim Eng
Unprecedented Value
Core media business below historical low
We are revising our ad revenue growth assumption to -20.0% from 3.0% given the negative GDP outlook. Historically, ad revenue growth underperforms GDP growth in a market down cycle. In 2002, ad revenue declined 19.8% yoy. Overall revenue is estimated to fall by 1.6% in FY09F, mitigated by the contribution from Sky@Eleven. At 11.8x forward PER, SPH is now trading at its trough valuation. Our implied valuation of the core media business shows a trading PER of 10.6x, which is below the previous low of 11.8x over the last 10 years of trading.
Cutting cost to counter recession
We have reduced our FY09F staff cost estimates by 29% following the cost cutting instituted by the management, with employees’ variable wage component at about 10%. FY09F net profit estimate is reduced to $424.3m, representing a 2.8% decline yoy. The impact of changes to estimates are a lower DPS of 23.8 cts for FY09F and 22.2 cts for FY10F, translating to a yield of 7.6% and 7.1%, respectively. The estimates are based on 90% payout from both media and development income.
Free cash flow to support payout
We expect free cash flow of $408m in FY09F and this should support the dividend payout of $380m. SPH is in a net cash position of $280m as at Aug’08, with $1.1b in investible funds. An additional $150m three-year loan inked recently may be deployed for overseas media joint ventures.
Dividend track record a key attribute
SPH remains one of our most defensive pick, as the company rewards shareholders with dividends even in bad times. Assuming 90% payout of recurring earnings, we are projecting a normalized yield of 5.2% (excluding payout from Sky@Eleven), which depicts more sustainable dividend profile as contribution from property development will cease from FY11.
Lower core media business valuation impacts SOTP target price
Our new SOTP target price of $4.48 is derived from the lower DCF valuation of the core media business of $2.96 (7.4% WACC and 2% terminal growth rate) and further assuming a 10% mark down on investments given the uncertain equity market. Our valuation assumption of $2b for Paragon remains intact as we believe that the opening of competing up-market shopping malls along Orchard Road in 2009 may raise the profile of surrounding properties and lend support to valuation. There is a 43% price upside to the new target price. Maintain Buy.
SingTel – CIMB
Telstra out of NBN race
Telstra said this morning that it has been excluded by the Commonwealth from Australia’s national broadband network (NBN) request for proposal (RFP) because it did not include a plan on how to involve small and medium enterprises in the building of the NBN.
Comments
Increases Optus’s chances? This is a surprising twist of events, although it was questionable if Telstra’s 15-page proposal would be accepted as a bid. With Telstra out of the NBN race, Optus’s odds of winning may be elevated as it is now the largest bidder, both in terms of network and balance sheet.
Negative on Optus if it wins. We reiterate our view that we would be negative on Optus if it wins the bid as the economics of the NBN is questionable given the astronomical estimated cost of A$10bn-15bn to be spent over five years, the long gestation period for this service, the retail pricing (which is unlikely to be significantly below current levels) and litigation/delay tactics employed by Telstra if Optus were to win and seek access to Telstra’s exchanges and last mile access.
We are especially concerned about funding as Optus is likely to shoulder the burden alone as its other consortium members lack the balance-sheet strength for a meaningful equity infusion. There has been talk that SingTel would contribute A$1bn- 2bn in equity for the project and an Optus spokesperson has said that “it (SingTel) would contribute whatever (funding) we needed to.” However, we believe that such injections would stretch SingTel’s balance sheet, which currently stands at 1.1x net debt/annualised EBITDA, and drain SingTel’s cash of S$1.1bn. This may hamper SingTel’s ability to pursue any acquisitive opportunities.
Telstra holds the advantage. Telstra holds the advantage by virtue of its incumbency, as it has cost advantage given its ownership of the copper network and passive infrastructure, scale and expertise. If Telstra loses, we believe it is likely to proceed with its own network along the lines of its proposal and roll out faster and gain access to consumers faster by undercutting the business case of the official NBN bid.
That said, Optus has sought an “overbuild” protection in its bid. i.e. to stop other players (especially Telstra) from rolling out their own network to compete with its NBN. However, it is uncertain if upgrading Telstra’s network will be considered building an alternative network and whether the government will grant Optus, if they win, the overbuild protection.
Valuation and recommendation
Maintain earnings forecasts, Neutral rating and sum-of-the-parts target price of S$2.72. Given the many moving parts and lack of transparency surrounding the NBN process, we are retaining our earnings forecasts and target price of S$2.72 for SingTel. Also intact is our NEUTRAL rating. We believe the stock lacks catalysts due to currency volatility despite its holdings in free cash flow-positive Tier-1 telcos in the region.
SFI – BT
SATS shareholder takes issue with SFI takeover
But Merrill Lynch says valuation is fair and there’s no conflict of interest
Are the shareholders of Singapore Airport Terminal Services (SATS) getting a raw deal in its Singapore Food Industries (SFI) takeover?
Some SATS minority shareholders seem to think so.
Stockbroker Ong Chin Woo, who owns 150,000 shares, has sent letters to both SATS and the media, voicing his concern that, among other things, SATS is not only overpaying for SFI, but has failed to carefully evaluate the balance sheet and business ‘risks’ of SFI.
All this comes just weeks after the Changi Airport ground operator announced a $335 million takeover of Temasek Holdings’ 69 per cent stake in Singapore’s largest integrated food specialist. The value of the deal is likely to balloon to $509 million following an expected general offer.
Mr Ong, who claims to represent a group of minority shareholders that hold some four million SATS shares, contends that the valuation methodology used to price SFI at 93 cents per share, or a price-to-book of over three times, ‘is not comprehensive’ nor ‘compelling’, and says this is a ‘huge premium to SATS’ own valuation’.
He notes that only the EV/Ebitda measure was used in the market comparables, while weighted average cost of capital for SATS and the internal rate of return (IRR) were not used as measures.
‘The proposed deal destroys value for SATS shareholders,’ Mr Ong claims.
He also notes that SFI’s balance sheet was highly leveraged (equity to asset of only 0.41 times), had high content of intangibles (intangible to total assets of 0.18 times), and large amount of accounts receivables to tangible equity (>1.4x tangible equity, raising risk of default in an economic crisis). He further says that SFI is a mature business, with low growth, low margin, ‘which would be a potential drag to SATS’.
Mr Ong also sees a potential conflict of interest with Merrill Lynch as SATS financial adviser, given that Temasek – which has an indirect stake in SATS via Singapore Airlines – is also a stakeholder of Merrill Lynch and its parent, Bank of America (BOA).
Merrill Lynch Singapore managing director for investment banking Keith Magnus, who is advising SATS, rebutted the claims, saying that they may have been well intentioned but were based on wrong premises.
‘First of all, Temasek has no influence on Merrill Lynch in any shape or form. It has no board seats and its stake will be diluted with the Bank of America takeover. In fact, Singapore’s Securities Industries Council has cleared Merrill to act as SATS’ financial adviser.’
Temasek Holdings has invested about US$6 billion in Merrill, with its 14 per cent making it the largest single investor. But following the US$50 billion takeover of Merrill by BOA, Temasek’s stake will be diluted to under 5 per cent.
Mr Magnus also dismissed Mr Ong’s contention that SFI was overvalued, saying that very rigorous methodologies were used to value the food specialist, including discounted cash flow analysis, full analysis of synergistic benefits and comparisons to similar companies in the public domain.
‘We’ve done a very detailed valuation exercise and the board met many times to scrutinise this,’ said Mr Magnus. ‘It’s a very fair valuation compared to peers. Mr Ong should also familiarise himself with the legal requirements in Singapore regarding disclosures, particularly Rule 1012 of the Listing Manual which makes it very onerous for companies in a takeover situation to make forward-looking statements, forecasts of profit, revenue and such.’
He said that companies such as SFI, where branding and the business model were the main assets, should be valued in terms of EV/Ebitda, rather than just pure tangible assets. He also referred to an Oct 23 Kim Eng report that described SFI as a ‘well-managed company with strong free cashflow, which are attractive traits for potential bidders in a takeover exercise’. Kim Eng’s fair-value range for the stock was 90 cents to $1.
As for accounts receivable, Mr Magnus added that SFI’s clients, such as the Singapore Armed Forces and UK supermarket giants Tesco and Sainsbury’s, were ‘pretty good’ credit.
In any case, he added, SATS’ minority shareholders and independent directors will be advised by ING Bank.
SATS claims that the deal would boost cash, ROE, revenue, earnings per share and also cushion it from the volatility and vagaries of the aviation sector. But some minority shareholders fear that with all its cash used up for the deal, SATS will have very little left over to pay the generous dividends which it is known for. With Temasek and SIA not voting, the fate of the deal lies in the hands of the minority shareholders.
Some might recall that Mr Ong successfully led a group of minority shareholders of Overseas Union Enterprise in 2005 to push the listed property company to sell its United Overseas Bank shares, to unlock shareholder value.