Month: January 2009
M1 – CIMB
Recovery expected
4Q08 results preview
We do not anticipate any major surprises in M1’s 4Q08 results which will be released tonight. We expect its core net profit to rise 6.8% qoq but slip 3.2% yoy, on the back of revenue growth of 3.3% qoq but decline of 1.8% yoy. We expect EBITDA margins to improve to about 39% in 4Q (from 38% in 3Q) as the effects of mobile number portability (MNP) fade from the system and as subscriber acquisition and retention costs (SARC) normalise. FY08 core net profit is projected to decline by close to 10%, at the extreme bound of M1’s guidance of a single-digit decline.
Expect some dividends. M1’s commitment to a minimum 80% payout should theoretically entail a further cash return in 4Q08. Our numbers suggest that M1 could distribute a 7.4cts gross DPS in 4Q to top off the 6.2cts declared in 2Q. This would bring full-year gross DPS to 13.6cts, based on an 85% payout and translating into a yield of 9% for FY08.
Competition moderating. Throughout the festive season, there were more rational promotions from the three telcos. The campaigns stayed clear of providing free monthly subscriptions, which wreaked havoc on margins earlier, to focus on deeper handset subsidies or rebates for monthly subscriptions without equipment. We do not anticipate a repeat of the severe margin compression both before and after MNP and believe that SARC should moderate.
Favourite for OpCo? The winner of the OpCo bid will be announced sometime in 1QCY09. As highlighted before, we regard M1 as the favourite as it has the most room to be aggressive in wholesale pricing which constitutes the bulk of the criteria. Either way, a win or a loss would be positive for M1 as it would be transformed into a multi-product operator with the ability to compete on a more equal footing either as an official OpCo or retail service provider.
Valuation and recommendation
Maintain OUTPERFORM, forecasts and DCF-based target price of S$2.32 (WACC 8.3%, terminal growth 1.0%). M1 is our top Singapore telco pick as it offers relatively attractive yields at comparatively lower risks than its peers, trades at near-trough valuations, will face receding competitive risks on the mobile front and avoid a bruising and distracting content war. NGNBN would help to address its single-product disadvantage. Re-rating catalysts could include: 1) attractive dividends; 2) winning OpCo; and 3) cost-savings from backhaul upgrades at a conservative S$20m p.a. from FY10 or 11% of net profit then.
SingTel – BT
SingTel: No rights issue on the horizon
CEO says telco wants to maintain ‘a healthy debt-to- equity ratio’
ALTHOUGH rules for rights issues have been eased, Singapore Telecom’s local chief says the company will not be turning to shareholders any time soon to help expand its war chest.
‘Calling capital from shareholders is a last resort. While the credit markets are available, we will continue to get money from credit markets,’ said SingTel Singapore CEO Allen Lew.
SingTel has an A+ rating from Standard and Poor’s and an Aa2 rating – the third-highest on a scale of 10 – from Moody’s Investors Service.
With these strong ratings, loans may be SingTel’s preferred method for recapitalisation. But other local companies are increasingly tapping on shareholders for funding amid the tight credit market.
Last month, DBS Holdings unveiled a rights issue to raise $4 billion. And companies such as Saizen Reit, United Engineers and KSH Holdings have since taken the same route.
Earlier this week, the Singapore Exchange even rolled out new measures to cut the time needed for companies to complete rights issues.
But SingTel’s Mr Lew said: ‘We always want to retain a certain level of debt.’ SingTel wants to maintain ‘a healthy debt-to-equity ratio’, he told BT on the sidelines of the launch of SingTel’s new retail outlet at Jurong Point.
With the opening, the operator will say goodbye to the ‘Hello’ branding that has previously been associated with its retail presence.
Like the new outlet, the company’s 10 other Hello stores will take on the new ‘SingTel Shop’ name as they are refurbished over the next few years. The shops will also get a similar interior make-over to reflect SingTel’s new multimedia positioning, Mr Lew said.
For example, there are large touch-screen displays inside and outside the Jurong Point shop so customers can search for product information and even buy ringtones or music tracks after operating hours.
Traditional customer service counters have been replaced with a cafe-style set-up, where customers are waited on at individual tables by service staff.
‘This (revamp) will help us enhance the brand and help us cut through the clutter during this period,’ Mr Lew said.
SingTel would not say how much the retail overhaul is costing. ‘Our own generated cash flow can fund this,’ said Mr Lew. SingTel had $1.089 billion cash and cash equivalents as at Sept 30 last year.
SingTel – CIMB
Ringing loudly again
• Raised to Outperform from Neutral. We are upgrading SingTel to OUTPERFORM as the factors that led to a sharp de-rating of the stock – risk aversion to emerging market assets and their currencies and stiff competition in Singapore and Indonesia – are receding. Bharti continues to gain market share and is a key earnings driver for SingTel. SingTel’s high trading liquidity and exposure to regional Tier-1 cellcos make it a highly defensive stock to ride out the recessionary environment. However, M1 remains our top pick in Singapore for its very attractive dividends.
• Falling risks. SingTel should benefit from receding aversion towards emerging market assets and their currencies which peaked in Nov 08. Some 65% of its sumof- the-parts valuation and 57% of its FY10 PBT are attributable to its investments in emerging markets, while Optus in Australia contributes 15% to both. We believe that competitive heat in Singapore will peter out in the current recessionary environment as telcos strive to protect cash flows.
• Telkomsel turning around; Bharti gaining market share. Competition in Indonesia is easing as Excelcomino (XL) has largely exhausted its ability to undercut prices by surprise. Bharti is poised to entrench its dominance thanks to its expansion to rural areas.
• Maintaining forecasts; higher target price. We are maintaining our forecasts as regional currencies are broadly within our assumptions. We expect FY09 earnings to bottom out with a 16% contraction before growing by an estimated 8% in FY10. However, we raise our target price to S$3.10 from S$2.72, after removing our 10% discount for overseas assets earlier attached on account of currency volatilities.
SPH – OCBC
Unexpected investment losses, downgrade to HOLD
Sep-Nov stock market carnage hits SPH. Singapore Press Holdings (SPH) announced its 1Q09 results yesterday with topline growing by 9% YoY to S$343m while PATMI took a 35% YoY nose dive to S$73m. The poor bottomline showing was primarily due to a S$33.7m investment loss (first since 1Q03) as SPH suffered significant Mark-to-Market (MTM) losses on its investment portfolio. While this is non cash in nature, our initial assumption of positive contribution from its investments have been significantly negated. Stripping out the effects of investments, SPH managed a credible flat pre-tax performance of S$127.8m despite rising costs and slowing core print revenue.
External funds under management were hit. While we do not have granularity of its 1Q09 investments, details from its FY08 Annual Report indicated that 35% of its short-term investments were subjected to MTM gains/losses on the income statement. These investments were externally managed funds that were invested in a broad spectrum of bonds and equities that suffered mark downs during the Sep-Nov 08 stock market crash.
Sentiments on print earnings getting heavier. SPH’s print advert revenue has declined but at a greater magnitude than we had expected. We now forecast a 2.5% (prev. 1.6%) fall in FY09F print revenue, as management notes that the Company’s advertising revenue will continue to be affected by the downturn. We remain hopeful that the traditionally stronger advertising efforts during the Dec 08 and Jun 09 sales season may mitigate a free fall in this segment’s revenue.
Earnings revision. While our topline estimates are buffered by Sky@Eleven’s recognition, we have to lower our FY09F bottomline by 14% due to the MTM losses incurred. Dividends are expected to hold at S$0.215/ share (7.1% yield) for FY09F.
Valuation metric change. We have swapped the use of DCF valuation for its core operations with a PER-based one as we think that sentiments of its core print earnings will drive its valuation as compared to a DCFbased approach. As such, we peg its FY09F core ops EBIT at 16x FY09F, a premium when compared to its peers in view of its stronger margins. Our SOTP fair value is moderated to S$3.13 (prev. S$4.86) and we downgrade to HOLD. With our revised forecasts, SPH is trading at 14x PER, above its trough valuation of 12x (12-28x between 2001 and 2008). We will turn buyers at S$2.60-S$2.65 when FY09F PER is ~12x.