Month: January 2009
SingTel – DB
Ten things to watch in 2009
2009 should be busy for STel; 10 key issues to focus on
We believe 2009 will be a busy year for STel as it is involved in the S’pore NBN NetCo build, bids for the Australian broadband network, competes for the S’pore EPL rights, deepens its Associate relationships and potentially uses reduced telco valuations to expand internationally. In this note, therefore, we detail the ten issues we will be watching in 2009. We maintain Buy for the TP upside and STel’s increasingly defensive nature (reduced Sing/Australia valuation & NAV discount).
2009 events in Australia & S’pore should focus on NBNs, costs & the EPL
Australia and S’pore 2009 themes are likely to be dominated by the national broadband projects. Information on both projects currently remains scarce and as more details are released throughout 2009, estimates and sentiment may be impacted. In addition, both operations will focus on cost control (watch headcount as the most visible indicator of this), while NCS expansion in S’pore is likely to significantly dilute margins. Finally, we expect STel to increase content acquisition and to bid aggressively for the English Premier League TV rights in 3Q09.
And internationally, in 2009 watch the Assoc relationships, PBTL and M&A
We will be watching the strength of STel’s existing Associate relationships in 2009, which we expect STel to deepen – this may involve a strengthening of the Bridge Alliance. In terms of STel’s portfolio, attempts will be made to re-invigorate PBTL through broadband wireless, while 2009 may be the year that the SingPost asset is finally disposed and the Taiwan interest exited. Finally, if STel is serious about international expansion, 2009 is likely to be active given recent valuation declines but as such, investors should not expect any accelerated returns.
Still attractive given TP upside, NAV discount and Sing/Au valuation; Buy
Our S$3.23 SOTP TP is based on S’pore S$0.88/share (DCF: 7.1% WACC, 0% g), Optus S$0.78/share (DCF: 9.6% WACC, 1% g), DB covered listed Assocs at TP, non-DB covered listed Assocs at market value and investment value for others. Given current valuations, the NAV discount and the reduced Sing/Australia fwd PE we recommend Buy. Risks to our view and Buy rating include adverse FX trends, increasing market competition and an emerging market sell-off.
StarHub – DBS
Good entry price for yield play
StarHub is a safe yield play in a relatively benign competitive and regulatory environment. Higher cost of sports content might affect its bottom-line in FY10F, but it should not be excessive and has been included in our below consensus estimates. Upgrade to BUY for 13% share price upside and 8% dividend yield.
Stable FY09F earnings despite economic slowdown. It is reasonable to expect lower roaming revenues as Singapore’s tourist arrivals drop. But rising data revenue following offers of unlimited data plans should offset the weakness to a large extent. FY09F will also benefit from the absence of S$6-7m Euro Cup content costs incurred in FY08 and easing competition in the postpaid mobile space.
Least worried about dividends. Management claimed it had sufficient unutilized and committed credit facilities from local banks to meet (i) refinancing needs for the next twelve months, and (ii) capex requirements for OpCo, in case StarHub wins the award. Management believes it can continue to pay average dividend payout of 65-70% of free cash flow, implying upside to our 8.4% yield projection.
PCCW case suggests StarHub might secure EPL again. In our view, PCCW in Hong Kong had secured key channels such as Star TV, HBO, etc., and built a respectable subscriber base before aggressively going after EPL. This is not the case with SingTel, which has a small subscriber base (around 50K) for mio TV with many popular channels still held by StarHub. We estimate the EPL bid price in 2006 was S$40-50m higher than that in 2003, and the magnitude of increase should be comparable in the 2H09 EPL bid, whose impact on the bottom-line will be visible only in 4QFY10.
Upgrade to BUY, S$2.08 target price unchanged. This is pegged to 12x FY09F PER, or 20% premium to our 10x PER target for M1 due to (i) StarHub’s better track record, (ii) no cash tax till FY09F, resulting in 12.5% free cash flow yield and providing sufficient cushion for 8.5% dividend yield.
SFI – BT
Food firms under SATS umbrella to reap big gains
An SFI-Country Foods entity seen as a sizeable regional player
AN integrated pan-Asian food giant with a footprint stretching from India, through South-east Asia and into China.
That is the vision of Frankie Tan, founder and CEO of Country Foods, the frozen food subsidiary of Singapore Airport Terminal Services (SATS)
Country Foods was set up in 1989 by Mr Tan as a processed food and sauce maker.
After a decade of strong growth, the company caught the eye of SATS, which paid about $6 million for a 66.7 per cent stake in 2002.
Realising the market potential of frozen food, especially in the low-cost airline segment, SATS bought the other 33.3 per cent of Country Foods for another $5.6 million last year, making it a wholly owned subsidiary.
‘By 2000, we had reached the stage where we needed to scale up for further expansion,’ said Mr Tan, who is a minority shareholder of SATS. ‘SATS gave us that scale and exposure.’
Country Foods seems to have been somewhat of an appetiser for SATS, which six years later has moved to acquire the much larger listed Singapore Food Industries (SFI).
BT understands that SATS looked at SFI in 2001 but decided to go after the smaller Country Foods first.
The decision seems to have paid off.
Today, Country Foods, with revenue of more than $30 million, is one of the fastest-growing suppliers of frozen and processed food in Singapore.
Besides fast-food outlets such as McDonald’s, Pizza Hut, 7-Eleven and Burger King, its customers include hospitals and several hospitality industry players.
Its Macau unit dominates the frozen and processed food market for staff eateries and food outlets in the territory’s casinos. Plans are already underway to expand into Hong Kong.
Mr Tan envisages similar opportunities at Singapore’s two integrated resorts, which will employ some 20,000 people.
Meanwhile, Country Foods is already in talks to supply frozen meals to budget carriers including Tiger Airways, Cebu Pacific and Jetstar.
It already provides in-flight meals and frozen deserts to several Asian and Middle Eastern full-service carriers.
‘In Europe, virtually all the airlines serve frozen and chilled food on board,’ Mr Tan said. ‘But the concept is still in its infancy in Asia, largely because catering costs are still relatively low here.’
But with costs, quality and consistency of supply (or food security) becoming hot-button issues not just for airlines, but other businesses too, Mr Tan sees huge growth in Asia.
And this is where SFI comes into the picture.
‘SFI is a huge player, especially in logistics, procurement and mass volume catering,’ he said.
‘It also has a presence in other markets. We see huge synergies in teaming up with it under the SATS umbrella. There will be big economies of scale from the combined operations. And we will have the critical size to provide end-to-end support to customers.’
SATS has moved to buy Temasek Holdings’ 69.6 per cent of listed SFI at 93 cents per share.
And with a general offer a certainty, the total purchase price will be $509 million.
SATS reckons SFI will make it a world-class group powered by the twin engines of airport and food services, lessening its exposure to the vagaries of the aviation market.
Mr Tan sees an integrated SFI-Country Foods entity as a sizeable regional player with a footprint stretching from South Asia, through South-east Asia and into North-east Asia.
Indeed, the numbers seem to point in that direction.
The Singapore in-flight catering market is worth about $500 million, of which SATS controls 80 per cent or $400 million.
With the takeover of SFI, SATS food business will immediately grow by $700 million. Then there is Country Foods, whose revenue is more than $30 million.
Looking ahead, new growth will come from the expansion of the frozen and chilled food segment, said Mr Tan.
‘The food business is relatively stable,’ he said. ‘Because barriers to entry are low, it is a competitive business. But if you have the size and technology, you will have the economies of scale to dominate the market.’
And that is exactly what SATS seems intent on doing with the takeover of SFI.
M1 – BT
Will M1 put on a new game face?
TELCO counters are often seen as defensive plays during turbulent times and no other local telco epitomises this quality in its modus operandi more than M1. However, with the impending arrival of a new chief, will M1 finally change tack and go on the offensive, or will it continue to play nice and passively defend its turf?
Last Friday, M1’s chief executive Neil Montefiore announced his surprising decision to step down next month. Chief financial officer Karen Kooi will take the helm in the interim while the company hunts for a new head honcho.
Unlike Mr Montefiore’s 12-year stint, M1’s incoming chief is in for a much rougher ride. When it was formed in 1994, M1 was the only alternative to incumbent Singapore Telecommunications in a market long deprived of options.
Coupled with a relatively untapped base for radio paging and cellular services back then, M1 cruised to a decade of rapid subscriber growth and established a comfortable beachhead alongside SingTel and StarHub.
However, with sweeping changes being made to the competitive landscape in the last 12 months, M1 is showing early signs that it could be buckling under the pressure.
On the one hand, the operator is experiencing higher churn rates compared to its two rivals in the era of ‘true mobile number portability’.
More M1 customers have defected to SingTel and StarHub now that they are able to transfer their mobile numbers from one telco to another.
An average of 7,000 cellular subscribers port their mobile numbers every month, representing around 0.1 per cent of Singapore’s 6.27-million-strong cellphone user population. The churn rate in itself is not significant but the underlying fact that more subscribers are choosing to leave M1 is a cause for concern.
What is more alarming, however, is the ability of M1’s competitors to draw new subscribers even with the mobile market edging towards saturation point. In the third quarter of 2008, SingTel gained 45,000 new post-paid customers while StarHub recorded a tally of 17,000. In contrast, M1 added only 4,000 new subscribers in the period.
The results in the fourth quarter should tell a similar tale. SingTel will no doubt get a lift from its exclusive tie-up with Apple for the iPhone. StarHub’s longstanding strategy of ‘hubbing’ or offering discounts for multiple services is expected to retain its allure, especially when consumers are now careful with their spending.
Both companies are even dangling freebies from notebooks to desktop computers alongside new broadband contracts, paving the way for them to up-sell additional services such as cellular subscriptions in future.
Without a viable second business, M1 cannot afford to do the same. At a time when providing mobile services has become somewhat of a lowest common denominator, a new laptop or a sizeable monthly discount could well be the deciding factor between one operator and another.
With the impending change-of-guard, a strategic review of M1’s existing business will be among the top items on the agenda. One key question that will face the new chief is how M1 will eke out growth when competitors seem to have the upper hand.
Unlike its rivals, M1 has always chosen to play nice under the stewardship of Mr Montefiore. When StarHub entered the market as an Internet service provider in 1999, it went on the offensive and offered free unlimited dial-up Internet packages, effectively sealing the fates of market leaders Pacific Internet and SingNet. It followed this up by with free incoming calls and per-second billing on the mobile front.
Diversification
SingTel also threw down the gauntlet locally by hogging the iPhone distributorship and by going after the next generation of mobile users with student plans offering free campus calls and unlimited text messages.
M1 will have to come up with something more impactful to shift the market dynamics back in its favour.
Diversification, both from a product or geographical perspective, is the other key decision that has to be made by the new M1 CEO.
With Singapore’s mobile penetration already at a sky-high rate of 130 per cent, should the company diversify into broadband-related ventures when Singapore’s new high-speed fibre-optic network becomes operational in 2012?
The danger here is that the Republic’s small Internet user base may not be able to support the vibrant broadband landscape that local authorities have envisioned with the dawn of the new network.
Overseas expansion could be another consideration for M1 with mobile services just starting to take off in emerging regional markets such as Vietnam and Cambodia. With its limited capital, partnerships with foreign players or even consolidation with another local telco could help this cause.
While M1’s future direction will undoubtedly hinge on its new skipper, one thing is for certain: the company cannot afford to stand still amid the current sea change. Against cutthroat competition, sometimes the best defence for a company is a good offence.
STEng – DBS
Holding Fort
We upgrade ST Engineering to BUY with a target price of S$2.80. Amidst the worsening global economic outlook, STE has sustained its reputation of being a defensive counter, with a slew of new contract wins in recent months across different segments. In spite of possible slowdowns in its Aerospace and Marine segments, we are positive on the stock given 1) its ability to boost growth through M&A, 2) a relatively secure dividend yield of 7%, 3) record orderbook of
S$10b and 4) cash and cash equivalents of S$1b.
Robust orderbook of S$10b will drive revenues.
Contract wins have been stable across the Group’s subsidiaries in recent months, demonstrating the defensive nature of the Group’s diversified earnings stream. It is also in line with our expectation that public spending in defence, transport, and infrastructure projects will mainly drive revenue growth over the next two years.
US operations may recover faster than expected.
Even though major US airlines have pared capacity in FY08, jet fuel prices have corrected significantly and airline industry losses, going forward, will be lower than previously expected. Hence, the demand for 3rd-party MRO work may recover earlier than projected.
Upgrade to BUY, attractive dividend yield of 7%.
The group is focused on enhancing value for shareholders and STE has been paying out 100% of its earnings as dividends since 2002. As a result, the Group has been able to generate very high ROEs in the range of 30%, while still retaining cash and cash equivalents of approximately S$1b at the end of 3Q08. We believe this strong cash holding will present potential growth upside – in the form of good acquisitions at distressed valuations.