Month: April 2009
TELCOs – OCBC
1QCY09 results likely steady
Likely steady results from SingTel and StarHub. Based on the relatively steady results from MobileOne (M1) last week, we are also looking forward to similar showing from SingTel and StarHub when these companies report quarterly results over the next few weeks. As a recap, M1’s 1Q09 results were mostly within expectations; topline slipped 8.6% YoY and 4.3% QoQ to S$186.4m, but net profit jumped 10.4% YoY and 14.5% QoQ to S$41.9m, albeit due to one-off accounting adjustment for the 1%-point corporate tax rate reduction; EBITDA service margin was steady at 44.6%, despite suffering a near-12k drop in subscribers.
Associates – main concern for SingTel. On 14 May 2009, SingTel will announce its 4Q09 results. We expect revenue to show a modest QoQ decline (<5%) as we expect the economic slowdown to exert a slight toil on its business; the weaker AUD is also expected to negatively impact its consolidated revenue. But the biggest concern will still be its regional mobile associates – SingTel had earlier guided for lower overall pre-tax contributions. As such, we are looking for a slightly larger fall (<10% QoQ) in 4Q09 earnings, buffered by the inclusion of contributions from recentlyacquired Singapore Computer Systems (SCS).
OpCo – medium-term positive for StarHub. On 7 May 2009, StarHub will announce its 1Q09 results – we are pencilling in a modest QoQ (<5%) drop in both revenue and earnings due to the impact of the economic slowdown. And we do not expect any changes to its stated S$0.045/quarter dividend policy, despite StarHub landing the OpCo bid for the NBN; based on our estimates, its strong operating cashflow should be sufficient to fund most of its higher capex requirements (likely to kick in from next year onwards). In any case, we see the OpCo win as a medium-term positive for StarHub and have adjusted our numbers recently.
Keeping sector as Overweight. Despite the recent rally in the overall market, where there has been a shift towards higher beta stocks in the belief that the worst of economic/financial crisis is behind us, we are not convinced that there will be a rapid recovery. We believe that investors should continue to hold on to some defensive stocks such as telcos for their less vulnerable earnings and stable dividend payouts as a means of portfolio diversification. As such, we maintain our OVERWEIGHT rating on the sector.
M1 – Phillip
1Q FY2009 results
1Q FY2009 results. For 1Q FY2009, M1 reported operating revenue of S$186.4m (-8.6% yoy), profit before tax of S$44.1m (-5.8% yoy) and net profit of S$41.9m (+10.3% yoy).
There are four main revenue segments: telecommunication services, international call services, fixed network services and handset sales. Telecommunication services registered 8.4% ecrease in revenue to S$140.3m. Postpaid revenue fell by 9.9% to S$122.6m while prepaid revenue ncreased by 3.5% to S$17.7m. Moreover, international call services posted 5.0% drop to S$32.0m while handset sales fell by 18.7% to S$13.9m. Fixed network services was a new segment that contributed revenue of S$0.3m.
Operating expenses also decreased to S$141.3m (-9.0% yoy) due to lower handset costs and staff costs. M1 benefitted from the Jobs Credit Scheme, paid lower bonus and hired fewer staff.
Despite the drop in revenue, net profit increased mainly due to the 75.0% decrease in provision for taxation from S$8.8m in 1Q FY2008 to S$2.2m in 1Q FY2009. This was a result of the reduction in corporate tax rate from 18% to 17%.
Profit margin. Net profit margin increased from 18.8% in 4Q FY2008 to 22.5% in 1Q FY2009 due to the tax adjustment. Based on a year-on-year comparison, it rose from 18.6% in 1Q FY2008 for the same reason.
Decrease in market share. M1 saw a decrease in the number of prepaid and postpaid customers from 748,000 and 882,000 in 4Q FY2008 to 740,000 and 879,000 in 1Q FY2009 respectively. Its market share for the prepaid and postpaid segments has also decreased from 24.4% and 27.2% in 4Q FY2008 to 23.9% and 26.8% in 1Q FY2009 respectively. As M1 does not have Pay TV, it is unable to offer bundled services to customers. This is a concern as it is likely to lose market share to SingTel and StarHub.
Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. Despite the economic downturn, it expects operations to remain stable. Moreover, its dividend policy for 2009 is to pay 80% of net profit after tax as dividend.
Maintain Hold with fair value at S$1.67. Based on our valuation using the free cash flow to firm model, the target price is at S$1.67. M1 remains a hold due to its limited focus on the domestic market and the lack of Pay TV services. The dividend yield of M1 is 8.8%.
SingTel – BT
Near-term cheer for SingTel shareholders
IN the cut-throat business world, companies often find joy in their rivals’ mishaps. In the case of Singapore Telecommunications, however, it could be well be the company’s shareholders that end up cheering the failure of the group’s recent broadband bids.
The absence of a major foreign acquisition, coupled with SingTel’s failure to capture recent broadband tenders in Singapore and Australia, means that the firm is now freed from major capital commitments. In all likelihood, this could set investors up for a higher cash payout when SingTel releases its results for the financial year ended March 31, 2009 next month.
The company had previously stated that its dividend payout ratio for the year would be 45-60 per cent of underlying earnings. With concerns of major capital expenditure allayed, shareholders should find themselves at the higher end of this reward spectrum.
In 2008, SingTel put a halt to its payment of special dividends, a move that prompted market talk that it was conserving cash to support the bid for South Africa’s MTN Group by its Indian associate Bharti.
The demise of the deal a few months later meant SingTel drew a blank on the foreign acquisitions front in 2008. Its local purchase of Singapore Computer Systems aside, the war chest that has been set aside for funding its overseas ambitions has remained largely untapped.
Apart from the MTN bid, SingTel’s involvement in broadband projects in Singapore and Australia were also seen as other likely burdens on the firm’s capital resources.
Top on this list was SingTel’s attempt to land the NetCo (Network Company) and OpCo (Operating Company) bids in Singapore, two separate contracts covering the building of the nation’s new fibre-optic network and the wholesaling of bandwidth on the new broadband pipes.
In particular, there was much uncertainty over the degree of financial drain from the NetCo project, an undertaking which was projected to cost nearly $3 billion.
SingTel won this bid last September as part of a four-member consortium called OpenNet. But instead of having to make a substantial cash outlay, SingTel is to be compensated $1 billion over the coming years for surrendering its Internet assets to OpenNet to speed up network rollout.
The operator then went solo in the OpCo bid but it lost out to rival StarHub, which snagged the deal for operating Singapore’s new high-speed broadband network earlier this month. For SingTel, the loss meant that additional spending on OpCo-related equipment has also been averted.
Beyond local shores, SingTel’s Australian unit Optus was involved in a similar bid to build and operate a high-speed National Broadband Network (NBN) Down Under.
Due to Australia’s large land mass, the project was expected to cost over A$40 billion (S$43.3 billion) and it prompted speculation that SingTel may have to increase borrowings or slash dividends should Optus land the contract. Both worries have been dispelled with the Australian government turning down all four bids this month on the grounds that they were not up to par.
Instead, the authorities will take on the job of wiring up Australia themselves, a move described by some analysts as the ‘best-case scenario’ for SingTel. This is because it is now freed from the capex commitment but Optus can still benefit under the country’s more open broadband regime. As a result, some market watchers now expect SingTel to exceed its stated dividend payout ratio.
Since the onset of the recession, SingTel has consistently been hailed as one of the storm shelters for panic-stricken investors. With no major investments on the cards and the additional breathing space created by the recent upswing in regional currencies, there is no better time to show investors that they have made the right call by playing it safe.
SPAusNet – BT
SP AusNet update on bushfire damage
SP AUSNET, the Australian power distributor which is part of the Singapore Power Group, yesterday said that damage from the severe bushfire crisis experienced in the state of Victoria in February is lower than originally expected.
The company also said in a filing with the Singapore Exchange that there has been no material impact on previous earnings guidance for the year ended March 31, 2009, as a result of the fires.
‘SP AusNet has now been able to access all fire-affected areas to assess the scale of damage to its electricity distribution network and is pleased to advise that the damage is lower than originally expected, with less than one per cent of these assets being damaged by the fires,’ the company said.
The electricity firm is also facing a lawsuit from Australian wildfire survivors, who have launched a class action lawsuit alleging that a downed power line set off a fire that killed at least 100 people.
With regard to these legal proceedings, SP AusNet said yesterday that on April 16, 2009, it was served with the writ previously filed in the Supreme Court of Victoria, which alleges that ‘faulty and/or defective power lines’ caused loss and damage.
SP AusNet believes the claim is ‘both premature and inappropriate’, and intends to vigorously defend the claim. As it has previously stated, the firm intends to give its full support and assistance to the Royal Commission of Inquiry, which is set to commence public hearings on May 11.
SingTel – BT
Clouds fading away
SingTel has underperformed STI by 6% year to date. The good news is that regional currencies have rebounded back and risks due to Aussie National broadband Network (NBN) have subsided. The bad news is that Bharti witnessed its first ever market share decline in March 09. With more positives than negatives, we raise our FY10 earnings forecast by 6% but our numbers are still 3% below consensus. Upgrade to HOLD with revised target price of S$2.75, incorporating higher valuation for regional associates. We would be monitoring Bharti’s results and outlook on 30 Apr, for further update on SingTel.
The good news (i) Regional currencies (AUD and IDR) have rebounded back by 8-10% versus SGD in the hope of broader economic recovery, which is inline with our house view of recovery in 2H 2009 (ii) Aussie government decided to build NBN itself, which implies that SingTel dividends are secure, as it does not have to commit funds for NBN, in case it had won the award.
And the bad news (i) Latest data released by Cellular Operator association of India (COAI) shows that Bharti’s GSM market share declined for the first time in March 09, from 33.5% in Dec 08 to 32.5% in March 09, as Vodafone, BSNL and Reliance increased their market share (ii) Telkomsel has been gaining market share in Indonesia, but ARPU may weaken in ex-Java region, which account for more than half of its business, due to lower usage.
4Q09 earnings preview We expect SingTel to report net underlying profit of S$826m (-15% yoy, -1.5% qoq) on 14 May 09, lower than consensus’ S$887m, due to (i) impact of weak AUD, INR & IDR during the quarter (ii) lower roaming revenue in Singapore. (iii) Bharti faces headwinds due to tariff wars.
Upgrade to HOLD with revised target price of S$2.75. We have replaced market price of associates with target prices to reflect higher risk appetite. We narrowed holding company discount to 5% from 10% previously to reflect lower currency risks.