Month: April 2009
M1 – CIMB
Good cost-control amid revenue pressure
• Within expectations. 1Q09 core profit was spot on, making up 24.9% and 25.3% of our full-year forecast and consensus respectively. Reported profit includes a S$5.5m tax adjustment for a lower corporate tax rate from 18% to 17%. 1Q was characterised by topline fatigue, steady margins and continued market-share loss. No dividend was declared, as expected.
• Weak revenue. Top line slipped 9% yoy and 4% qoq due to competition, lower roaming and reduced handset sales. Postpaid revenue dropped 9.9% yoy and 4.4% qoq from fewer subscribers due to competitors’ bundling and exclusive handset offerings and M1’s own per-second billing and multi-line savers which eroded its ARPUs. Roaming accounted for 15% of mobile revenue, and usage has been coming off due to a slowing economy.
• Cost-controls masked by Take3. EBITDA margins ticked up 0.6% pt qoq and 2.3% pts yoy from more active cost-control, particularly of handset (-24.3% yoy) and staff costs (-20.8% yoy). However, lower handset costs were masked by its Take3 programme which amortises handsets over the life of contracts vs. expensing under other schemes.
• NGNBN pursuit. M1 is intent on its transformation into a full-service operator. This should gain momentum once NGNBN is operational. Strategies have not been revealed but M1 has been gaining experience from reselling StarHub’s broadband access. Consistent with our view, M1 sees downward pressure on retail broadband tariffs from low wholesale pricing.
• Guidance reiterated. M1 held on to its FY09 guidance of stable operations, implying stable PATs despite a challenging economic outlook. This also implies a stable DPS for FY09, in our view.
• Reiterate OUTPERFORM, earnings forecasts and target price. While we retain our OUTPERFORM rating, we flag growing concerns over its market-share loss, postpaid weakness and the scope for further cost-controls. For now, we retain our earnings forecasts and DCF-based (WACC: 8.3%) target price of S$2.13. Re-rating catalysts could include a reversal of market-share loss, qoq improvements in earnings, strong dividends and a favourable outcome from NGNBN.
M1 – DBS
Good results for a weak quarter
Excluding exceptionals, 1Q09 net profit of S$36m (-4% y-o-y, flat q-o-q) exceeded our expectation despite significant lower revenue, due to effective cost control. Including dividends, M1 outperformed the STI by 2% YTD, but its solid 9% yield is the key attraction. M1 remains a BUY although we nudged up our estimates, and target price to S$1.60. There is potential upside to our FY10F earnings because of S$15-20m backhaul cost savings.
Earnings better than expected despite revenue contraction. Excluding S$6.6m exceptional income (S$5.5m in tax credit and S$1.1m from interest rate swap), net profit of S$36.4m (-4% y-o-y, flat q-o-q) exceeded our expectation of S$34m. This was despite a larger than expected 8.6% y-o-y drop in revenue; the company registered higher EBITDA margin because of (i) lower staff costs due to job credit scheme and lower facilities expenses due to lower rentals, (ii) lower handset costs as M1 started to amortize handset subsidies over a longer contract period instead of fully expensing it in the quarter under its new promotion “Take3”.
Market share loss coupled with decline in churn rate. M1 lost more market share than expected which management attributed to a spike in competitive intensity and weak economy. Meanwhile, postpaid ARPU also fell more than expected, due to promotions on bundled mobile plans by M1. Management hopes to arrest market share loss with its new promotion “Take3” that was launched in late Feb09. On a positive note, churn rate declined for the third consecutive quarter to 1.6%.
Management reiterates stable FY09F earnings. But they hesitated to guide for stable top line. Lower staff and facilities costs should continue to benefit the company. We maintain a BUY rating for M1, with a revised target price of S$1.60 based on 10x FY09F PER. There is a potential upside to our FY10F earnings arising from S$15-20m backhaul cost savings.
M1 – DMG
No big surprises
Operational earnings down, in line with expectations. In the first quarter to Mar 09, revenue declined 8.6% to S$186.4m while earnings rose 10.3% to S$41.9m. The improved net margins were largely a result of tax adjustments for reduction in corporate tax rate. Taking out the tax impact, the results would be within our expectations.
Balance sheet improves further. Due to strong cash flows, M1’s key leverage ratios have improved. Net gearing now stands at 0.68x, against 0.85x a year ago. EBITDA/Interest, at 45.2x, is the highest among the telcos, and an improvement over the 37.6x it recorded in the previous corresponding period. Some concerns. M1’s post-paid market share fell from 27.2% in 4Q08 to 26.8% in 1Q09. While the level of competition tapered off in 4Q08, it intensified again in the past few months. From the tone of the management, we gather that should its market share continue to fall, it will retaliate aggressively. M1 has already introduced innovative programmes like Take3 to win over new customers. One other concern investors may have is the vacuum at the top after the departure of Neil Montefiore in Jan 09. Acting CEO and CFO Karen Kooi indicated that the new CEO will be unveiled “very soon”.
NBN plans. M1 believes it will benefit from the NBN when it becomes operational in 2Q10. In our view, it may not be as rosy. We expect SingTel and StarHub to launch aggressive campaigns to lock in customers later this year, pushing market penetration past the 90% mark by then. Morever, the low wholesale prices will attract new players, which will place pressure on broadband prices.
Maintain estimates and call. We are maintaining our earnings estimates for M1, with a 5.6% contraction to S$141.6m in FY09 and a growth of 4.6% to S$148.1m in FY10. Based on DDM, we attain a target price of S$1.52. Given the limited upside, we maintain NEUTRAL on M1.
StarHub – BT
Funding capital spending a key issue at StarHub
FEARS that StarHub could initiate a cash call sparked a flurry of questions from shareholders about the operator’s capital expenditure (capex) plans for the year at its annual general meeting (AGM) yesterday.
Minority shareholder Tan See Peng got the ball rolling with a barrage of queries revolving around the group’s outstanding bank loans of $914 million and whether there are plans for major cash outlays in 2009.
‘I’m just afraid you (StarHub) will turn to us (for cash),’ he quipped. His concern could stem from the right issues called by other corporate titans such as DBS Group, CapitaLand and Chartered Semiconductor in recent months.
Moreover, StarHub recently landed the government’s OpCo tender for operating the nation’s upcoming fibre-optic broadband network and there may be some uncertainty about the investments required for this project,
‘This (OpCo) will have some requirements on capex, but we have sufficient resources, as well as lines of credit to fund the expenditure,’ said StarHub chairman Tan Guong Ching.
The operator has previously said that it expects to pump in $100 million over the next few years to set up its OpCo venture. The new unit is projected to require an annual capital spending of around $40 million over the next 25 years.
‘We have a very strong cash flow. It’s more than sufficient to pay for capex as well as for the repayment of loans,’ he assured shareholders.
StarHub’s AGM typically attracts a smaller crowd compared to rivals Mobile One and Singapore Telecommunications as the stock is largely owned by institutional investors.
While the annual gathering is usually wrapped up in less than hour, yesterday’s AGM stretched to nearly 90 minutes with queries about the pay of StarHub directors prolonging the latter part of the question-and-answer session.
They were mostly fielded by shareholder Tony Tan, who also owns shares in M1. Armed with a detailed analysis of the two companies’ financial statements, he quizzed StarHub’s rationale for paying its directors a remuneration package of $1.078 million, a figure which he said is ‘2.8’ times higher than that of its competitor.
In addition, he queried StarHub’s need for having a large board composition of 13 members when rival M1 was doing the opposite by shrinking its directorate pool.
‘We have diversified revenue. The experience needed for some of these (segments) is very different. The complexity of their (M1’s) business is different from ours,’ StarHub CEO Terry Clontz explained.
This is because StarHub is among a handful of operators capable of offering a complete suite of Internet, telephony and pay-TV services, he added.
‘This (diversification) will cushion us against a downturn in any particular sector,’ said StarHub chairman Mr Tan, adding that its mobile business is already seeing signs of a slowdown due to Singapore’s saturating mobile phone user base.
M1 – BT
M1’s Q1 profit up 10.3%, helped by tax adjustment
Results show underlying weakness in core cellular business
A TAX adjustment helped lift MobileOne’s first quarter net income up 10.3 per cent to $41.9 million but the gain failed to mask the the underlying weakness in its core cellular business.
The increase was largely due to a reduction in Singapore’s corporate tax rate, M1 said in its regulatory filing yesterday. The move translated to a 75 per cent reduction in M1’s Q1 tax provision to $2.2 million, from $8.8 million a year earlier.
The firm’s earnings per share for the period was 4.7 cents, 9.3 per cent higher than 2008.
The ceasefire following the all-out marketing war between the three local telcos as a result of mobile number portability (MNP) last year lent M1 some reprieve in Q1.
Customer acquisition and retention cost in Q1 was $121 and $113, down 15.4 per cent and 16.9 per cent respectively year-on-year.
Cost of sales also dropped 6.7 per cent to $71.9 million in Q1 compared to the previous corresponding period. The conclusion of festive promotions also led to a 30.4 per cent sequential decline in advertising and promotion expenditure to $19 million for the quarter.
However, the company continues to be a victim of MNP, losing 11,000 customers in the last three months to end Q1 with a mobile customer base of 1.62 million.
While the number is 4.2 per cent higher than the tally last year, the growth is lower than rivals StarHub and SingTel.
This means that M1’s market share has now dipped to 25.4 per cent from 26.5 per cent in 2008. Churn rate, or the number of customers leaving M1, stood at 1.6 per cent in the first quarter, up from 1.3 per cent last year.
M1’s post-paid revenue slid 9.9 per cent year-on- year to $122.6 million as a result of aggressive bundling by rivals StarHub and SingTel, as well as exclusive deals for handsets such as the Apple iPhone. Its prepaid sales however, increased by 3.5 per cent to $17.7 million.
The ongoing recession also crimped customer spending on services such as international calls, with revenue from this segment dropping 5 per cent to $32 million in Q1.
One positive trend amid the gloom is the uptake in other M1 services such as its broadband offerings. The firm’s non-voice sales now account for 25.1 per cent of total service revenue, up from 23.2 per cent last year.
The company’s first-quarter operating revenue came in 8.6 per cent lower at $186. 4 million.
Earlier this month, M1 lost the bid to operate Singapore’s upcoming fibre-optic broadband network to StarHub, but it maintained the desire to move from pure mobile play to become a ‘full-service operator’ when the new Internet highway is in place.
‘Based on the current outlook, and taking into consideration the benefits arising from the government measures announced in Jan 09, we continue to expect operations to remain stable for the year 2009,’ the company said.
M1 shares closed unchanged at S$1.47 yesterday before its earnings were released.