Month: September 2009
M1 – DBS
Hitting the right buttons for NBN
• M1’s acquisition of Qala demonstrates a clear strategy of leveraging on corporate broadband opportunities through National Broadband Network (NBN).
• TP revised to S$2.05, still pegged to 12x PER, as we roll over to average FY09F-10F earnings. M1 remains our top sector pick.
• 15% potential upside and 8% regular yield plus likelihood of an additional 10% yield in FY10F, through capital management.
A concrete step in the corporate data segment. M1 has acquired Singapore-based Internet Service Provider “Qala Singapore” for about S$17.9m in cash. Out of S$17.9m, S$3m would be paid only if Qala meets its annual targets in June 09. Qala has 9-year experience in providing data centre and broadband solutions to Singapore corporates.
Corporate data segment is worth over S$1 bn annually. Corporate data market is estimated to be worth over S$1 bn annually in Singapore, where SingTel is the dominant player. Despite NBN providing level playing opportunity in 2010, our earlier impression was that M1 could hardly make an impact in the corporate segment due to the lack of expertise and track record. However, by acquiring corporate data capability through Qala, M1 should be able to secure decent market share among SMEs and corporate customers. M1 can take care of consumer broadband segment on its own through its extensive island wide distribution network.
How much can M1 benefit from broadband? The household fixed broadband penetration is around 74% in Singapore, implying the market is not completely saturated yet. M1 is keen to gain 20% market share in the broadband market in the next five years. Overall, we estimate, M1’s top line could grow by about 20-25% in the
next five years from consumer and corporate broadband. While broadband margins are difficult to estimate, M1’s bottomline should grow by at least 10% in a similar time frame. We would model NBN benefits into our model, once we have more clarity on broadband margins.
ComfortDelgro – AmFraser
Growth opportunities support long-term prospects
• We initiate coverage of ComfortDelGro (CD) with a BUY rating. CD is trading at the lower-end of its PE band of 13x-18x. Our fair value of S$1.96/share is 17.3x FY10 PE, which offers a share price upside of 22%. Despite earnings volatility from forex moves (we factored in a 4% discount in deriving FV), we feel the potential of its overseas operations outweigh the volatility. Overseas contributions made up 42% of revenue and 39% of operating profit in 1H 2009.
• CD has established a strong foothold in the transport sector in its key markets of Britain, Australia and China. We expect CD’s good delivery of bus services in Britain and Australia to garner more of such contracts from the respective governments – while margins are protected to a large extent by pass-through clauses. These account for a combined 27% of group revenues and 23% of operating profit in 1H 2009.
• With its toehold in taxi operations across 11 cities in China, CD has yet to tap the full potential of the vast market in China. Continued acquisitions of taxi licences and vehicles – adding to its current fleet of 9,700 – will boost contributions from this segment. CD’s taxis in China contributed 12% to group operating profit – on margins of 31% – in 1H 2009.
• The train segment will be the spark for operations in Singapore. CD’s North-East line continues to enjoy stronger
ridership growth as it is less mature than SMRT’s older lines. Incremental ridership also flows through to the
bottomline as passenger load is below estimated 80% during peak times. CD is also a strong contender for the upcoming 40km Downtown Line – expected to be awarded end-2009 or 1H 2010. Taxi and bus earnings recovers in
FY09 from lower cost of diesel.
• A strong balance sheet with net gearing at a low 7% at 1H 2009 supports continued expansion overseas. But CD is adopting a conserve-cash approach this year amid the economic uncertainty, while maintaining dividend policy at 50% of net profits. This translates to a yield of 3%-4% p.a. Unless, opportunistic M&As come along, CD is likely to return extra cash to shareholders.
• On a negative note, after a sharp recovery in FY09 as a beneficiary of lower oil prices, our net profit forecast of 3%-4% p.a. for FY10-11 leaves little buffer from adverse currency rates. We estimate that a 5% appreciation in the S$ against the Pound Sterling, A$ and RMB, translates to a 2% reduction in earnings in each forecast year. In addition, about 15% of group cost structure is vulnerable to rising oil prices.
SPH – CIMB
Reasons to remain positive
• Domestic proxy. As our house is expecting a stock-market pullback in the near term, we recommend a return to defensive stocks like SPH. We recommend SPH as a domestic proxy for a recovery in consumption spending and beneficiary of Singapore’s upcoming two integrated resorts, once the resorts start organising events/conferences in 2010.
• Ad demand is gradually coming back. We note that the Saturday edition of the Straits Times averaged 215 pages in August, 46 pages above its low in January. While this was still far below 2008’s peak of 293 pages, we believe the uptrend is sustainable, backed by a booming property market and an improving retail outlook.
• Well-positioned. We believe SPH has competitive advantages over its US peers, which have been badly hurt by falling ad revenues, as SPH has a near monopoly of newspaper advertising in Singapore and is less threatened by Internet advertising.
• Reiterate Outperform. Our FY10-11 earnings estimates have been raised by 1-2% on slightly higher media earnings assumptions. Our sum-of-the-parts target price has been raised from S$3.99 to S$4.05 following our earnings upgrade and a lower risk free rate used, in line with declining house forecasts in recent months. We now value the media business using a WACC of 8.1% instead of 8.3%.