Month: July 2012
SingPost – OCBC
IMPACT FROM REVISED QoS FRAMEWORK LIKELY LIMITED
•Changes in QoS framework
•Do not foresee an impact
•Seeks growth on back of stable mail business
Revised Quality of Service Framework
The Infocomm Development Authority of Singapore (IDA) has revised the Quality of Service (QoS) framework for postal services. A key change is the increase in financial penalty for breach of the standards – a penalty of up to S$50,000/month per indicator may be imposed for non-compliance. This compares with the current penalty of S$1,000- S$5,000/month per indicator. The second key change is the requirement for SingPost to appoint an independent assessor to conduct a sampling letter test.
How will this impact SingPost?
The revised framework will be applicable to Singapore Post’s (SingPost) basic letter delivery service (effective 1 Jul 2012), and does not apply to parcel deliveries. According to statistics collected by SingPost in recent years, the group has been delivering over and above IDA’s requirements. Should this trend continue, we do not foresee an impact from the increase in penalty. Meanwhile, SingPost’s compliance with IDA’s QoS framework is currently measured via a sampling letter test that is carried out by SingPost itself. Under the new framework, SingPost has to appoint an independent assessor to conduct the sampling letter test at SingPost’s cost as an additional method of measuring compliance.
Expanding other divisions while being true to the core
A structural decline in the mail business due to e-substitution and lifestyle changes has affected personal correspondence and business transactional mail. However, growth in direct marketing mail has been observed, supporting mail volumes. We appreciate SingPost’s dominant domestic market position, operating efficiency, and stable operating cash flows. We are also mindful of margin pressures as well as the relatively limited growth opportunities in the core mail business. However, the group is seeking geographical and business expansion in logistics and retail, with continued investments in its core mail business. Maintain BUY with S$1.14 fair value estimate.
SingPost – OCBC
IMPACT FROM REVISED QoS FRAMEWORK LIKELY LIMITED
•Changes in QoS framework
•Do not foresee an impact
•Seeks growth on back of stable mail business
Revised Quality of Service Framework
The Infocomm Development Authority of Singapore (IDA) has revised the Quality of Service (QoS) framework for postal services. A key change is the increase in financial penalty for breach of the standards – a penalty of up to S$50,000/month per indicator may be imposed for non-compliance. This compares with the current penalty of S$1,000- S$5,000/month per indicator. The second key change is the requirement for SingPost to appoint an independent assessor to conduct a sampling letter test.
How will this impact SingPost?
The revised framework will be applicable to Singapore Post’s (SingPost) basic letter delivery service (effective 1 Jul 2012), and does not apply to parcel deliveries. According to statistics collected by SingPost in recent years, the group has been delivering over and above IDA’s requirements. Should this trend continue, we do not foresee an impact from the increase in penalty. Meanwhile, SingPost’s compliance with IDA’s QoS framework is currently measured via a sampling letter test that is carried out by SingPost itself. Under the new framework, SingPost has to appoint an independent assessor to conduct the sampling letter test at SingPost’s cost as an additional method of measuring compliance.
Expanding other divisions while being true to the core
A structural decline in the mail business due to e-substitution and lifestyle changes has affected personal correspondence and business transactional mail. However, growth in direct marketing mail has been observed, supporting mail volumes. We appreciate SingPost’s dominant domestic market position, operating efficiency, and stable operating cash flows. We are also mindful of margin pressures as well as the relatively limited growth opportunities in the core mail business. However, the group is seeking geographical and business expansion in logistics and retail, with continued investments in its core mail business. Maintain BUY with S$1.14 fair value estimate.
SingTel – DBSV
Three thorns – Bharti, currency and ICO
• Instead of easing, competition is intensifying in India; a weak Rupee compounds the problem further
• Upcoming Inter Connect Offer (ICO) may spur faster fiber adoption along the S-curve in Singapore
• The stock is trading at 13.4x PE versus 13.2x historical mean; Downgrade to HOLD as we see total potential returns of only 5% including dividends
Tariff cut of ~50% in India from May onwards. Leading operators including Bharti have lowered tariffs to 0.5 paisa per sec from 1.0 paisa through discount vouchers. At the same time, dealer commissions have also been raised substantially. We are not sure whether market leaders have embarked on these aggressive strategies to stem market share loss or whether small operators are trying to inflate their subscriber numbers before the expiry of 2G licenses.
Weak Indian Rupee (INR) is a key concern. INR has declined another 8% against SGD over the last 3 months. Normally this should have a 1% adverse impact on SingTel’s earnings. However, Bharti has a large USD denominated foreign debt which may result in significant forex losses. This could result in FY13F earnings growth coming in lower than our below consensus projection of 50% in INR terms.
Upcoming ICO to spur fiber adoption along the S-curve. In Singapore, regulator IDA is finalising the new ICO, which should help address key bottlenecks (installation quota) and have a regular review mechanism in place for the National Broadband Network. We expect 10-15% increase in the regular installation quota in 3Q12E and a similar increase in 4Q12E with six monthly reviews. An aggressive ICO could result in SingTel barely achieving stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. There are other cost pressures in Singapore too.
Downgrade to HOLD with SOP based TP of S$3.29. The key change is weaker INR assumption in our valuation. SingTel has outperformed the STI by 8% over the last six months, which may not continue. We like SingTel’s strategy of venturing into mobile advertising space and its bold restructuring exercise. However, we expect to see cost pressures in the near term, before rewards in the longer term.
SingTel – DBSV
Three thorns – Bharti, currency and ICO
• Instead of easing, competition is intensifying in India; a weak Rupee compounds the problem further
• Upcoming Inter Connect Offer (ICO) may spur faster fiber adoption along the S-curve in Singapore
• The stock is trading at 13.4x PE versus 13.2x historical mean; Downgrade to HOLD as we see total potential returns of only 5% including dividends
Tariff cut of ~50% in India from May onwards. Leading operators including Bharti have lowered tariffs to 0.5 paisa per sec from 1.0 paisa through discount vouchers. At the same time, dealer commissions have also been raised substantially. We are not sure whether market leaders have embarked on these aggressive strategies to stem market share loss or whether small operators are trying to inflate their subscriber numbers before the expiry of 2G licenses.
Weak Indian Rupee (INR) is a key concern. INR has declined another 8% against SGD over the last 3 months. Normally this should have a 1% adverse impact on SingTel’s earnings. However, Bharti has a large USD denominated foreign debt which may result in significant forex losses. This could result in FY13F earnings growth coming in lower than our below consensus projection of 50% in INR terms.
Upcoming ICO to spur fiber adoption along the S-curve. In Singapore, regulator IDA is finalising the new ICO, which should help address key bottlenecks (installation quota) and have a regular review mechanism in place for the National Broadband Network. We expect 10-15% increase in the regular installation quota in 3Q12E and a similar increase in 4Q12E with six monthly reviews. An aggressive ICO could result in SingTel barely achieving stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. There are other cost pressures in Singapore too.
Downgrade to HOLD with SOP based TP of S$3.29. The key change is weaker INR assumption in our valuation. SingTel has outperformed the STI by 8% over the last six months, which may not continue. We like SingTel’s strategy of venturing into mobile advertising space and its bold restructuring exercise. However, we expect to see cost pressures in the near term, before rewards in the longer term.
SMRT – Kim Eng
Early-Bird Discounts: Sufficient Bait?
Increasing incentive of early-bird discounts. SMRT will be extending the morning off-peak travel discount scheme to five more stations in town (total: 14 stations) and increasing the discount quantum from SGD30 cts to 50 cts. This applies to commuters who end their journey at these 14 stations before 745am. This scheme, effective from 6 Aug 2012, is part of SMRT’s effort to ease the morning rush hour train load.
Would you wake up earlier for SGD50 cts a day? Our opinion: probably not, especially if you are earning an average or above-average wage1. We suggest an alternative of a fixed percentage-based discount, which we believe would give a better incentive to those living in fringe locations to switch to an earlier travel schedule.
Small impact, but a negative one nonetheless. The new discount is intended to persuade another 3–4 % of commuters to start travelling earlier. This translates to approximately 2,000 more commuters daily and a revenue loss of SGD0.25m p.a. for SMRT. Including the existing commuters who are already travelling during this time period, we estimate the total negative impact on SMRT’s top and bottomline to be under SGD1m. Although the financial impact to SMRT may not be material (less than 1% of FY12 profit), we believe the push for such initiatives reaffirms SMRT’s/LTA’s concern about over-loaded trains. The discounts, in light of the absence of fare revisions this year, will further diminish the bottomline for shareholders.
Look out for Ex-D sell-off, Maintain SELL. SMRT’s share price has recently been supported by its SGD0.057 per share dividend going ex on 18 July. We maintain our SELL call based on 15x FY13 PER, as we remain concerned about the continuous pressure on SMRT to improve maintenance efforts without any fare relief this calendar year. While current efforts to reduce overcrowding should reduce the strain on SMRT’s trains, and alleviate maintenance needs in the longer term, we think that a percentage-based discount could work better in maximising the intended effect of an off-peak rate, and create more goodwill for its target commuter segment.