Month: October 2012
M1 – Kim Eng
Hold on for the dividend
iPhone effect already factored in. M1 will report its 3Q12 results on 15 Oct. We expect service revenue to be SGD190-191m (flat QoQ) and net profit to fall QoQ to SGD33-34m, with EBITDA margin expected to fall further QoQ. However, margins should rebound in 4Q12 and beyond as the effects of the iPhone 5 wane. With dividends likely to be maintained at 2011 level of SGD0.45 a share, the stock’s yield of 5.5% should limit downside. However, positive catalysts are limited and likely to stay so until late 2013 at least. Maintain HOLD.
Handset subsidies to spike in short term. iPhone 5 was launched on 21 Sep. M1’s accounting allows it to offset part of the handset cost against future revenue. However, it is not a full offset and we do expect margins to be affected. Also, the high-end Galaxy S3 should also have exerted a negative impact on margins, as it was launched only in May 2012 (just 1 month of sales in 2Q12) and unlike iPhone, M1 expenses off subsidies for Android phones immediately.
Expect to see lower margins in 3Q12. Despite falling two percentage points to an unprecedented low of 38% in 2Q12 (mainly due to higher subscriber acquisition and retention costs), we estimate EBITDA margin could have fallen another two percentage points or more QoQ to approximately 36% in 3Q12.
But margins should improve thereafter. Margins may stay depressed in 4Q12 from spillover iPhone effects. However, we should see an improvement in the following quarters as the impact of the more expensive handsets evens out. Generally, Android phones excluding the hugely popular high-end models such as the Galaxy S3, carry lower subsidy costs than the iPhone. In the longer term therefore, the greater popularity of Android handsets should boost margins and earnings due to their lower costs relative to the iPhone.
Earnings depressed but dividends to be maintained. We had downgraded full year earnings following 2Q12 results. However, management has committed to maintaining dividends at 2011 level of SGD0.145 a share, hence M1’s tradionally healthy yields (currently 5.5%) will also remain intact. This should support the stock on the downside despite a lack of fundamental catalysts in the short term.
M1 – Kim Eng
Hold on for the dividend
iPhone effect already factored in. M1 will report its 3Q12 results on 15 Oct. We expect service revenue to be SGD190-191m (flat QoQ) and net profit to fall QoQ to SGD33-34m, with EBITDA margin expected to fall further QoQ. However, margins should rebound in 4Q12 and beyond as the effects of the iPhone 5 wane. With dividends likely to be maintained at 2011 level of SGD0.45 a share, the stock’s yield of 5.5% should limit downside. However, positive catalysts are limited and likely to stay so until late 2013 at least. Maintain HOLD.
Handset subsidies to spike in short term. iPhone 5 was launched on 21 Sep. M1’s accounting allows it to offset part of the handset cost against future revenue. However, it is not a full offset and we do expect margins to be affected. Also, the high-end Galaxy S3 should also have exerted a negative impact on margins, as it was launched only in May 2012 (just 1 month of sales in 2Q12) and unlike iPhone, M1 expenses off subsidies for Android phones immediately.
Expect to see lower margins in 3Q12. Despite falling two percentage points to an unprecedented low of 38% in 2Q12 (mainly due to higher subscriber acquisition and retention costs), we estimate EBITDA margin could have fallen another two percentage points or more QoQ to approximately 36% in 3Q12.
But margins should improve thereafter. Margins may stay depressed in 4Q12 from spillover iPhone effects. However, we should see an improvement in the following quarters as the impact of the more expensive handsets evens out. Generally, Android phones excluding the hugely popular high-end models such as the Galaxy S3, carry lower subsidy costs than the iPhone. In the longer term therefore, the greater popularity of Android handsets should boost margins and earnings due to their lower costs relative to the iPhone.
Earnings depressed but dividends to be maintained. We had downgraded full year earnings following 2Q12 results. However, management has committed to maintaining dividends at 2011 level of SGD0.145 a share, hence M1’s tradionally healthy yields (currently 5.5%) will also remain intact. This should support the stock on the downside despite a lack of fundamental catalysts in the short term.
RafflesMed – OCBC
TIME TO REVISIT THIS STOCK
- Seasonal 2H strength to continue
- Expect margin expansion in FY13
- Trading at undeserved discount to major peers
Expect stronger 2H12 and FY13
We expect the seasonally stronger 2H trend for Raffles Medical Group (RMG) to continue in FY12, despite rising staff costs. This is supported by expected traction gains in its patient loads and room to raise charges, albeit on a gradual basis, given its competitive pricing vis-àvis its major peers. We forecast RMG’s 2H12 revenue and core earnings to increase 8.2% and 24.0% HoH to S$162.1m and S$29.8m, respectively. This also translates into a growth of 14.6% and 14.1% YoY, respectively. For FY13, we believe that the commencement of operations at its new Specialist Centre in 1H13 would help boost RMG’s net margin from 17.3% in FY12F to 17.7% in FY13F. This would be driven by improved economies of scale, increased referrals to its Raffles Hospital and better utilisation of manpower which were hired in preparation for its enlarged operations.
Favourable valuations vis-à-vis major peers
Based on forward PER valuations, RMG currently ranks as the second cheapest stock amongst its direct comparable peers from Singapore, Malaysia, India and Thailand, despite delivering the second highest estimated net margin, according to Bloomberg consensus data. We further conduct our analysis on the PER trends of RMG and its peers set, and note that the ratio of RMG’s PER relative to its peers’ average is currently at a 13.5% discount to their 5-year average.
Roll forward our valuations and upgrade to BUY
Since we downgraded RMG to ‘Hold’ on 24 Jul 2012, its share price has trended 4.3% downwards, underperforming the STI by 7.1%. While we are retaining our forecasts, we roll forward our valuations on RMG to 24x FY13F EPS. This correspondingly bumps up our fair value estimate from S$2.63 to S$2.82. Coupled with a dividend yield of 1.6% (FY13F), we upgrade RMG from Hold to BUY given potential total returns of 15.8%. Our upgrade is also reinforced by continued uncertainty over the macroeconomic backdrop, which we believe would provide an investment merit for defensive counters which also generate strong operating cashflows, such as RMG.
STEng – Phillip
Partners DCNS for major US defence project
Company Overview
ST Engineering (STE) is an integrated engineering group with exposures to four key business segments: Aerospace, Marine, Electronics and Land Systems. The company is also an anchor customer of Singapore’s defence industry.
- STE partners DCNS for the USCG OPC contract
- Long gestation period for the project
- Greater clarity on the project when the USCG awards the initial contracts to three shipyards in 2013
- Maintain Accumulate with unchanged TP of S$3.40
What is the news?
STE recently announced that their US based subsidiary, VT Halter Marine (VTHM), signed a partnership agreement with DCNS to submit a proposal to the Department of Homeland Security (DHS) for the design and construction of the US Coast Guard (USCG) Offshore Patrol Cutter (OPC). According to STE’s press release on the collaboration, VTHM would be the prime contractor and DCNS would be the exclusive subcontractor for the OPC platform design.
How do we view this?
According to the details disclosed by the USCG, there were 7 shipyards that had expressed interest in this project as of July 2012. Our research suggests that at least four of the shipyards have a history of business dealings with the USCG. Hence, we expect competition for this contract to be stiff. We believe that there should be greater clarity on the project when the USCG awards the initial contracts to three shipyards in 2013.
Investment Actions?
We remain positive and expect potential contract wins to catalyze the stock. Despite a significant rally since the start of the year, STE would still yield >4% on our estimates. Pending the release of STE’s results in early November, we kept our recommendations and estimates unchanged. Accumulate.
SingTel – Kim Eng
India 3G roaming – To ban or not to ban?
Ban or no ban: who knows? India’s proposed ban on 3G roaming alliances between domestic telcos is only the latest uncertainty in a telecom market already famous for regulatory earthquakes. However, the impact is minimal for a couple of reasons. One, 3G subscribers form just 2-3% of the total number of mobile phone users in India, hence the impact on earnings is relatively small, and two, SingTel and Axiata are insulated by their minority stakes in their Indian associates. We maintain SELLs on SingTel (TP SGD3.03) and Idea (TP Rs68) and BUYs on Axiata (TP MYR7.30) and Bharti Airtel (TP Rs400). We like Bharti for its improving FCF and earnings profile, and Axiata for potential surprises in earnings and dividends.
3G roaming pact ban notices served. Bharti Airtel, along with Idea and Vodafone, said this week that they has received a notice from DoT, the Indian telecom regulator, to stop offering 3G roaming in areas (or “circles”) that it does not have 3G spectrum rights within 60 days. In 2010, Bharti won 3G licences in 13 of the total 22 telecom circles for USD2.3b. In 2011, it entered into 3G roaming agreements with Vodafone and Idea (part of Axiata), giving it a 3G presence in the whole of India. DoT claims that by doing this, the government is not receiving its just dues, and wants it stopped.
Telcos are appealing. Naturally, the telcos are appealing against the decision. They claim that there was no specific provision made against roaming pacts when the 3G licences were sold in 2010.
Not a big deal, as 3G subscribers in India are a rare breed. In total, 3G subscribers only account for 2-3% of the total number of mobile subscribers in the country, which hit 672m active users as at Aug 2012. The biggest 3G mobile telco players in India by subscriber size are Reliance Communications (RCOM), Bharti Airtel, Idea Cellular and Vodafone. We estimate Bharti has 5.1m “active” 3G subscribers, followed by Reliance with 4m and Idea with 3.1m. Vodafone has the smallest subscriber base.
Old news, but this is getting old. A possible ban on such 3G roaming pacts is not new, as there has already been numerous warnings since Dec 2011. Given that 2G roaming is allowed, Ganesh Ram our telco analyst in India believes the regulator will eventually also allow the 3G pacts to continue with some modifications. Nevertheless, this creates further uncertainty in a market fraught with regulatory stress lines, most recently being the cancellation of 122 2G licences earlier in 2012.
Minimal impact on Bharti and Idea, as well as their parent companies. If the 3G ban is implemented, Ganesh estimates the earnings impact on Bharti to be negligible. For Idea, the impact will be larger at Rs600m or Rs0.18/share, 8% of his FYMar13 forecast. Ganesh has a BUY on Bharti (TP Rs400) and a SELL on Idea (TP Rs68). As SingTel owns only 15.9% of Bharti Airtel directly and Axiata owns a mere 19.7% of Idea, the impact on SingTel (SELL, TP SGD3.03) and Axiata (BUY, TP MYR7.30) are also negligible.