Author: kktan
SingTel – OCBC
SHARE SALE MINOR HICCUP
- Temasek selling 400m shares
- Temporary knee-jerk reaction
- Adding value to mobile business
Temasek selling 400m shares
Temasek Holdings has entered into an agreement to sell 400m shares in SingTel as part of its portfolio rebalancing. We understand that it has a upsize option to sell another 100m shares. According to newswire reports, the share sale was done at S$3.20 each, which is a 3.9% discount to Tuesday’s S$3.33 close, and also at the lower end of the indicative S$3.20-3.25 range. As expected, the news resulted in a negative knee-jerk reaction, causing SingTel’s share price to open some 5.1% lower at S$3.16.
Not indicative of SingTel’s business prospects
Meanwhile, Business Times reported that the sale was a result of a “reverse inquiry” from bankers, suggesting that the move is more opportunistic (given that the share price has risen 6.7% YTD) rather than a direct reflection of SingTel’s business prospects. In any case, we note that Temasek will be barred from selling more shares for 120 days after completing the sale. Temasek will hold a 51.3% stake in SingTel (assuming 500m shares are sold), and the telco will remain the largest company in its portfolio by market capitalization.
Good demand for iPhone 5
Separately, demand for the new iPhone 5 over the weekend has been very positive. We visited several SingTel outlets – including some of its competitors – and the queues were very long indeed. While the higher subsidies for the iPhone 5 may initially weigh on margins, the new contracts with less generous data bundles and the faster LTE access speed should eventually bump up ARPU and margins. SingTel has also made several acquisitions in the mobile service space – the latest being a S$3m stake in mobile game firm – and this should allow it to add value to its mobile business.
Maintain BUY with S$3.61 fair value
Despite the negative knee-jerk reaction, we believe that investors should not read too much into the share sale. Instead, we continue to like its defensive business and relatively decent dividend yield of ~5%. Maintain BUY with an unchanged S$3.61 fair value.
TELCOs – Kim Eng
iPhone 5 To Dampen Margins in 2H12
Slower 2H ahead. We are maintaining our SELL calls on SingTel and StarHub as we expect them to be hardest hit by the higher subsidies and longer clawback periods of the iPhone 5 in 2H12. However, M1 is likely to see a more muted impact due to its accounting treatment which brings forward part of future revenue to offset the cost of the subsidy. As such, M1 remains a HOLD, and is our top telco pick in Singapore.
iPhone 5 trumps iPhone 4S. Apple’s iPhone 5 started selling around the world last Friday, including Singapore, and demand is much stronger than the 4S model. Apple has reported that pre-orders for iPhone 5 topped 2m units in 24 hours, more than double the amount of pre-orders it took for the iPhone 4S, reflecting strong pent-up demand for this new model. In Singapore, all the telcos sold out online 90 minutes after opening for booking.
Subsidies rise sharply. Based on the telcos’ iPhone 5 plans, they are stretching their subsidies out over a longer period for iPhone 5 compared to the iPhone 4S. At the sweet spot of the two cheapest plans, which have a minimum contract period of 24 months, the telcos will need almost 1.5 months more to recoup their subsidy cost for the iPhone 5 than the iPhone 4S.
Margin impact likely to be worse than iPhone 4S. EBITDA margins are likely to be affected in 3Q12. Based on past trends, we expect a larger impact (3-4ppt) for SingTel and StarHub, but a more muted impact on M1 (1-2ppt) due to its accounting treatment for iPhones where future revenue is brought forward to cover the cost of subsidies. Based on current reported iPhone sales however, we think our existing forecasts are still in the money.
Hopefully, higher data usage can offset higher subsidy. iPhone 5 is an LTE handset, and the faster LTE speeds should drive up data usage as it would be much easier to consume data, particularly when viewing video and using FaceTime for video chats. We are not assuming a significant rampup in data revenue yet because we think there will be a period of adjustment, where telcos need to improve their app and content offerings, and users need to adjust their consumption patterns.
TELCOs – OCBC
IPHONE 5 TO HELP DRIVE LTE
- iPhone 5 to help LTE adoption
- LTE still likely 2013 story at best
- Defensive earnings, attractive yields
Launch of new iPhone 5
Apple has unveiled the latest reiteration of the hotly popular iPhone, which will be available in Singapore from 21 Sep. Besides sporting a slightly larger screen and better resolution, faster processor, improved battery life, the iPhone 5 is 4G LTE-enabled and will work on the 4G (1800MHz) networks being implemented here.
Demand likely strong
As with the previous versions of the iPhone, we expect the demand for the new iPhone 5 to be pretty strong, especially from people still holding the iPhone 4, which is becoming pretty long in the tooth. We also believe that most iPhone 4 subscribers are eligible for a subsidized upgrade, as the 2-year lock-up period should be over by now.
Should help drive LTE adoption
While the strong demand could see near-term pressure on the telcos’ EBITDA margins due to the higher subsidies for the new iPhone (as compared to Android phones), we also expect the smartphone’s popularity to help drive LTE adoption over the medium to longer term. We had earlier identified the lack of LTE-enabled handsets to be a stumbling block to the adoption of LTE.
Gradual recovery in margins
However, with both M1 and StarHub recently announcing their new mobile plans with tiered data pricing, new and re-contracting subscribers will get greatly reduced free data bundles (starting from 2gig compared to 12gig previously). Because of this, we could see subscribers initially reining in their data usage, thus resulting in minimal – if any – ARPU uplift for the telcos. However, we think that this is just a temporary setback, and should see data usage continuing to increase, thus resulting in a gradual recovery in margins.
LTE is still 2013 story at best
While we expect the iPhone 5 to help subscribers make the jump from 3G to 4G LTE, we still opine that LTE is still a 2013 story at best. Nevertheless, we continue to like the overall telco sector for its defensive earnings and attractive dividend yields (backed by strong operating cashflows). Maintain OVERWEIGHT.
TELCOs – DBSV
4G pricing is an ultimate cure
- M1 & StarHub to price 4G services significantly higher than 3G. Players with bigger exposure to the mobile sector will benefit more
- Even if we ignore the impact of lower data-caps StarHub’s FY13F/14F earnings could benefit 4%/8%, marginal impact for SingTel.
- Raise StarHub’s TP to S$3.67 assuming DPS of 22 Scts in FY13F, implying 6% yield. HOLD SingTel for 5% yield, intense competition in India, Australia and startup cost for mobile advertising as key concerns
4G pricing to correct 3G’s too generous data pricing in Singapore. In June, SingTel lowered the data-caps to 2GB from 12GB. During the 3G era, c.22% of M1’s users exceeded the 2GB limit without paying an extra cent. With higher 4G speeds (five times higher than 3G), more users are likely to exceed the 2GB data-cap to end up paying S$5.35 per extra GB. In addition, SingTel will charge S$10.70 per GB for exceeding the data-cap from Jan 2013 onwards. M1 took it one step further in September and announced that it will charge an additional S$10.70 in subscription fees for 4G versus its 3G ARPU of S$53. StarHub has also put in place higher 4G pricing of an additional S$10.70 for 4G plans from March 31, 2013 onwards when its 4G coverage will be significantly higher. StarHub will charge slightly higher S$6.42 per GB for exceeding the datacap. An additional S$10 per month works out to be 19% of M1’s, 14% of StarHub’s and 12% of SingTel’s reported postpaid ARPUs.
4G penetration of 8% in 2013F, 20% in 2014F. These projections are based on experience in countries like the US where 4G penetration reached around 9% after 18 months of launch, while in Korea, penetration hit 17% after 13 months of launch. 4G network coverage and handset availability are the two most important factors. However, 4G is not priced at a premium in the above countries, hence 4G adoption could be slightly slower in Singapore despite the widespread 4G network.
Robust longer-term outlook for the sector. We raise StarHub FY13F DPS to 22 Scts versus our expectations of 21 Scts earlier on better longer-term outlook and a very low FY12F net debt to EBITDA ratio of only 0.5x. In our DDM model, we assume 8% cost of equity, 2% long-term growth rate and 22 Scts DPS. However, upside for StarHub is limited as 22 Scts DPS is already reflected in the share price.
STEng – Kim Eng
When the Tough Keep On Rollin’
A shield against global worries. Recent contract wins have helped cement our view that STE remains one of the top defensive picks for investors concerned about global macro uncertainties. STE’s strong orderbook, helped in no small way by its defence contract capabilities, provides earnings visibility and supports an attractive forward dividend yield of 5-5.5% p.a. Our BUY call has worked out quite well since our upgrade in April, with a ~10% total return on investment. With a target price of SGD3.78 pegged to mid-cycle valuations of 19x FY2013 PER and the best yet to come, we maintain our BUY call.
FY2012 in the bag; FY2013 looking good. SGD179m in contracts recently announced by ST Marine reaffirms strong contract win momentum despite the tough economic conditions. This brings its total orderbook closer to SGD13b, of which ~SGD2.5b (40% of our FY2012 revenue forecast) is expected be booked in 2H2012. With 1H2012 revenue of SGD3.1b (50% of FY2012 forecast), we believe our FY2012 revenue forecasts are in the bag. As we expect the strong momentum to continue, FY2013 is also looking good.
Conservative margin assumption suggests upside to earnings. We have assumed a 9% net margin for our FY12-14 forecasts, but there may be upside potential as these are conservative assumptions that mirror operating conditions immediately after the Great Financial Crisis of 2008-09. STE’s earnings resilience comes from diverse businesses that help shield it from sector-specific shocks. Historically, they have given earnings a complementary mix of stability and profitability.
The cycle is still on STE’s side. We believe Aerospace and Marine still have upside in their respective cycles, as the aviation MRO industry is expected to benefit from the proliferation of airline capacity, and high oil prices are keeping activities in the offshore sector positive. For Electronics, government initiatives to enhance the local rail transport network are improving contract win visibility, while Kinetics will continue to be underpinned by steady defence-based contracts.