Author: kktan
M1 – Kim Eng
Singing the 4G Tune
No big splash from 4G. Come 15 Sept, M1 will be the second telco in Singapore to launch 4G plans after SingTel. Its prices and data caps are closely in line with SingTel’s and we do not expect a price war to erupt. While ARPU should be boosted as they are priced at a premium to existing 3G plans, the impact on earnings is at best 10%, by our estimates. Maintain HOLD. However, M1 is our top telco pick for its attractive dividend yield of 5.7%, the highest in Singapore currently.
4G plans launched. M1 has launched four 4G plans for smartphones and three for mobile broadband devices, the second telco to do so after SingTel. Immediately, three things are notable. First, the 4G plans are priced at a premium to its 3G plans. Second, it has reduced its data bundles from 12GB to mirror that of SingTel’s (2GB, 3GB, 5GB). Third, as expected, M1 has removed its top-end unlimited plan and replaced it
with a lower cap 12GB data plan.
Should not rock the boat. M1’s 4G plans are rational as they are actually priced at a premium to SingTel’s 4G plans. As such, we do not expect net-adds to spike. However, the additional 1GB data allowance to be given for recontracting customers (worth SGD10.70) should equalise the price difference between the two telcos, hence it should minimise the churn and maintain its existing subscriber base. Over time however, the premium to 3G should boost its ARPUs.
Potentially 10% earnings upside. According to M1, 80% of its smartphone users uses less than 2GB of data a month, and less than 10% uses more than 5GB a month. Similarly, 80-90% of SingTel and StarHub’s users consume an average of only 1GB a month. As a result, they should be able to tap on 10-20% of their subscriber base to monetise the lower data caps. Depending on the actual usage, we estimate up to 9.6% upside to FY13 earnings in the best case scenario.
Maintain HOLD. We maintain HOLD on M1 with a target price of SGD2.65 based on peer average PE of 14x earnings as we roll forward to 2013. However, the stock is attractive on its dividend yield of 5.7%, still 430 basis points ahead of the 10-year Singapore Government Bond, and is our top Singapore telco pick.
M1 – Kim Eng
Singing the 4G Tune
No big splash from 4G. Come 15 Sept, M1 will be the second telco in Singapore to launch 4G plans after SingTel. Its prices and data caps are closely in line with SingTel’s and we do not expect a price war to erupt. While ARPU should be boosted as they are priced at a premium to existing 3G plans, the impact on earnings is at best 10%, by our estimates. Maintain HOLD. However, M1 is our top telco pick for its attractive dividend yield of 5.7%, the highest in Singapore currently.
4G plans launched. M1 has launched four 4G plans for smartphones and three for mobile broadband devices, the second telco to do so after SingTel. Immediately, three things are notable. First, the 4G plans are priced at a premium to its 3G plans. Second, it has reduced its data bundles from 12GB to mirror that of SingTel’s (2GB, 3GB, 5GB). Third, as expected, M1 has removed its top-end unlimited plan and replaced it
with a lower cap 12GB data plan.
Should not rock the boat. M1’s 4G plans are rational as they are actually priced at a premium to SingTel’s 4G plans. As such, we do not expect net-adds to spike. However, the additional 1GB data allowance to be given for recontracting customers (worth SGD10.70) should equalise the price difference between the two telcos, hence it should minimise the churn and maintain its existing subscriber base. Over time however, the premium to 3G should boost its ARPUs.
Potentially 10% earnings upside. According to M1, 80% of its smartphone users uses less than 2GB of data a month, and less than 10% uses more than 5GB a month. Similarly, 80-90% of SingTel and StarHub’s users consume an average of only 1GB a month. As a result, they should be able to tap on 10-20% of their subscriber base to monetise the lower data caps. Depending on the actual usage, we estimate up to 9.6% upside to FY13 earnings in the best case scenario.
Maintain HOLD. We maintain HOLD on M1 with a target price of SGD2.65 based on peer average PE of 14x earnings as we roll forward to 2013. However, the stock is attractive on its dividend yield of 5.7%, still 430 basis points ahead of the 10-year Singapore Government Bond, and is our top Singapore telco pick.
M1 – OCBC
LTE is still 2013 story at best
- Nationwide LTE network from 15 Sep
- Limited by few 4G handsets
- Yield still attractive; BUY
Launches nationwide 4G LTE Network
M1 Ltd will launch its nationwide 4G LTE network in Singapore on 15 Sep, where it will offer 95% coverage for indoor and outdoor areas (but not in the MRT tunnels yet). Although SingTel introduced its 4G LTE services in Jun, it will be looking to achieve 80% coverage by end-2012, and over 95% by 1Q13. StarHub also just announced that it will offer its 4G LTE services in key business areas from 19 Sep and achieve nationwide coverage by 2013.
4G plans at a premium
M1 has also announced new pricing plans for its 4G LTE and 3G bundles, which now start with just 2G of data (versus 12G data previously). More interestingly, M1 has decided to price its 4G at a premium to its 3G plans, costing subscribers some S$10.70 more per month (StarHub is doing the same). The plans are also slightly more expensive (S$3 to S$10 more) than similar plans from SingTel (which has same prices for its 4G and 3G plans).
Limited 4G handsets
While the 4G premiums could be a minor stumbling block (but unlikely to deter early adopters), the bigger stumbling block is likely to come from the limited 4G handsets that are available. Currently, there are only four phones and two tablets that work on Singapore’s LTE network. However, this could change with the launch of the new iPhone 5, which is widely touted to be LTE-enabled.
LTE still a 2013 story at best
In any case, we believe that 4G LTE is still more of a 2013 story at best, as the mass market may still take some time to convert their 3G handsets to 4G. As such, we have not factored in any significant contribution from LTE until 2014 in our model. We continue to like M1 for its defensive earnings and relatively attractive dividend yield of 5.3%. Maintain BUY with an unchanged DCF-based fair value of S$2.80.
Sarin – Kim Eng
Early signs of easing
De Beers cut rough diamond prices. In the last DTC sight in August, De Beers reduced rough diamond prices by an average of 8%. As a result, all rough diamonds were taken up by sightholders, compared to more than 20% rejections in the previous two sights. Based on a Rapaport report, the cut in rough prices narrowed the gap between rough and polished price movements from about 15% to 5%. This is a positive move for the industry as it would ease liquidity challenges and profit margin pressures for manufacturers.
Polished prices more stable. Polished diamond prices were more stable in August, following steep declines in previous months. There should be gradual improvement in demand ahead of the fourth-quarter buying season. Demand for lower-quality and cheaper diamonds appears steady while that for high-quality stones is still relatively weak. All eyes are on the Hong Kong jewellery show in late September, which would give a clearer indication of polished buying demand.
Indian manufacturers still face liquidity problems. While there is an improvement in sentiments, given the added burden of a weak rupee, Indian manufacturers are still plagued with liquidity issues. We do not expect these manufacturers to resume capital equipment purchase until further signs of easing as they remain cautious. However current developments are moving in the right direction.
Look for growth beyond FY12. We maintain our view of looking for the next leap of growth for Sarin beyond FY12, which would come from the penetration of the polished diamond market. Meanwhile, we are not even midway through the adoption cycle of the Galaxy, which would drive recurring revenue to reach about 30% of total revenue by FY13F.
Current valuations a steal, reiterate BUY. Current depressed stock price offers a good opportunity for accumulation. While Fidelity trimmed its position from 6.2% to 4.8%, Sarin has bought back 0.3m of its own shares recently at SGD0.90-0.92, demonstrating its confidence in the company. We lower FY12F net profit by 4.4% as we incorporate more conservative 3Q12 numbers. We roll forward our valuation multiple onto FY13F earnings and our target price is marginally higher at SGD1.68, peg to 13x peer average forward PER.
Aviation Services
Qantas-Emirates tie-up
Sector Overview
The Transportation Sector under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT, ComfortDelGro) & Aviation Services (SIA Engineering, ST Engineering, SATS).
- Qantas is shifting its European hub from Singapore to Dubai
- A mix bag for SIA
- Mildly negative in the near term for SIAEC & SATS
- We caution against overreacting to the news
What is the news?
Qantas announced a strategic 10yrs partnership with Emirates that would see the Australian carrier shift its European hub from Singapore to Dubai. Consequently, Qantas would terminate their 17yrs long business alliance with British Airways. Qantas would also withdraw its Singapore to Frankfurt route that had been underperforming.
A mix bag for SIA
Strategically, this implies that competition for traffic between Europe and Australia would be stiffer with the new alliance between two of its major competitors. However, we opine that it also implies less competition for European customers travelling to Singapore. Hence, we see this development as a mix bag for SIA.
Minimal near term impact for SATS & SIAEC
This move by Qantas has tactical and strategic implications for the aviation service providers, SIAEC & SATS, under our coverage. We see this as mildly negative for the aviation service providers as the termination of flight services would result in lower work volume for both companies. However, we estimate that the shifting of flights to Dubai would account for less than 2% of flight traffic at Changi Airport and caution against overreacting to the news.
The Qantas Group is the 2nd largest user of Changi Airport, after the SIA Group, but only after including significant traffic from Jetstar Asia. We believe that Asia remains an important market for the Qantas Group and would continue to be an important part of their growth strategy. In fact, Alan Joyce, Qantas’s CEO, mentioned “Qantas will increase dedicated capacity to Singapore and re-time flights to Singapore and Hong Kong to enable many more ‘same day’ connections across Asia.” Bloomberg news subsequently reported this capacity growth to Changi Airport at 25%. Hence, this expected increase in traffic growth at Changi could actually be positive for the aviation service providers!
Strategic implications for SIAEC & SATS
There are also concerns over a potential loss of contracts with Qantas, as the second largest service provider at Changi Airport, dnata Singapore, is part of the Emirates Group. We acknowledge this as a longer term risk, but opine that near term effects are limited. In particular, we see little risk in the near term for SATS as the company had recently renewed their contract (inflight catering, laundry services, ground and cargo handling) with Qantas in 1QFY13. Contract information for SIAEC is not available.