Author: kktan
StarHub – CIMB
Still shining in 2Q
1H12 earnings were 4% and 9% above CIMB's and consensus estimates, respectively, due to margin surprise and we consider it in line as we expect margins to moderate in 2H due to higher handset subsidies and competition. StarHub maintained its outlook for FY12.
But it nudged its capex up as it is accelerating its LTE rollout. Maintain DCF-based target price (WACC 7.9%/LTG 1.4%) and Outperform call given its higher dividend potential as its net debt/EBITDA of 0.5x is its lowest since 2Q06. Hence, StarHub remains our top Singapore telco pick.
2Q earnings highlights
StarHub's operational performance was robust with service revenue rising 2% qoq and 4% yoy and EBITDA margin gaining 1.5% pts yoy and 0.4% pts qoq. This is mainly due to a 1.3% qoq decline in operational costs, thanks to lower marketing expenses and cost of handsets.
However, a few red flags:
1) 2Q prepaid revenue fell 2% qoq and 5% yoy due to lower ARPUs and fewer subscribers as users switched out after promotions expired,
2) the number of pay TV subscribers fell 0.2% qoq and yoy as customers churned out after short-term promotions expired, and
3) broadband user numbers also dipped 0.2% qoq as they left for cheaper offerings by new entrants riding on NGNBN.
Margin pressure in 2H
StarHub maintained its EBITDA margin guidance of 30% despite 1H's coming in at 32% because it expects margins to come under pressure when the new iPhone is launched in 4Q. It expects the device to be very popular given the widely-anticipated radical upgrades and new features.
Maintain outlook, nudging up capex
Starhub maintained its FY12 outlook and kept its 20 Scts DPS. We are still optimistic about its dividend upside potential as net debt/EBITDA is at its lowest since 2Q06. However, it has revised up its capex guidance from "below 11%" of revenue to "about 11%". It plans to accelerate its LTE rollout in 2H12, ahead of the release of new LTE handsets.
SATS – Phillip
Visit to MBCCS
Company Overview
SATS Ltd is a provider of Airport Services & Food Solutions with a dominant presence in Singapore's Changi Airport. The Group also has a network of JVs across Asia and holds a majority stake in TFK Corp, an inflight catering business based in Japan.
- New cruise centre contribution immaterial in near term
- Highly variable cost structure
- Dividend yields of 5-6% remains attractive
- Maintain Neutral with TP of S$2.65
What is the news?
We visited the Marina Bay Cruise Centre Singapore (MBCCS) that is operated by SATS's new JV, SATS-Creuers. Salient points from the visit:
- Infrastructure. 80 check-in counters, max capacity of 6,800 passengers at any time, 25 coach bays, 327 carpark lots, walkway linkage to MRT station expected to be ready in 2014, minimal retail space.
- Customers. Royal Carribean International, Celebrity Cruises, Holland America Lines, Princess Cruises, Silversea Cruises and Azamara Cruises. Hosted 8 vessels since opening in May 2012. Another 60 plus vessels scheduled till the end of FY13E.
- CruiseFly. 5 airlines (Singapore Airlines, SilkAir, Air China, China Eastern & China Southern) currently offer CruiseFly services.
- Staff. 12-15 permanent staff with extra workload handled by subcontractors.
- Financials. Not expected to reach revenue of S$10mn in the near term, highly variable operating cost structure.
How do we view this?
Our view remains unchanged and do not think that this new venture would have a material impact to SATS and its stock in the next 1-2 years. The ability to handle larger vessels is the only significant advantage that MBCCS has over the existing cruise terminal facility at Harbourfront Centre.
Investment Actions?
While we maintain our Neutral view on the stock, our Singapore Sector Strategist remains overweight on the Aviation Services sector for their sustainable yields. On our projections, SATS would yield 5-6% over the next 3 years.
StarHub – Kim Eng
The New iPhone Cometh
2Q could be all she wrote as a new iPhone looms. StarHub will report 2Q12 results on 8 Aug and earnings should rise on seasonal strength. The stock’s continued rise is a good chance to take profit, in our view, as the launch of a new iPhone in 3Q12 can be expected to depress margins in 2H12. Also, yields have been compressed to historical lows and we do not expect upside in dividends given potentially heightened capital commitments next year for BPL and 4G spectrum cost. The important factors to look out for are EBITDA margin, Android handset mix, pay TV content cost and management tone on dividends. Finally, do keep an eye on the Samsung/Apple legal tiff as it is likely to impact future phone prices and telco subsidies. SELL.
2Q12 usually the strongest quarter but iPhone coming. Given benign competition during the quarter, we expect service revenue to grow YoY and QoQ, driven by mobile and Pay TV, which had the benefit of Euro 2012 revenue in June. Topline is expected to grow 5% YoY to ~SGD600m while net profit should rise 15-20% YoY to SGD90-95m, aided by better margins from lower subsidies, fueled by higher Android sales. However, 2H12 is expected to be hit by lower margins given the impending launch of a new iPhone.
The following are the most important numbers/factors to look out for.
1. EBITDA margin. We expect a YoY rise on higher mix of Android handsets. 30-32% would be expected but below 30% would disappoint, not that this matters much for the rest of the year. With the rumor mill fingering a Sep 12 launch for iPhone 5, we can expect all the telcos to suffer a margin crunch in 4Q12 and 1Q13. Despite overseas telcos’ attempts to break away from the margin-killing phone subsidy model, this is unlikely to happen in Singapore for the foreseeable future.
2. Android handset mix. Android handsets accounted for 50% of all handsets sold in 1Q12, up from 25% before. M1 said its Android mix in 2Q12 was 70% so we would not be surprised if StarHub reports a similar number. A range of 60-70% would be within expectations, while anything below 60% would be worrying. However, we think anything below 70% is unlikely as StarHub’s SmartSurf data-bundled mobile plans and MaxMobile stand-alone data plans are highly attractive.
3. Pay TV content cost. StarHub recognised the cost of the UEFA Euro 2012 soccer tournament in 2Q12, which hopefully was sufficiently matched by subscription, advertising and sponsorship revenue. We do not expect any negative surprises as it started selling subscriptions three months ahead of the matches, and mioTV viewers would also have been able to subscribe via cross-carriage. More importantly would be any new updates on the upcoming BPL auction in Sep/Oct 2012.
4. Dividends. While we expect 2Q12 DPS to remain at 5 cents a share and FY12 full year dividends at 20 cents a share, we would watch out for the tone of management’s commentary on future dividends. At this point, we expect the cost of BPL and 4G spectrum rights, payable next year, to reduce management’s willingness to consider raising its ordinary dividends. Management has also previously ruled out the possibility of one-off capital distribution.
HLFin – TODAY
Hong Leong sues Morgan Stanley over Pinnacle notes
Singapore finance firm alleges instruments were designed to fail in US bank’s favour
NEW YORK – Morgan Stanley was sued by Singapore’s Hong Leong Finance in federal court in Manhattan over claims it deceptively sold investments that were designed to fail.
Hong Leong alleged in a complaint filed today that it entered into a distribution agreement with the New York-based investment bank to sell about US$72.4 million (S$89.8 million) worth of the so-called Pinnacle notes to customers.
The notes later failed and the Singapore-based company was required to compensate customers for at least US$32 million in losses, according to the filing.
Morgan Stanley sold the notes as relatively safe investments while rigging them to fail for its own benefit, Hong Leong claimed.
“Morgan Stanley secretly, deceptively, and wrongfully invested the investors’ principal in very risky underlying assets,” according to the complaint, filed by Mr David S Stellings, a lawyer for Hong Leong.
A spokeswoman for Morgan Stanley declined to comment on the suit. BLOOMBERG
SingPost – DBSV
Slow & steady transformation
• Underlying net profits of S$36.6m above estimates; 1.25Scts DPS in line
• Operating costs still rising faster than revenues
• Business transformation is underway but earnings turnaround could take a while
• Maintain HOLD for 6% yield; TP S$1.04
Decent start to the year. 1Q13 underlying net profits of S$36.6m (down 2% y-o-y) came in higher than our estimate of S$33m, on the back of a 6.5% y-o-y growth in revenues to S$151.6m. Domestic mail business was down again, but this was offset by higher growth in international mail and hybrid mail businesses, with contribution from Novation Solutions, acquired in May 2012. Revenues of both the Logistics and Retail divisions grew at a faster clip of about 12% y-o-y. Operating expenses were up 9% y-o-y, and continued to outpace revenue growth owing to developmental expenditure (upgrading talent, IT, operations). On a q-o-q basis, though, operating costs were down 3%, likely owing to more control over non-strategic costs.
More acquisitions in the cards? In March 2012, SingPost had issued S$350m of perpetual bonds at 4.25% coupon. This could be in anticipation of acquisition plans and the expiry of S$300m worth of bonds in April 2013. We would like to highlight that these perpetual bonds are accounted for as equity in our model.
6% yield appears safe to us. As expected, 1.25 Scts of interim dividend was declared for 1Q, as cash flow remained healthy. With free cash flow expected to exceed earnings and dividend commitments, FY13 DPS of 6.25 Scts looks safe in our view. Though transformation efforts are underway, and investments in growth areas like e-commerce could bear fruit in the long term, we believe that it may take two to three years before we see any real turnaround in earnings at SingPost. No change to earnings estimates for now. Our DDM-based TP remains at S$1.04 (cost of equity of 6% and terminal growth of 0%). Maintain HOLD.