Author: kktan
M1 – OCBC
Softer 2Q12 earnings
• 2Q earnings 15.4% below forecast
• Not expecting stable performance for FY12
• Paring fair value to S$2.80 from S$2.81 Softer-than-expected 2Q12 showing
M1 Ltd reported a softer-than-expected set of 2Q12 results yesterday. Revenue of S$232.2m was down 5.3% YoY and 11.5% QoQ, or 7.1% below our estimate. Management explained that the lower revenue was due to lower handset sales. Due to a change in sales mix, with nearly 70% of its post-paid customers adopting an Android phone, which subsidies are expensed upfront, net profit tumbled 17.8% YoY and 12.7% QoQ to S$35.2m, or 15.4% below our forecast. Meanwhile, M1’s 1H12 revenue fell 1.6% to S$494.7m, making up 45.0% of our FY12 forecast; while net profit slipped 11.5% to S$75.5m, or 45.8% of our full-year estimate. Nevertheless, M1’s interim dividend remains at S$0.066/share, unchanged from last year.
Removes stable outlook guidance
Going forward, M1 expects capex to be around S$120m, versus its earlier S$110-130m guidance. But we note that management has not reiterated its “stable performance at both top and bottom-line” guidance. Instead, M1 guided that the strong interest in new high-end smartphones seen in 2Q will contribute to revenue growth over a two-year period. It also expects handset subsidies expensed upfront to have an immediate impact on profitability, but believes that margins will recover over the 2-year contract period. Meanwhile, M1 is looking to be the first telco in Singapore to have a nation-wide 4G smartphone and dongle coverage by end-3Q. However, the adoption of this new technology could take up to 2 years to reach an optimal level, the higher roll-out cost could depress near-term margins.
5.4% lower FY12 earnings forecast
In view of M1’s latest guidance, we are revising down our FY12 revenue forecast by 3.4% (mainly on lower handset sales) and earnings by 5.4% (on weaker margin outlook). We also kept our FY13 revenue forecast but cut earnings by 2.6%. However, with our DCF-based model, the earnings cut only has minimal impact on our fair value, reducing it from S$2.81 to S$2.80. Lastly, free cashflow remains strong, reflecting M1’s defensive earnings and ability to sustain a dividend payout ratio of 80%. Maintain BUY.
SMRT – CIMB
One-off fine is no surprise
The LTA will impose a S$2m fine on SMRT for December’s service disruptions. This fine has been widely expected and should not result in knee-jerk selling. We are not too bothered by this one-off cost. Rather, we worry about a structural increase in SMRT’s opex.
We are keeping our EPS forecasts intact as the quantum of the penalty is within expectations. Maintain Underperform and our DCF target price (WACC: 6.6%). We anticipate de-rating catalysts from falling dividends and margin compression.
What Happened
LTA has fined SMRT the maximum penalty of S$2m for two instances of service disruptions on the North-South Line in December 2011. The fine translates to 1.4% of our FY13 profit forecast. We believe that SMRT will have no issues funding this via its operating cash flows. In reaching this decision, LTA highlighted lapses in SMRT’s due diligence and maintenance, among other shortcomings. Funds will be donated to the Public Transport Fund to provide needy families with financial assistance.
What We Think
This fine has been widely anticipated and should not result in knee-jerk selling. We view this fine as a one-off expense that should not eclipse the permanent elevation in SMRT’s cost structure arising from higher repairs and maintenance costs. We forecast a 0.3%-pt decline in recurring net profit margin in FY13, dampened by higher maintenance and energy costs. We expect positives from falling energy prices to be eroded by higher energy consumption and staff costs as the group increases the frequency of train and bus runs to meet Singapore’s growing ridership.
What You Should Do
We maintain our preference for ComfortDelGro over SMRT for exposure to Singapore’s land transport sector. SMRT’s efforts to improve service reliability will result in higher staff costs as the group beefs up its technical team, as well as maintenance costs in a bid to implement a more pre-emptive maintenance regime. We expect lower dividends in FY13 as free cash flow weakens on higher capex spending.
M1 – CIMB
Android accounting impact
M1’s 2Q12 core net profit missed our forecast and consensus by 16% and 11% respectively due to the accounting of non-iPhone device subsidies. Despite lower earnings, M1 pledged to maintain absolute DPS. It declared a 1H12 DPS of 6.6 cts, unchanged yoy.
We maintain Neutral on M1 but raise our DCF-based target price by 14% to S$2.86 on: 1) lower subsidies given the rising popularity of the lower-cost Android devices vs iPhones and 2) lower WACC of 7.6% vs 7.9% to reflect its fairly attractive dividends. We also adjust our FY12-14 EPS forecasts by -7% to +3%. StarHub remains our top pick.
Profitability impacted by accounting
Although its cashflows are unaffected, M1’s margins were impacted negatively by its accounting treatment for Android devices where the subsidies are expensed vs being amortised over the contract period for the iPhones. We suspect that this impact will carry over to 3Q12 as the very popular Samsung Galaxy S3 had only a one-month impact in 2Q12 since it was launched in end-May. Android devices made up about 70% of the total devices sold in 2Q, a reverse from previous quarters where the iPhones dominated. However, we think margins should improve thereafter when: 1) the new iPhone is launched, typically in 4Q, and 2) the impact of the Samsung Galaxy S3 washes through.
Outlook
Not surprisingly, M1 expects a “short-term” impact of handset subsidies on its profitability. It reiterated FY12 capex of S$120m. M1 views OpenNet’s 29% higher installation quota positively, but feels that it is insufficient to reduce the service activation period.
Maintaining dividends
Despite net profit being weighed down by expensing subsidies, M1 pledged to maintain its absolute FY11 DPS in FY12, i.e. by raising its payout ratio. The company said that it planned to maintain its FY11 absolute DPS of 14.5cts for FY12. It declared an interim dividend of 6.6cts (80% payout vs 70% in 1H11).
M1 – CIMB
Android accounting impact
M1’s 2Q12 core net profit missed our forecast and consensus by 16% and 11% respectively due to the accounting of non-iPhone device subsidies. Despite lower earnings, M1 pledged to maintain absolute DPS. It declared a 1H12 DPS of 6.6 cts, unchanged yoy.
We maintain Neutral on M1 but raise our DCF-based target price by 14% to S$2.86 on: 1) lower subsidies given the rising popularity of the lower-cost Android devices vs iPhones and 2) lower WACC of 7.6% vs 7.9% to reflect its fairly attractive dividends. We also adjust our FY12-14 EPS forecasts by -7% to +3%. StarHub remains our top pick.
Profitability impacted by accounting
Although its cashflows are unaffected, M1’s margins were impacted negatively by its accounting treatment for Android devices where the subsidies are expensed vs being amortised over the contract period for the iPhones. We suspect that this impact will carry over to 3Q12 as the very popular Samsung Galaxy S3 had only a one-month impact in 2Q12 since it was launched in end-May. Android devices made up about 70% of the total devices sold in 2Q, a reverse from previous quarters where the iPhones dominated. However, we think margins should improve thereafter when: 1) the new iPhone is launched, typically in 4Q, and 2) the impact of the Samsung Galaxy S3 washes through.
Outlook
Not surprisingly, M1 expects a “short-term” impact of handset subsidies on its profitability. It reiterated FY12 capex of S$120m. M1 views OpenNet’s 29% higher installation quota positively, but feels that it is insufficient to reduce the service activation period.
Maintaining dividends
Despite net profit being weighed down by expensing subsidies, M1 pledged to maintain its absolute FY11 DPS in FY12, i.e. by raising its payout ratio. The company said that it planned to maintain its FY11 absolute DPS of 14.5cts for FY12. It declared an interim dividend of 6.6cts (80% payout vs 70% in 1H11).
SPH – DBSV
Low growth but reasonable yields
• Core 3Q earnings in line with expectations
• Muted growth on cautious GDP outlook
• Dividend yield remains attractive at 6%
• Maintain Hold, TP unchanged at S$4.01
Highlights
Core 3Q results in line. Headline net profit fell 11.5% y-o-y to S$99.8m, slightly below our expectations, largely due to lower investment income (S$9.5m, -60%) and higher staff costs (S$94m, – 6%) as a result of bonus provisions. Core operations were otherwise resilient with revenue growth of 1%, helped by strong property rental revenue (S$48.7m, +13%). Despite worries about the global economy, print ad revenues remained resilient and registered marginal growth of 0.3%. This was offset, however, by slowing circulation revenue (-3% y-o-y to S$52.4m).
Revenue from the newspaper and magazine segment stayed relatively flat at S$261m vs S$263m in 3Q11. 9M12 earnings of S$281.4m now account for 72% of FY12’s earnings forecast, in line with expectations considering lower earnings, due to lower investment income. Investment income was strong in FY11 due to non-recurring recovery of losses arising from the Lehman crisis.
Our View
Growing rental income is key to growing volatility in media sector. We see SPH’s growing rental income as a key bulwark against potential volatility in ad spend and weakening circulation. The property segment now contributes 15% of revenues (13% last year) and 22% of profit before tax (14% last year). In contrast, newspaper and magazine’s PBT declined from S$95.7m to S$91.6m. The property segment has therefore become increasingly important in mitigating earnings volatility in the media segment, even as GDP expectations for Singapore this year are not expected to outpace last year.
Earnings growth likely to be muted, in line with Singapore’s cautious GDP growth expectations. Our DBS economist is forecasting GDP growth at 3.5% vs 4.9% last year. Since ad spend correlates well with Singapore’s GDP growth, we remain conservative over such growth in the coming quarters. We have imputed 2% growth in Ad Ex in FY13F, a marginal growth from our forecast of a 0% growth in FY12F.
Recommendation
Maintain Hold for 6% yield, TP unchanged at S$4.01. Even though growth may not be exciting, the stock is still attractive for its dividend yield of 6%. We therefore maintain HOLD with our sum-of-parts derived TP unchanged S$4.01.