Author: kktan
StarHub – Kim Eng
It’s Been A Stellar Ride
Time to say goodbye. Our long-standing buy call on StarHub has been rewarding. However, it is time to say goodbye and we advise clients to take profit. The stock has raced to an all-time high amidst the current risk-off environment and its dividend yield has compressed to the lowest level since listing. Going by our DDM model, the share price has already discounted a 20% rise in dividends, but our original expectations of higher dividends may be dashed by an upcoming 4G spectrum auction in 2013. Management has also indicated there will be no capital management or reduction initiatives. Assuming dividends stay flat at SGD0.20 a share, our DDM-derived target price is SGD3.04 or 15% below the current level. SELL into the current strength.
Stock is overvalued if dividend stays put. StarHub has almost reached our DDM-derived TP of SGD3.64, which had assumed a 20% rise in annual dividends to SGD0.24 a share. However, the 4G spectrum auction in 2013 may lead to a rise in cash commitment next year, which could reduce the company’s willingness to increase dividend payout. If dividends stay put at the current SGD0.20 a share, the stock is now overvalued, with a DDM-derived TP of SGD3.04.
Spectrum cost to push up 2013 cash needs. Using past auctions to provide a pricing benchmark, StarHub may need to pay SGD110-131m for refarmed 4G spectrum. An auction is likely to be held in 1H 2013. This could bump up 2013 cash requirements by 43-51% and push 2013 net debt/EBITDA from 0.63x to 0.78-0.81x. While this should not endanger its current SGD0.20 DPS, it may undermine our original thesis that StarHub can afford to increase its dividends.
Absolute valuations also difficult to justify. At the current level, StarHub is yielding just 5.6% on its ordinary dividend, the lowest since it was listed in 2004 and started paying dividends in 2005. The spread between dividend yield and the 10-year Singapore government bond yield has also narrowed to its tightest level yet, a mere 400bp, since the bond itself was issued in 2007. Dividend yield is also barely hedging against domestic inflation of 5% (as at May 2012).
StarHub – Kim Eng
It’s Been A Stellar Ride
Time to say goodbye. Our long-standing buy call on StarHub has been rewarding. However, it is time to say goodbye and we advise clients to take profit. The stock has raced to an all-time high amidst the current risk-off environment and its dividend yield has compressed to the lowest level since listing. Going by our DDM model, the share price has already discounted a 20% rise in dividends, but our original expectations of higher dividends may be dashed by an upcoming 4G spectrum auction in 2013. Management has also indicated there will be no capital management or reduction initiatives. Assuming dividends stay flat at SGD0.20 a share, our DDM-derived target price is SGD3.04 or 15% below the current level. SELL into the current strength.
Stock is overvalued if dividend stays put. StarHub has almost reached our DDM-derived TP of SGD3.64, which had assumed a 20% rise in annual dividends to SGD0.24 a share. However, the 4G spectrum auction in 2013 may lead to a rise in cash commitment next year, which could reduce the company’s willingness to increase dividend payout. If dividends stay put at the current SGD0.20 a share, the stock is now overvalued, with a DDM-derived TP of SGD3.04.
Spectrum cost to push up 2013 cash needs. Using past auctions to provide a pricing benchmark, StarHub may need to pay SGD110-131m for refarmed 4G spectrum. An auction is likely to be held in 1H 2013. This could bump up 2013 cash requirements by 43-51% and push 2013 net debt/EBITDA from 0.63x to 0.78-0.81x. While this should not endanger its current SGD0.20 DPS, it may undermine our original thesis that StarHub can afford to increase its dividends.
Absolute valuations also difficult to justify. At the current level, StarHub is yielding just 5.6% on its ordinary dividend, the lowest since it was listed in 2004 and started paying dividends in 2005. The spread between dividend yield and the 10-year Singapore government bond yield has also narrowed to its tightest level yet, a mere 400bp, since the bond itself was issued in 2007. Dividend yield is also barely hedging against domestic inflation of 5% (as at May 2012).
RafflesMed – CIMB
Ready to rumble
ASEAN healthcare stocks have found a new lease of life, with share prices being re-rated amid increased trading volume. But is this happening on the back of an upcoming new listing or are there other catalysts?
We found various themes at work, including a lack of new capacity that is driving healthcare inflation in Singapore. An eventual unlocking of the value of RFMD's real estate for capital recycling could be on the cards. Maintain Outperform, EPS and target price at 20x CY13 P/E, its mid-cycle valuations.
No beds: good or bad?
Singapore's hospital bed shortage is an acute problem. The country has a lower bed ratio (2.22 beds per 1,000 people in 2010) than other developed nations. Though the government has been increasing bed capacity at public hospitals (through expansion and new developments), public hospitals are still unable to cater to rising demand for hospital beds. With capacity constraints in public and other private hospitals, patient loads at RFMD's flagship Raffles Hospital have been good.
Healthcare costs are surely rising
RFMD is creating capacity at its flagship hospital. When completed, the group will be able to increase its clinical services and specialist offerings. We expect the additional space to come on stream in FY14. With re-adjustments in in-patient billings and other charges, we see ample room for RFMD to catch up with its rates, albeit gradually initially (5-10% in FY12).
Catch this laggard
RFMD's balance sheet has been stronger than peers with a net cash position, though there may be additional capex in the next few quarters. ROEs are also strong, the result of the consistent return of spare cash to shareholders in the form of dividends. Valuation-wise, the stock is at 17x CY13 P/E (22.5x for peers) and 11x CY13 EV/EBITDA (Asian sector average of 14x).
STEng – CIMB
Nera deal is off; moving on…
We are not disappointed that Nera’s shareholders have voted against STE’s proposed acquisition of the firm. Firstly, we estimate that the deal would have only contributed 2% to STE’s earnings. Secondly, we believe there other M&A targets in Asia.
No change to our EPS or target price (blended P/E, DCF, dividend yields). Our forecasts have not assumed contributions from the acquisition. No reason was disclosed but we suspect Nera’s remaining shareholders (49.95%) are hopeful of striking a higher offer price. Maintain Outperform on STE for catalysts from stronger pick up in MRO.
What Happened
The shareholders of Nera Telecommunications have voted against STE’s proposed acquisition of the firm (all the shares).The acquisition was first announced on 10 Feb12,whenSTEsaid that its subsidiary, ST Electronics, had received an irrevocable undertaking from Nera’s controlling shareholder, Eltek ASA (50.5%),in favour of the transaction. The offer price then was S$0.45/share (S$0.39 cash and S$0.06 dividend), amounting to S$141m.
Nera is a provider of products, solutions and services ranging from satellite communications and wireless infrastructure networks to Internet protocol, optical and broadcast network infrastructure.
What We Think
We believe Nera’s remaining shareholders are hoping for a higher selling price. Nera’s share price hit a high of S$0.50 on 10 Feb just before the announcement (after trading hours).
The proposed purchase price of 10x CY11 P/E appeared fair vs. STE’s valuation (16.5x) then. We think STE is unlikely to pursue the matter further and is likely to move on to other M&A targets.
We are not extremely disappointed. Nera is “good to have”, given a clean balance sheet and potential synergies, but is not imperative to the group as we estimate only a 2% earnings contribution.
What You Should Do
Stay invested as STE is still trading close to its trough of 15xP/E in the last five years.
TELCOs – DBSV
Regulator tightens belt to press the pedal on fiber
What's new?
Singapore telecoms regulator IDA is raising the weekly fiber installation capacity to 3,100 per week from Aug 2 onwards. This is up 30% from 2,400 earlier and exceeds our forecast of a 15% rise highlighted in our report on SingTel released on 2nd July. A dynamic mechanism to raise capacity in line with demand has also been put in place.
200 installations out of the quota will be for commercial buildings. This is the most attractive pie for retail service providers as each commercial connection commands much higher ARPUs than residential connections. IDA wants OpenNet (the fiber backbone provider) to offer an activation period of 10 days from its side, unless building owners cause a delay in wiring up their buildings.
Our view
Slightly negative for SingTel but positive for others. The commercial broadband market represents the biggest slice of the market, accounting for an estimated 60% of the total, with residential accounting for less than 40%. SingTel is the leader in the commercial space with an estimated 80% share of the commercial broadband market while StarHub has less than 20% due to difficulties in accessing commercial buildings. SingTel has differentiated itself on the basis of its strong managed service portfolio, cloud computing and strong IT support. However, SingTel's market share and margins may still feel the heat as retail service providers offer services to price-sensitive small and medium (SME) customers. SingTel may barely achieve stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. Ongoing re-structuring and its mobile advertising business are other cost pressures in the near term.
S-curve ahead as Singapore lags Malaysia in fiber adoption. Fiber adoption stands at 12% of rollout in Singapore versus 25% in Malaysia, due to the various bottlenecks the regulator IDA has identified and wants to quickly resolve. Compared to only 99k fiber subscribers in Singapore at the end of 2011, we project at least 150K subscribers to be added each year for the next three years in line with the "S curve".
No change to our TP and recommendations on stocks under our coverage.