Author: kktan
StarHub – Kim Eng
Going for the Gold
Expect earnings to rebound in 1Q12. StarHub will report 1QFY12/12 results on 4 May. We expect net profit of SGD85m, up 8% QoQ from an adjusted SGD79m. Given its rather lazy balance sheet currently, we will be on the lookout for indications of a dividend hike in coming quarters, but even without any, the current yield is still attractive at 6.3%. Given its recent outperformance, the stock may pull back before re-rating further, but fundamentally, we maintain our BUY call with a higher target price of SGD3.50, based on the average 5.7% yield of the top 15 dividend stocks over a billion in market cap.
Margins should rebound. For one thing, we do expect margins to bounce back in 1Q12. Similar to M1, margins should recover QoQ. In 4Q11, handset subsidies pushed EBITDA margin to 30.7% (excluding capex writebacks), although the severity was much less than the other telcos. Relieved of this pressure, we expect margin to rebound toward 32% in 1Q12. Nevertheless, our full year forecast assumes a lower 31% margin, reflecting higher cost pressures in 2H12.
Mobile business should continue to outperform. In addition, mobile should grow QoQ despite lower seasonality, for a couple of reasons. One, we believe StarHub has gained market share at the higher end of the market, with its postpaid base now skewed more toward the higherend SmartSurf plans. Two, we expect data revenue to continue to benefit from higher penetration for smartphones and tablets.
Pay TV should also get a price hike kick. Last Aug, StarHub raised its Pay TV basic rate by SGD2, which stemmed the decline in Pay TV revenue that started after the loss of BPL. 1Q12 should continue to reflect this increase. However, margins may be squeezed slightly by operational costs related to cross-carriage ahead of the UEFA Euro 2012 games that will kick off in Jun 2012.
What to look out for. In particular, we would be interested in whether StarHub will utilise its currently under-utilised balance sheet to raise dividend payout this year. In 2006 and 2007, it had made two rounds of capital returns when net debt/EBITDA fell to current levels. Further, it has raised dividends every year except 2010 and 2011. Looking at its forward cashflow and capex needs, we reckon it is in a good position to increase dividends beyond SGD0.20 a share.
M1 – DBSV
Difficult to find positives except 6% yield
• 1Q12 profit slightly below expectations. Net profit of S$40m (5% y-o-y) was slightly below expectations of S$42m. Higher postpaid acquisition cost (S$363, +10% y-o-y) and lower than expected “fixed service” revenue were key culprits.
• Slow growth in new business. Fixed service revenue stood at S$11.8m versus S$10.6m in 4Q11 as M1 added 7K fiber subscribers to take its base to 29K. Long waiting time in activating broadband subscriptions continues to be a challenge.
Our Views
• Mobile trends are not encouraging. Postpaid mobile market share declined for the fourth consecutive quarter to reach 25.9% versus 26.0% in 4Q11 & 26.6% in 1Q11. While smart phone subscribers comprise 69% of its postpaid subscriber base, they do not generate higher ARPU as M1 had projected in fair value accounting for handsets. Adjusted postpaid ARPU fell 6% y-o-y to S$52.9.
• Dividends safe but capital management unlikely in 2012/13. Regulator IDA plans to auction spectrum in 1800MHz, 2.3GHz and 2.5GHz bands in 2013. Telcos should be keen to acquire these spectrums as the current use for the 1800MHz band will expire in 2017 and the remaining two bands in 2015. M1 had previously bi S$21.7m for 30 MHz block of 1800MHz spectrum in April 2011 valid for 7 years. The new spectrums auctioned will be valid for 13 15 years and therefore hold more value for telcos.
Recommendation
• HOLD for 6% dividend yield. The stock is trading at 13x FY12F PE (+1SD valuations). Among the telcos, StarHub is the most expensive at 17.5x (+2SD valuations) and 6% yield. SingTel is the cheapest at 12x (hist. average) and offers superior growth plus 5% yield, although it is in the middle of re-organization.
STEng – Kim Eng
4 business pillars, 1 growth model
A mega contract in the bag. ST Engineering’s (STE) marine arm, ST Marine, has bagged its largest order in recent years – an S$880m contract to design and build four patrol vessels for the Royal Navy of Oman. This was welcome news, coming on the back of ST Kinetic’s recent blacklisting by India for its alleged involvement in a bribery scandal. It also confirms that STE’s reputation as a defence engineering specialist is untarnished.
Multi-pillar earnings growth model. ST Aerospace, STE’s largest revenue contributor, also reported significant contract wins in 1Q12 that amounted to S$550m. The increase in defence expenditure by the government and its push for a more efficient public transportation system should augur well for ST Electronics and ST Kinetics as well. Taken together, these factors would continue to drive STE’s growing orderbook, thereby providing earnings visibility for the near future.
Healthy dividend payout. STE has a strong history of dividend payment, even in the absence of a formal policy. It typically pays out approximately 90% of its earnings. We do not expect any major change to this assumption and believe that its yield of 5% is sustainable.
Reputation untarnished, upgrade to Buy. We believe that the latest contract win by ST Marine reaffirms STE’s reputation as a global defence engineering specialist. Its multi-pillar strategy should also offer comprehensive support for growth, prompting us to raise our forecasts to account for a more visible earnings outlook, especially from ST Marine. Our target price thus goes up from $2.88 to $3.60, pegged at the historical PER mean of 19x FY12 earnings and providing upside of 16% (including FY12F dividend of $0.17). Upgrade to Buy.
SMRT – Lim and Tan
• We are less concerned today about the fate of the 6.75 cents per share final dividend for ye Mar ’12.
• While hearings before the Committee of Inquiry will last 6 weeks, yesterday’s opening session (essentially “finger pointing” by LTA, which owns the train infrastructure, and SMRT, the operator) suggests the final outcome may not be as dire for SMRT as feared immediately after the Dec 15/17 incidents.
(Indeed, SMRT’s share price has “rebounded” above the many-times tested $1.73 technical support since the train operator announced on Mar 28th it had completed its internal investigations into the unfortunate incidents.)
• SMRT asserted it has even exceeded the maintenance requirements set not just by LTA but manufacturers of the metal wheels of the trains, and that the ageing infrastructure is to be blamed.
• SMRT has been paying 8.5 cents a share for a few years now, costing $129 mln based on latest issued capital. Profit for 9 months ended Dec ’11 has amounted to $106 mln, and operating cash flow of $200 mln. Besides, SMRT has $182 mln cash after reducing borrowings by $100 mln to $150 mln.
• SMRT will release results for Q4 / Full year ending Mar ’12 on Monday Apr 30th.
• The 4.8% yield justifies at least a HOLD.
SPH – DBSV
Hold for decent sustainable yields
At a Glance
• 2Q12 within expectations; 1H12 forms 46% of our estimates similar to previous years
• Rental income shines, while Newspaper & Magazines posted anemic growth
• 7 Scts interim DPS declared; expect full year DPS of 24 Scts
• Hold for 6.2% yield, TP unchanged at S$4.01
Comment on Results
2Q within expectations; 7 Scts interim dividend declared. Net profit grew by 12% y-o-y to S$84.1m, aided largely by stronger rental property income and a tax write-back of S$1.2m. Interim DPS of 7 Scts was declared, as expected. Book closure will be on 9 May, with payment on 23 May.
Rental income from property shines. Total revenue growth was subdued at 4% y-o-y to S$298.5m. By segments, Newspaper and Magazines registered flat revenue growth (S$234.5m, +0.1%) while Property rental revenue increased strongly by 22% to S$48m, supported largely by a full quarter contribution from Clementi Mall (+S$7.8m to S$9.2m) vs partial in 2Q11. EBIT margins rose 1.4ppt y-o-y to 32.4% as operating costs increased by slower 2.2%. Staff costs decreased by a marginal 0.3%, but costs such as newsprint (+3.5%), depreciation (+6.8%) and other operating expenses (+6.3%) headed higher.
Print ad growth in line with our FY12F for flat growth. Revenue from print ads rose a marginal 0.8% y-o-y in 2Q12, versus the 1.3% decline in 1Q12. The cautious employment market took a toll on recruitment ads, which contributed to a 9% dip in classified ad revenue. Display ads, however, improved 4% helped by the property and auto sectors. 1H12 print ad revenue was down a marginal 0.3% y-o-y, on track to meet our assumption for flat growth for the year.
Recommendation
Hold for 6.2% yield, TP remains at S$4.01. We see share price trading within a narrow range on the back of an uncertain global economic environment, with support from its attractive 6.2% yield. Maintain Hold for 9% total return to S$4.01 TP.