Author: kktan
M1 – CIMB
Muted tone
Our recent visit to M1 left our views unchanged. Any re-rating catalysts will depend on improvements relating to LTE and NGNBN, we feel. Take-up of fibre remains slow owing to issues at OpenNet.
The regulator has stepped in to resolve issues such as bureaucracy and installation capacity at OpenNet. Lacking re-rating catalysts, we remain Neutral and keep our DCF target price (WACC 7.9%). Switch to StarHub which has capital-management potential, in our view.
Benign competition, eyeing higher LTE price
There are no competitive hotspots emerging in the mobile space. M1 has stopped offering unlimited mobile broadband to new customers. It has launched LTE services but only to corporate users and then limited to the central business district and industrial areas. M1 plans to raise LTE prices when subscribers expand in 2H12. SingTel also has plans to raise LTE prices when coverage reaches a larger part of the country.
Catalysing NGNBN
Along with the other service providers, M1 has submitted its response to the regulator on the provision of services to NGNBN and is awaiting response from the IDA. Among the matters raised are bureaucratic issues; revision of installation quota, and inconsistent data between OpenNet and access seekers.
Potentially higher capex
M1’s capex could rise on the back of more stringent regulatory requirements for mobile coverage. M1 has not revealed numbers as it is still in dialogue with the regulator on more reasonable coverage terms.
Lacking catalysts
M1 continues to lack re-rating catalysts, in our view. Such catalysts could come from raising data prices, resolving matters with NGNBN, and clarity on its capex from the regulator’s plans to boost service quality. M1 noted a slight improvement in OpenNet’s attitude to resolving issues but much more would need to be done. Switch to StarHub, which is likely to manage capital in the form of a special DPS/capital repayment in 2H12, on top of its attractive recurring 20ct DPS.
M1 – Kim Eng
Margin concerns fading
Upgrade to Buy. We expect margin concerns for M1 to fade for a while as the new iPad should not cause a dent, the iPhone 5 launch is unlikely till October 2012 and the telco appears to have shed its previous aggressive stance on fibre, even as the government steps in to smoothen NBN rollout issues. Upgrade to Buy with a target price of $2.85 (including DPS of $0.145) for a total return of 14%.
No adverse margin impact expected from new iPad. When Apple’s new iPad comes onto the market, expected to be available today, we do not expect M1 to suffer a margin upset. The iPad tends to have a much smaller impact on subscriber acquisition costs than the iPhone. In fact, with all the telcos making a concerted break away from unlimited data caps on their new iPad plans (now only 10GB bundled), we are hopeful tablets will play a larger role in boosting data ARPUs.
Easing up on aggressive fibre stance. M1 appears to be easing up on its aggressive stance on fibre. At the recent IT Show 2012, it raised its promotional monthly rate for 100Mbps home fibre broadband from $39 to $45, putting it closer to SingTel’s rate of $49.90 and StarHub’s $49.65. Even so, M1’s rate is still considered attractive vis-à-vis its peers because its price point is lower and it also includes a bundled mobile broadband plan with 5GB data cap.
Enough time for margins to recover. With the new iPad out on the market, the next iPhone (iPhone 5 or just the new iPhone?) is not expected to be launched until October. This is in line with the timing of the iPhone 4S last year, when Apple pushed back the rollout date from a traditional June launch closer to the year-end holiday season. M1’s margins had taken a beating in 4Q11, hence this will give it time – at least two quarters – for its margins to recover.
Fibre to get higher speed limit, positive for M1. The government has finally stepped in to force OpenNet to be more responsive to market needs. As OpenNet works on increasing its permanent installation capacity and comes out with a way to better handle demand fluctuations, we anticipate faster growth in fibre net-adds this year. NGNBN take-up has been slow last year, but if the teething issues are resolved, this will be a positive catalyst for M1.
Aviation Services – Phillip
Aviation Services
Results commentary. Profits declined for SATS due to the loss on disposal of Daniels Group & cost pressures suffered at its core business. SIAEC recorded the higest level of sales in recent history and had strong contributions from its Joint Ventures. Despite the reversal of sales due to the terminated ROPAX contract, ST Engineering performed better than expected with significant margin improvements.
Maintain Overweight. Our Strategist kept his Overweight rating on the Aviation Services sector. Record fleet delivery into the region suggests favorable long term outlook. The current low interest rates in the market could also favor these high yielding stocks under our coverage.
Valuations. Surplus cash post divestment of Daniels Group supports our non-consensus view that SATS could pay out a special dividend at its full year results announcement. While SATS currently trades at the top end of its historical P/E trading range, we believe that this ignores the cash surplus in the company and expected earnings recovery in FY13E. At 16X Forward P/E, SIAEC’s valuation is in line with historical averages. STE currently trades below its historical average P/E multiples.
Land Transport – Phillip
Land Transport
Results commentary. Operating losses of S$5mn for SBST’s bus business, sequential decline in average fares & operating losses at its bus business in China resulted in the lower than expected earnings for CDG. While SMRT’s profits declined significantly in the quarter, the margin pressure felt was inline with our expectations.
Capacity Expansion. Singapore’s Transport Minister updated on plans for the public transport system during the Ministry’s Committee of Supply (COS) debate (See: Transportation Sector Update, dated 8 March 2012). Initiatives to ease congestion and improve service quality for the public transport sector imply that more capacity would be injected into the Bus & Rail network over the next few years. For the Bus network, the government would setup a S$1.1bn Bus Service Enhancement Fund to fund the purchase of 550 buses. The Public Transport Operators (PTOs) would fund another 250 buses, representing total fleet growth of 800 buses (c.20% of current fleet) over the next 5 years. Congestion on the Rail network would also be eased with a 40-70% increase in train fleet across various parts of the network.
No Fare adjustment in 2012. There would be no fare adjustments in 2012. Singapore’s public transport fares are reviewed annually with the maximum allowable fare increase set by a predetermined formula (0.5*ΔCPI+0.5*ΔWI-1.5%). With capacity expansion and rising operating costs, we believe that keeping transport fares unchanged would result in margin compression for the PTOs.
We prefer CDG to SMRT. With Singapore’s fare based business accounting for more than half of the Group’s profits and 77% its sales, SMRT has a significant exposure to the new measures implemented. CDG would be less affected due to the diversity of its global operations. For CDG, exposure to Singapore’s fare based business is much less material at only a fifth of its sales and 3% of profits. When comparing valuations on a Forward P/E basis, CDG’s stock price is much more attractive at 13X as compared to SMRT’s 20X. We maintain our Buy recommendation on CDG and Sell on SMRT.
SingPost – Kim Eng
Issuer of excellent pedigree
Potential for higher payout, reiterate Buy. SingPost’s recent issue of $350m in perpetual securities is superior to other issues as it commands the highest debt rating in the market and its 4.25% coupon rate is also the lowest. We see this as an opportune time to remind investors of the company’s financial strength and the fundamental stability of its core mail business. Reiterate Buy on SingPost for its very attractive dividend yield of 6.4%, which we believe is almost guaranteed, based on its history of very stable earnings, even before counting any potential upside from special dividends. Our target price is slightly reduced to $1.05 as we roll forward our valuation basis to FY Mar13F.
Not at shareholders’ expense. The $350m senior perpetual cumulative securities, or Perps, pay a 4.25% coupon, which is higher than SingPost’s overall cost of debt of 3.13-3.5%. With the Perps, the group’s interest expense is expected to double to $26m. Nonetheless, management’s dividend commitment of 6.25 cents per share is intact. In fact, there may be room for dividend upside as SingPost may not use up all the additional funds for acquisitions. And even as the company continues to face cost pressures, our earnings sensitive analysis shows that pre-tax income can withstand a decline of 20% before the payout ratio begins to look too generous on paper.
Time to flex financial muscle? To recap, SingPost has not even used up half the $200m it raised in March 2010 for acquisitions. The additional $350m raised will give the group substantial firepower to gun for bigger acquisitions, if not offer a higher dividend payout or even buy back its own shares that are giving a higher yield than its coupon rate.
Balancing optimal gearing ratio and ROE. Management is comfortable with a gearing level of up to 2x. With Perps being classified as equity, SingPost’s net gearing thus falls from 0.5x as of FY11 to $224m net cash including the Perps. This implies significant debt headroom not only for expansion, but also in support of our argument for higher dividend payouts to optimise its gearing ratio and ROE.
Dividend provides valuation support. We roll forward the basis of our target price to FY Mar13F, using a historical average PER of 14x to arrive at a target price of $1.05, slightly reduced from $1.09 previously. While SingPost continues to face cost pressure, its dividend payout should provide valuation support. Buy for a total return of 15%.