Author: kktan
SATS – CIMB
Margins threat from inflation, challenging aviation sector
• Turbulence ahead. We expect SATS to be swept into some turbulence ahead with headwinds arising from 1) margin squeeze from food inflation and inability to pass through costs in an environment of struggling profitability for main airline clients, and 2) the emergence of a third ground handler in Changi Airport, which could stiffen competition and further erode pricing power. At 13.7x CY12 P/E, SATS is trading slightly above its average forward P/E. A slowing aviation industry and margin pressure could spark a de-rating of its share price. We resume coverage with new forecasts, an unchanged UNDERPERFORM rating and S$2.60 target price, based on 13.1x CY12 P/E, its historical mean since 2004.
• Knock-on effects of a fragile aviation industry. With 59% of revenue derived from the aviation industry, SATS’s profitability is tied to the airline industry’s performance. We have an Underweight rating on this sector as our regional transport analyst anticipates margin pressure from falling utilisation and high fuel costs. Belt-tightening among airlines could have negative knock-on effects on service providers such as SATS, which may end up being squeezed between cost-conscious customers and high food costs.
M1 – CIMB
Not much to talk about
• Within expectations. Annualised, M1’s 1H11 results are within expectations, at 2% below our forecast and 1% above consensus. M1 declared a 6.6ct DPS for 2Q11, in line with our forecast. Highlights were slower revenue qoq due to lower handset sales and a qoq recovery in margins. We make no changes to our earnings forecasts for FY11-13 or DCF-based target price of S$2.63 (WACC: 8.5%). Maintain NEUTRAL as M1 lacks re-rating catalysts though downside should be limited by its dividend yields of 6-7%.
• Operating trends. 2Q11 revenue dropped 5% qoq due entirely to lower handset sales (-22.4% qoq) from lower sales volume. Revenue rose 10% yoy as 2Q10 was hit by a supply constraint for iPhones which had slowed handset sales. Service revenue, however, increased 2% qoq and 3% yoy, led by postpaid and growing contributions from fixed lines, both driven by an expanding subscriber base. EBITDA margins recovered by 2% pts qoq due primarily to lower handset costs and SACs but dropped 3.3% pts yoy due to higher handset costs from higher volumes.
• Fibre affected by low number of homes reached. M1 disclosed that NGNBN had passed 70% of homes but the number of homes reached was below 40%. The latter was attributed to the difficulty of obtaining access to condos and disagreements over who would bear the cost of pulling in fibre and lower awareness among heartlanders. M1’s fibre customer base doubled in 2Q from 1Q, to an estimated 10K from about 5K in 1Q. About 10k-12k subscribers come off contracts each month and it would take 1-2 years to address the entire base.
• Own OpCo. M1 will be launching its own corporate OpCo in 3Q11 to increase its competitiveness, offer customised solutions and lower its opex. Fixed margins should improve with the scale as it has to bear start-up costs now.
• Guidance kept. M1 has maintained its guidance of PAT growth for 2011. 1H11 growth of 7% yoy is fairly indicative of the full year and it is reasonable to assume the same run rates. We forecast yoy growth of 11% for 2011 PAT. M1 also keeps its 80% payout and would be monitoring the economy, its free cash flow, and gearing before deciding on any capital management.
M1 – BT
M1’s Q2 profit up 5% to $42.8m
Higher mobile and broadband revenue helps offset increase in handset costs
M1’s second-quarter net profit grew 5 per cent to $42.8 million, from $40.8 million a year earlier as higher mobile and broadband revenue helped offset a continued increase in handset costs.
Earnings per share for the three months ended June 30 rose to 4.7 cents, from 4.5 cents in 2010. Second-quarter sales climbed 10 per cent to $245.4 million, from $223.1 million.
For the first six months of this year, M1’s net profit rose 6.6 per cent to $85.4 million on the back of a 6.5 per cent improvement in sales to $503 million.
With its improved performance, Singapore’s smallest operator is proposing an interim dividend of 6.6 cents per share, to be paid next month, up from 6.3 cents in 2010.
In the second quarter, M1 added 34,000 mobile subscribers to take its customer tally to 1.97 million. Revenue from cellular services edged up 2.1 per cent during the period to $147.7 million.
The operator continues to see a strong demand for smart phones in Q2. This pushed up handset costs which in turn hiked Q2 operating expenses by 11.4 per cent year on year to $192.3 million.
To cope with the heightened demand for mobile bandwidth from smart phone and tablet users, M1 became the first local telco to introduce Long-Term Evolution (LTE) or so-called 4G services last month.
Coverage for its new LTE network is mostly confined to the financial district for now but it expects nationwide deployment to be achieved by the first quarter of 2012, according to M1’s CEO Karen Kooi.
M1’s nascent broadband venture turned in the highest improvement in the second quarter as the rollout of Singapore’s Next-Gen NBN (National Broadband Network) continues to gather steam.
Fixed services sales soared 61.3 per cent on year to $9.9 million as the operator dangled attractive promotions to snap up more customers for its fibre-optic broadband services.
Close to 70 per cent of the island is now covered by the new network. However, the actual percentage of local homes that are wired up and ready for fibre-optic services is far lower at just under 40 per cent, Ms Kooi revealed.
This resulted from a combination of factors, including initial resistance from the management committees of condominiums, as well as a low awareness of the government-backed NBN project among HDB dwellers, she added.
‘All stakeholders are working to resolve this,’ Ms Kooi said in a conference call yesterday.
The only business segment to turn in a poorer Q2 was international call services. Revenue from this segment dipped nearly 2 per cent to $30.9 million.
Looking ahead, Ms Kooi said she expects the implementation of the government’s cross-carriage policy on Aug 1 to open up new business opportunities for M1.
Introduced in March last year, the mandate forces pay-TV operators to allow their rivals to carry any exclusive programme they acquire. The policy was supposed to kick in last year but authorities pushed it back by nine months to give industry players more time to adjust to the new regime.
‘The whole pay-TV landscape may well change,’ Ms Kooi said, adding it could potentially allow consumers to purchase programmes on an a la carte basis instead of being forced to take up a bundle.
Looking ahead, she expects M1 to register an improvement in full-year net income, while dividend payout ratio will be kept at 80 per cent of its net profit after tax.
M1 shares closed unchanged at $2.57 before its second-quarter earnings were released.
SPH – CIMB
Slowdown in print-ad revenue
• In line; maintain Neutral. 3Q11 core net profit of S$114.8m is in line with our forecast and consensus, accounting for 30% of our FY11 estimate. 9M11 core net profit forms 77% of our full-year estimate. Though profit is in line, earnings quality is weaker with a decline in the print business propped up by stronger investment income. Though we had been expecting margin pressures for its print business, we were slightly surprised by the yoy weakening in ad revenue. We fine-tune our FY11-13 EPS estimates by 1%, with higher investment income assumptions offset by higher taxes and opex. Accordingly, our SOP target price falls to S$4.24 from S$4.29. Maintain Neutral with continued cost pressures, the low likelihood of accretive property acquisitions and a potential slowdown in ad-revenue growth amid weaker macro-economic sentiment. SPH should, however, be supported by dividend yields of about 6%.
• Ad revenue weakened yoy. Excluding revenue from Sky@eleven in 3Q10, operating revenue rose a smaller 4% yoy (2Q11: +8%) as higher rental and other revenue offset weaker print revenue. Though a moderation had been expected, the 4% decline in ad revenue in 3Q11 took us by surprise. This was the result of an 8% fall in classified revenue, stemming from reduced ad demand from the property and auto sectors. With companies potentially turning more cautious in the midst of weak macro-economic sentiment, any growth in ad revenue could be muted.
• Print cost pressures persisted. Margins remained hit by higher newsprint costs (+10% yoy) on a higher charge-out rate of US$666/MT. Staff costs, however, slid 8% yoy, though this was mainly due to lower provisions for variable bonuses (with a weaker print business) which offset increments and a bigger headcount.
• Stronger rentals for property but accretive acquisitions remain remote. Rental revenue grew 23% yoy and 9% qoq on a stronger performance from Paragon and with tenants progressively starting operations at Clementi Mall (which opened officially in May 11). Accretive retail property acquisitions remain remote, in our view, with continued aggressive bids by developers. SPH lost out on a bid to a CMT/CMA/Capland JV for the Jurong Gateway site in May 11.
SPH – BT
SPH reports Q3 net profit of $114.8m
SINGAPORE Press Holdings’ (SPH) third-quarter net profit and operating revenue fell 30.2 per cent and 20.8 per cent respectively, due mainly to the absence of contributions from the Sky@eleven development which was completed in May 2010.
For the three months ended May 31, net profit attributable to shareholders dropped to $114.8 million from $164.6 million a year earlier while turnover fell to $328.8 million from $414.98 million.
Excluding the previous Q3’s figures from Sky@eleven, net profit rose 17.1 per cent and operating revenue improved 4.4 per cent year-on-year.
SPH said yesterday that ‘improved performance from the Internet and exhibition businesses cushioned a marginal reduction in profits from the newspaper and magazine segment’.
Earnings per share for the quarter were seven cents, down from 10 cents a year ago. Group net asset value per share of $1.33 as at May 31, was also down from $1.39 at the end of the last financial year.
The newspaper and magazine segment posted operating revenue of $263 million, a 1.1 per cent dip from a year ago. Print advertising revenue slipped 1.6 per cent to $201.1 million, ‘mainly due to lower Classifieds advertisements’. Circulation revenue kept stable year on year at $53.8 million, thanks to newspaper subscription drives.
Though the property segment’s revenue dropped 68.1 per cent with the completion of Sky@eleven, property rental income grew 22.8 per cent in the quarter to $43.2 million, thanks to Paragon’s higher rental rates and a $6 million rental income from Clementi Mall for Q3 FY11. The Clementi Mall is fully leased and tenants have progressively started operations since January this year.
The strongest revenue growth of 64.5 per cent came from the group’s ‘other businesses’. Exhibitions held in Q3 – newly acquired IT Show and Food & Beverage Fair and the maiden trade show BuildTechAsia – contributed the most.
Costs associated with this exhibition business, as well as higher newsprint costs, pushed materials, consummables and broadcasting costs up by 14.9 per cent, or $5.8 million. Despite salary increments and a higher headcount, staff costs fell 8.6 per cent, or $8.3 million, due to a lower variable bonus provision.
Higher dividend income and fair value gains on investments led to a doubling of Q3 investment income year on year, to $23.7 million.
For the nine months ended May 31, the group’s recurring earnings of $305.4 million was 34.1 per cent lower than for the same period last year, which included Sky@eleven profits of $159.2 million. Investment income increased by $14.6 million (57.5 per cent). Net profit attributable to shareholders of $292.5 million was 30.8 per cent lower.
Chief executive Alan Chan said: ‘In the near term, prospects remain positive and the group’s print advertisement revenue is expected to move in tandem with the Singapore domestic economy. The Clementi Mall, which was officially opened in May, is poised to enjoy good catchment from the surrounding residential areas and tertiary institutions. We will continue to invest in new media and explore business adjacencies for growth.’
SPH closed four cents lower at $3.91 yesterday, on a day when Asian markets were hit by fears over European debt woes.