Author: kktan
TELCOs – DBSV
2Q11F Preview and key sector issues
• 2Q11F earnings of StarHub & M1 are likely to reinforce sector’s appeal as bastion of stability.
• Potential decline in smartphone sales in 2H11F to benefit StarHub more; Downgrade M1 to HOLD after its recent run-up.
• Cross-carriage to start from Aug 1, but may not have sharp teeth to make a difference.
2Q11F earnings should reaffirm sector’s defensive appeal. M1 is likely to report 2Q11 earnings of S$42.5m (0% QoQ, +4% YoY) on 14th July, as its fair value accounting may not leave much scope for improvement. StarHub is likely to report 2Q11 earnings of S$74m (+7% QoQ, +27% YoY) on 4th August in a seasonally strong 2Q as it recovers from the impact of “dunning” in 1Q11.
Potential decline in smartphone sales in 2H11F & FY12F may benefit StarHub. High penetration of smart phones (60-65%) in Singapore may imply lower smartphone sales in 2H11F, implying lower subsidy burden
at StarHub & SingTel. Lower smartphone sales, on the other hand, may adversely impact M1’s earnings due to its unique practice of fair value accounting. While M1 is a key beneficiary of National Broadband Network, it may take another 2-3 years to show significant profit contribution from the new business.
StarHub is our new top pick after M1’s recent outperformance. YTD total returns are 15% for M1 (our previous top pick) versus 11% for StarHub and –1% for STI. At current price, M1 offers 6-7% dividend yield based on 80-100% payout ratio vs assured 7% for StarHub. MI offers flat earnings in FY12F versus mid-single digit growth at StarHub.
Cross-carriage to start from Aug 1, but impact may be muted. Cross-carriage applies only to the “exclusive” content signed after Mar 12, 2010. Firstly, StarHub has locked-in most of the popular content on exclusive basis before Mar 12 for 3-5 years. Secondly, content can still be signed on “non-exclusive” basis where pay TV operators negotiate the price as opposed to bidding earlier. As long as other pay TV operators do not buy “non-exclusive” content rights, they would not be able to cross-carry those contents.
TELCOs – DBSV
2Q11F Preview and key sector issues
• 2Q11F earnings of StarHub & M1 are likely to reinforce sector’s appeal as bastion of stability.
• Potential decline in smartphone sales in 2H11F to benefit StarHub more; Downgrade M1 to HOLD after its recent run-up.
• Cross-carriage to start from Aug 1, but may not have sharp teeth to make a difference.
2Q11F earnings should reaffirm sector’s defensive appeal. M1 is likely to report 2Q11 earnings of S$42.5m (0% QoQ, +4% YoY) on 14th July, as its fair value accounting may not leave much scope for improvement. StarHub is likely to report 2Q11 earnings of S$74m (+7% QoQ, +27% YoY) on 4th August in a seasonally strong 2Q as it recovers from the impact of “dunning” in 1Q11.
Potential decline in smartphone sales in 2H11F & FY12F may benefit StarHub. High penetration of smart phones (60-65%) in Singapore may imply lower smartphone sales in 2H11F, implying lower subsidy burden
at StarHub & SingTel. Lower smartphone sales, on the other hand, may adversely impact M1’s earnings due to its unique practice of fair value accounting. While M1 is a key beneficiary of National Broadband Network, it may take another 2-3 years to show significant profit contribution from the new business.
StarHub is our new top pick after M1’s recent outperformance. YTD total returns are 15% for M1 (our previous top pick) versus 11% for StarHub and –1% for STI. At current price, M1 offers 6-7% dividend yield based on 80-100% payout ratio vs assured 7% for StarHub. MI offers flat earnings in FY12F versus mid-single digit growth at StarHub.
Cross-carriage to start from Aug 1, but impact may be muted. Cross-carriage applies only to the “exclusive” content signed after Mar 12, 2010. Firstly, StarHub has locked-in most of the popular content on exclusive basis before Mar 12 for 3-5 years. Secondly, content can still be signed on “non-exclusive” basis where pay TV operators negotiate the price as opposed to bidding earlier. As long as other pay TV operators do not buy “non-exclusive” content rights, they would not be able to cross-carry those contents.
Land Transport – DMG
Operators seek fare increase of up to 2.8%
SBS Transit and SMRT have both applied for fare hike of 2.8%, in accordance to the maximum fare adjustment formula set by the government-appointed Fare Review Mechanism Committee (FRMC) in 2005. Results of the application will most likely be announced in 4Q11 by the Public Transport Council (PTC). Given SMRT’s earnings are predominantly driven by Singapore’s train service (accounted for 58% of FY11 EBIT), it will experience the most impact compared to ComfortDelGro (CD). Our sensitivity analysis shows that a fare hike of 2.8% could raise SMRT’s and CD’s net profit by 11% and 6.6% respectively. Maintain OVERWEIGHT on the sector on the back of 1) resilient growth in ridership number, 2) potential fare hike, and 3) imminent award of Downtown Line in 2H11.
Maximum fare adjustment formula is tied to CPI, WPI and productivity gains. In order to cap overall fare increases in small, regular steps, the land transport operators are allowed to apply for fare adjustments according to FRMC-stipulated formula. Besides taking into consideration of the maximum fare adjustment request put forth by operators, the PTC also takes into consideration of other factors such as profitability of the two transport companies, as well as Singapore’s economic condition. This is evident from the fare adjustments carried out in 2008-2009 (2008: +0.7% fare hike; 2009: -4.6% fare hike) vs maximum allowable adjustments of +3%-+4.8% respectively. Our current estimates for both SMRT and CD are based on ~0.5% hike in fare prices of Singapore’s MRT and bus services.
Prefer CD within the sector. We continue to favour CD (BUY/TP S$1.80) over SMRT (NEUTRAL/TP S$1.94) due to the former’s 1) greater overseas growth potential, and 2) cheaper valuation. In addition to margin improvements from ridership increase, we think CD will be looking at acquisition of more land transport companies in foreign markets in order to achieve overseas growth. Separately, previous concerns regarding CD’s forex exposure due to its extensive overseas operations in UK & Ireland (9M10: 13% CD’s EBIT), Australia (9M10: 16% CD’s EBIT), and China (9M10: 12% CD’s EBIT) is overblown, evidenced from the minute forex impact on CD’s results in the last three quarters. Given the approximately even contributions from the emerging (China) and developed nations (UK, Ireland, Australia), we reckon the chances of adverse forex movement from sustained strengthening of S$ against the local currencies of CD’s overseas operations as low.
Land Transport – DMG
Operators seek fare increase of up to 2.8%
SBS Transit and SMRT have both applied for fare hike of 2.8%, in accordance to the maximum fare adjustment formula set by the government-appointed Fare Review Mechanism Committee (FRMC) in 2005. Results of the application will most likely be announced in 4Q11 by the Public Transport Council (PTC). Given SMRT’s earnings are predominantly driven by Singapore’s train service (accounted for 58% of FY11 EBIT), it will experience the most impact compared to ComfortDelGro (CD). Our sensitivity analysis shows that a fare hike of 2.8% could raise SMRT’s and CD’s net profit by 11% and 6.6% respectively. Maintain OVERWEIGHT on the sector on the back of 1) resilient growth in ridership number, 2) potential fare hike, and 3) imminent award of Downtown Line in 2H11.
Maximum fare adjustment formula is tied to CPI, WPI and productivity gains. In order to cap overall fare increases in small, regular steps, the land transport operators are allowed to apply for fare adjustments according to FRMC-stipulated formula. Besides taking into consideration of the maximum fare adjustment request put forth by operators, the PTC also takes into consideration of other factors such as profitability of the two transport companies, as well as Singapore’s economic condition. This is evident from the fare adjustments carried out in 2008-2009 (2008: +0.7% fare hike; 2009: -4.6% fare hike) vs maximum allowable adjustments of +3%-+4.8% respectively. Our current estimates for both SMRT and CD are based on ~0.5% hike in fare prices of Singapore’s MRT and bus services.
Prefer CD within the sector. We continue to favour CD (BUY/TP S$1.80) over SMRT (NEUTRAL/TP S$1.94) due to the former’s 1) greater overseas growth potential, and 2) cheaper valuation. In addition to margin improvements from ridership increase, we think CD will be looking at acquisition of more land transport companies in foreign markets in order to achieve overseas growth. Separately, previous concerns regarding CD’s forex exposure due to its extensive overseas operations in UK & Ireland (9M10: 13% CD’s EBIT), Australia (9M10: 16% CD’s EBIT), and China (9M10: 12% CD’s EBIT) is overblown, evidenced from the minute forex impact on CD’s results in the last three quarters. Given the approximately even contributions from the emerging (China) and developed nations (UK, Ireland, Australia), we reckon the chances of adverse forex movement from sustained strengthening of S$ against the local currencies of CD’s overseas operations as low.
SMRT, SBSTransit – BT
SMRT, SBS Transit seek fare adjustments
FACED with rising cost pressures, transport operators SMRT and SBS Transit have submitted applications to the Public Transport Council (PTC) seeking fare adjustments.
Despite efforts to manage costs, SMRT’s energy costs rose 17.5 per cent to $122.4 million in FY2011 on the back of higher electricity and diesel prices as well as with the launch of the Circle Line, it highlighted in a press release yesterday.
Staffing costs have also increased in line with both the higher employer’s CPF contribution rate and increased headcount for the Circle Line.
At the same time, SMRT has in recent years bumped up the frequency of train and bus trips to ease crowding as well as to cut waiting times, and has also continued to invest in new buses to beef up its fleet.
‘SMRT has been managing our costs while improving our productivity. Our non-fare businesses from commercial activities like retail rentals and advertising have contributed to productivity gains that are shared with commuters as it lowers the maximum allowable fare adjustment,’ said SMRT Corp’s executive vice-president (trains) Khoo Hean Siang. ‘However, with uncontrollable cost increases due to rising fuel prices and manpower costs, we have applied for the maximum fare adjustment of 2.8 per cent, which if approved, will help mitigate the cost increases.’
Meanwhile, SBS also said that it continues to face significant cost pressures despite efforts to cut costs and boost productivity.
‘Fuel and energy costs have been increasing. At the same time, we have also been investing in new buses as part of our fleet-renewal exercise which began in 2006. In the last year alone, we have ordered another 600 buses at a total cost of $268 million. In all, our 2,050 new buses are costing us some $854 million,’ SBS said, adding that details of its application, which is subject to the PTC’s approval, will be announced at a later date.