Author: kktan
M1 – CIMB
Battle for M1? We think not
Shareholding tussles unlikely
Maintain Outperform. The battle for control over Singapore-listed Parkway has led us to question if M1 could equally be a takeover target, given its fragmented shareholdings. However, we believe the probability of this happening is very slim as: 1) M1 operates in a small and mature market which is unlikely to attract substantial takeover interest, unlike Parkway; and 2) no new major shareholder has emerged in M1’s case. We maintain our OUTPERFORM rating with an unchanged DCF-based (8.5% WACC) target price of S$2.20. M1 remains our top Singapore telco pick, given its potential for capital management backed by a strengthening balance sheet, benefits from NGNBN and the positive impact of soaring tourist arrivals on its inbound roaming services.
The details
The battle for control at Parkway Holdings between Khazanah and Fortis has prompted us to sift through our coverage in search of telcos with fragmented shareholding structures. M1 comes to mind with its key shareholders being 29.62% Axiata (though Sunshare), 19.96% Keppel Telecoms, and 13.89% Singapore Press Holdings. SPH’s stake in M1 is seen as a non-core investment as its bread-and-butter is print media and property. The combination of M1’s fragmented shareholdings and SPH’s treatment of its stake in M1 could lead to speculation that Axiata could mount a full takeover of M1.
Low likelihood. We believe the probability of a battle for control or takeover of M1 by Axiata is very slim:
• Firstly, M1 operates only in Singapore, a small market and mature market, and is unlikely to attract the interest of Axiata or new strategic investors with interest in substantially larger emerging market assets. On the other hand, Parkway is seen as a growth company with a network of 16 hospitals in Asia, including Singapore, Malaysia, Brunei, India and China.
• Secondly, a new major shareholder has not emerged, unlike the case of Parkway. Should Axiata decide to buy out the other major shareholders in M1, it would breach the 30% trigger for a general offer. Assuming it acquires M1 at a 20% premium to M1’s share price, and fund 60% of this with debt, Axiata would have to cough up RM1.5bn, which should be easily funded by its balance sheet. We project its FY10 net debt/EBITDA at 1.1x, up from our base projection of 0.8x. However, the market is likely to frown at such a transaction as M1 is a slow-growth telco operating in a small market, and the funds should be returned as dividends.
Valuation and recommendation
Maintain OUTPERFORM on M1, with an unchanged DCF-based target price of S$2.20. M1 remains our top Singapore telco pick, given its potential for capital management backed by a strengthening balance sheet.
STEng – BT
ST Engg unit in JV to set up aircraft facility
ST Aerospace and its partner will invest US$99m in China
SINGAPORE Technologies Engineering (ST Engg) said yesterday its ST Aerospace arm will partner Guangdong Airport Management Corporation (GAMC) to set up a commercial aircraft heavy maintenance facility in Guangzhou, China.
They will invest US$99 million in a joint venture company called ST Aerospace (Guangzhou) Aviation Services, which will be operated and managed by ST Aerospace.
ST Aerospace will own a 49 per cent stake, and GAMC the other 51 per cent.
Located at Guangzhou Baiyun International Airport, the facility will have two hangars – each able to accommodate two widebody aircraft simultaneously. Construction is expected to take about two years, after which the facility will provide maintenance and modification services for Boeing and Airbus aircraft.
ST Engineering said the JV company is expected to start operating two years after incorporation. The venture, which is pending approval by the Chinese government, has already been endorsed by the Civil Aviation Administration of China.
ST Aerospace president Chang Cheow Teck said: ‘Guangzhou is a major aviation hub in Asia. We hope to build a strong capability to provide high-quality and reliable services for our global customers who operate in and fly into China.’
The JV brings the number of ST Aerospace’s China establishments to four. Its three other JVs in China are an aircraft maintenance, repair and overhaul (MRO) company in Shanghai; an engine MRO company in Xiamen and an import-export facility in Guangzhou.
ST Aerospace’s most recent deals include a US$105 million contract with Shanghai-based Spring Airlines in April and a US$750 million engine maintenance contract with India’s Jet Airways at end-March.
ST Engineering said the latest JV is not expected to have a material impact on its consolidated net tangible assets per share and earnings per share this financial year.
ST Engineering’s share price fell two cents yesterday, closing at $3.22.
StarHub – DB
2Q10 preview: Focus on pay TV outlook post-EPL
STH reports 2Q10 results on Thurs 5 Aug 2010.
We forecast total 2Q10 revenues at S$547m, down 2% QoQ as declines in equipment, cable TV and broadband revenues are partially offset by growth in mobile and fixed. Service revenues are projected to be approx S$522m (down QoQ but up 2% YoY). Margins should recover on 1Q10 but will still be down YoY on higher subsidies and we therefore expect STH’s 2Q10 EBITDA margin to be around 26.5% on all revenues and 27.8% on service revenues (versus 2Q09’s 30.3% and 31.4% respectively). Total EBITDA is projected to reach S$145m (down 10% YoY) with NPAT down 17% YoY to S$65m.
Key focus on pay TV performance and cash-flows
We expect STH’s financial performance will improve QoQ throughout 2010e after the weak 1Q10. This improvement is despite our expectations that both cable TV and broadband revenues will be impacted by the English Premier League (EPL) loss. Specifically, we expect pay TV ARPU declines while we also project a 40k net pay TV subscriber loss by end-2010. As a result, we forecast 2010e pay TV and broadband revenues to be down 10% and 8% YoY respectively. So clearly a key focus at the 2Q10 results will be on how STH’s pay TV business has performed over recent months, especially in terms of subscriber churn – if not as severe as we expect then there may be upside risk to our estimates. Elsewhere, we will be watching free cash-flow trends given 1Q10’s good cash-flow generation on more active working capital management.
STH is up 9% year-to-date (STI up 1.7% YTD) and it remains our preferred Singapore telco especially as we continue to believe that the 20c/share annual dividend per share and the associated 8.5% dividend yield is long-term sustainable. Our S$2.62 target price implies a target 7.6% yield and we maintain Buy particularly as we expect 2Q10 results to show QoQ improvement.
StarHub – DB
2Q10 preview: Focus on pay TV outlook post-EPL
STH reports 2Q10 results on Thurs 5 Aug 2010.
We forecast total 2Q10 revenues at S$547m, down 2% QoQ as declines in equipment, cable TV and broadband revenues are partially offset by growth in mobile and fixed. Service revenues are projected to be approx S$522m (down QoQ but up 2% YoY). Margins should recover on 1Q10 but will still be down YoY on higher subsidies and we therefore expect STH’s 2Q10 EBITDA margin to be around 26.5% on all revenues and 27.8% on service revenues (versus 2Q09’s 30.3% and 31.4% respectively). Total EBITDA is projected to reach S$145m (down 10% YoY) with NPAT down 17% YoY to S$65m.
Key focus on pay TV performance and cash-flows
We expect STH’s financial performance will improve QoQ throughout 2010e after the weak 1Q10. This improvement is despite our expectations that both cable TV and broadband revenues will be impacted by the English Premier League (EPL) loss. Specifically, we expect pay TV ARPU declines while we also project a 40k net pay TV subscriber loss by end-2010. As a result, we forecast 2010e pay TV and broadband revenues to be down 10% and 8% YoY respectively. So clearly a key focus at the 2Q10 results will be on how STH’s pay TV business has performed over recent months, especially in terms of subscriber churn – if not as severe as we expect then there may be upside risk to our estimates. Elsewhere, we will be watching free cash-flow trends given 1Q10’s good cash-flow generation on more active working capital management.
STH is up 9% year-to-date (STI up 1.7% YTD) and it remains our preferred Singapore telco especially as we continue to believe that the 20c/share annual dividend per share and the associated 8.5% dividend yield is long-term sustainable. Our S$2.62 target price implies a target 7.6% yield and we maintain Buy particularly as we expect 2Q10 results to show QoQ improvement.
M1 – AmFraser
Interims in line with expectations
• M1’s interim results were in line with our expectations. We maintain our forecasts, as well as HOLD rating on fair value of $2.29.
• Total mobile subscribers grew a healthy 11% YoY to 1.85 million. Prepaid net adds at 11,000/month were stronger in 2QFY10, while that for postpaid maintained at 7,000/month. Prepaid made up 48% of total subscriber base.
• However, mobile service revenues grew a modest 2% YoY to $288.1 mil in 1HFY10 as ARPUs declined in 2Q. Prepaid fell 6% oY to $14.50, while that for postpaid fell 2% YoY to
$59.70.
• Mobile data continues as a key revenue driver, increasing its contribution to 17.8% of mobile service revenues in 2QFY10, from 11.5% in FY09. M1 continues to upgrade its network to achieve 42 Mbps.
• M1’s maiden launch of iPhones in December 2009 led handset sales to surge more-thantwofold in 1HFY10 to $108mil.
• M1’s new fixed line business which consolidated the acquisition of Qala Singapore (renamed M1 Connect) from 4QFY09, maintained business momentum but still accounts for a mere 3% of total service revenues of $364mil in 1HFY10.
• The launch of the new fibre Next Generation National Broadband Network is now delayed to September/October 2010.
• Total operating expense jumped 31% to $373mil in 1HFY10, but this was largely due to revenue-related costs such as handset subsidies.
• On balance, pretax rose a healthy 9% YoY to $97mil in 1HFY10, but net showed a mere 1% rise to $80mil, masked by the effect of a tax credit in 1QFY09.
• Management maintains a cautious outlook amidst a depressed global macro-backdrop, but guides for bottomline growth for FY10. We maintain our 4% YoY net profit growth to $157mil.
• Dividend yield at 6% – 7% p.a. is now less compelling, after share price appreciation of 88% over the past 20 months since its low.