Author: kktan
SMRT – Lim and Tan
Small Impact
• The end of transfer penalties and the resultant decline in overall train / bus fares will lead to about $16 mln loss in revenue on an annualized basis for both SMRT (as well as for Comfort Delgro‘s SBS Transit).
• But somehow, as in the past, such “setback” (like the costs associated with the Circle Line) will probably not affect SMRT’s bottom-line much.
• Fact remains SMRT is at a new all-time high (obviously also benefiting from the surge in COE premiums for instance), while Comfort Delgro is 35% off its high.
• One can only hope SMRT stays Singapore-centric.
• We are holding on to our BUY call.
• SMRT will release its result for ye Mar ’10 on Friday Apr 30th. An unchanged 6 cents final dividend is a forgone conclusion. (Together with the 1.75 cents interm, yield at $2.19 is 3.5%.)
Transport – CIMB
2.5% overall fare reduction from July
New fare structure
Maintain Neutral on sector. The Public Transport Council (PTC) has announced that train and bus fares will be reduced by 2.5% using the fare formula for 2010 and the implementation of distance-based fares. Although transport operators will book lower revenue, commuters will have the flexibility to decide on routes without incurring extra charges. Furthermore, given the rising costs of private car ownership, we believe public transportation ridership will continue to climb yoy, boosted by higher tourist arrivals and a growing population. We maintain Outperform on SMRT with an unchanged DCF-based target price of S$2.41 (WACC 9%). We also maintain Underperform on CD with an unchanged target price of S$1.73, DCF-derived (WACC 10.4%) but with a 10% discount applied to account for its forex risks. Between the two operators, we continue to prefer SMRT for its bigger train operations (including new Circle Line), making it potentially a bigger beneficiary of higher train ridership. Furthermore, more than 20% of SMRT’s operating profit comes from rental revenue, which is likely to jump following additional space coming from new Circle Line stations.
The news
Yesterday, the PTC announced a full reduction of 2.5% for train and bus fares based on the fare formula for 2010 and the implementation of distance-based fares. With the reduction from 3 Jul 10, commuters will only be charged according to the distance travelled regardless of the number of transfers made. Based on the current pattern of public-transport journeys, the PTC said two in three commuters will benefit from the reduction or actually encounter no change in their weekly public-transport expenditure. Some 63% of commuters will save an average of S$25 a year. The remainder will pay S$16 more on average a year.
Comments
Making public transportation more flexible for commuters. This new fare structure does not come as a surprise as it had been outlined in the Land Transport Master Plan. Transfer penalties, which have been reduced gradually over the last two years (15 cts in 2008 and 10 cts in 2009), will be completely gone from 3 Jul. Distancebased fares will afford commuters full flexibility to decide on their preferred route of travel without incurring any fare penalty, if they choose to make transfers.
Positive impact on ridership. Given that the costs of private car ownership have shot up this year, we expect public-transport ridership to climb further yoy. Furthermore, ridership should be boosted by a growing population and higher tourist arrivals.
Train ridership continues to beat expectations. We believe that the fare-reduction impact for transport operations will be offset by higher train ridership, which has surpassed our expectations YTD. SMRT’s March ridership was up 9.1% yoy while ComfortDelgro’s February ridership was up 11.8% yoy.
Transport – AmFraser
New fare structure mildly positive
• Public Transport Council (PTC) will impose a 2.5% cut on bus and train fares. Effective 3 July 2010, both SMRT Corp (SMRT) and SBS Transit (SBST) – 75%-owned by ComfortDelGro Ltd (CD) – will implement new fares. Fare adjustment is based on formula 0.5CPI + 0.5WI – 1.5% productivity extraction. Change in Consumer Price Index (CPI) was 0.6% in 2009 while change in Wage Index (WI) was -2.6% in 2009.
• Distance-based throughfares implemented at the same time. A commuter incurs separate boarding charges when completing a full journey using both bus and rail modes. To-date, a transfer rebate of 40 cents Singapore (out of 50 cents boarding charge after the first transport mode) has been instituted in an attempt to move towards a distance-based throughfare structure.
• Total removal of transfer penalty incorporated in cut. New fares from 3 July 2010 will be totally distance-based and therefore incorporate total removal of transfer penalty. At the same time, all transfer rebates will also end.
• Last year’s fare adjustment deviated from formula. Amid the economic downturn early last year, SMRT and SBST did not apply for fare hikes (as justified by the formula) for 2009. Instead, they worked with the PTC to pass back cost savings (such as that from Jobs Credit Scheme) to commuters, from 2009 Singapore Budget. As such, the impact on SMRT was a 4.6% and that on SBST was 5.1% cut on average bus and rail fares.
• Previous 3% temporary fare cut imposed since April 2009 will end 2 July 2010. Last year’s fare cut implemented from April 2009, incorporated temporary and permanent components. Temporary component imposed on operators was a 3% cut for 15 months.
• Overall impact of 0.5% net increase mildly positive for bus and rail operators. With the end of the previous 3% temporary cut and the new 2.5% cut, net impact on operators will be a small 0.5% increase in avarage fares.
• No change to our official forecasts now, pending upcoming results. SMRT reports next week on 30 April. We will maintain our official forecasts till then, as impact from new fares will have a marginal full year positive impact of 2% on net earnings.
• Impact on ComfortDelGro (CD) less than SMRT. SMRT has two-thirds earnings exposed to Singapore fare business, while CD has 18%.
• No change to ratings – BUY CD, HOLD SMRT. CD offers 20% share price upside to our fair value of S$1.90/share. SMRT is trading at our fair value of S$2.19/share.
M1 – CIMB
Solid 1Q10
• Results in line. M1’s 1Q10 core profit was in line with our expectations but at the higher end of consensus at 25% and 26% of ours and market’s full year forecast respectively. As expected, no dividends were declared. M1 raised its FY10 net profit guidance, which does not surprise us. We tweak our FY10-12 core earnings forecast by 1.5-2.8% as we bump up our revenue and lower margin for higher handset sales and trim depreciation assumptions. However, our target is unchanged at S$2.26. We maintain TRADING BUY as we see M1 having the most capacity for capital management, the most upside from NGNBN and it would benefit over the long-term from the recent content carry regulation.
• Strong topline but flattish service revenue. As previewed, topline showed tremendous strength rising by 34% yoy and 15% qoq due to the full quarter impact of iPhone sales. Service revenue was fairly flattish qoq due to seasonally lower postpaid revenue which negated the higher prepaid revenue (from a larger base), higher IDD revenues (from higher traffic) and growth in fixed broadband revenue.
• Diluted margins. EBITDA margins declined by 5.7% pts qoq to 30.8% in 1Q10, the lowest in memory due to iPhone subsidies which pushed handset costs higher by 67% qoq. Subscriber acquisition cost rose to S$369, or 22% qoq, because of the subsidies but should peak in 1Q10. Service EBITDA margins fell by 1.6% pts qoq as higher handset costs were offset by lower traffic expense, leased circuit cost and advertising and promotional cost. Core profit rose by 8% yoy and 6% qoq due to lower depreciation as some components of the 2G assets were fully depreciated.
• Higher guidance. M1 raised its FY2010 net profit guidance from “comparable” to an improved earnings relative to 2009. We are not surprised and had highlighted its rather conservative guidance. The main drivers for the raised guidance are savings from commissioning its own backhaul, higher roaming revenue from a recovering economy, opening of the 2 new IRs and new revenue streams from its fixed broadband business. Our original FY10 core net profit was 5% above consensus.
M1 – AmFraser
No major surprises, forecasts maintained
• Headline 1Q10 net profit fall of 6% YoY to $39.3mil, is masked by a tax benefit in 1Q09 which lowered effective tax rate to 5%.
• Otherwise, results were in line with expectations on the back of a strong economic recovery. Pretax rose 9% YoY to $47.8mil.
• Mobile service revenues which account for 79% of total service revenues, grew 2% YoY to $143.3mil. With resumption of foreign worker influx, prepaid subscribers were a bigger growth contributor (+17% to 863,000) YoY basis. This helped offset 8% YoY fall in prepaid ARPU to $15.
• More encouraging is that postpaid net adds were a stronger 7,000/mth in 1Q10 (to 933,000), vs 5,700 for prepaid. M1’s launch of iPhones in December 2009 also helped
churn to fall to 1.4% from 1.6% in FY09. While postpaid ARPU of $59.7 maintained at 1Q09 level, this was a slight 2% decline from 4Q09.
• Uptake for M1’s fixed network services contributed $5.9mil revenues, an increase from $5.3mil in 4Q09 when its acquisition of Qala Singapore (renamed M1 Connect) was first consolidated. Despite the upcoming launch of NGNBN, management does not expect a big bang effect as about 20% of coverage will only be addressable in the early days.
• With M1’s recent launch of iPhones and rising demand for smartphones, handset sales surged almost four-fold YoY to account for 27% of total revenues. Typically handset sales account for 8% of total revenues.
• Sales of higher value-add phones bode well for data usage. M1 improved non-voice services to 29.8% of mobile service revenues in 1Q10. Separate data plan subscriptions doubled to 318,000 from 1Q09. M1 continues to upgrade its network in FY10 to achieve 42Mbps.
• Along with handset sales, handset subsidies surged, largely contributing to 42% jump in total expenses.
• Couple of bright spots at expense level: (1) cost savings from the completion of its backhaul network has started to come through with a 15% YoY fall in leased circuit cost to $11.2mil (2) fall in overall deprecation rate as some fixed assets have been fully depreciated.
• On balance, we are comfortable maintaining our forecasts. Stock is now trading at less than 15% upside to our fair value estimate of $2.29. We maintain HOLD rating.
• Dividend yield is also less compelling now at 6-7% p.a., after share price appreciation of 83% over the past 17 months since its low.
• To reflect the group’s strategy to develop from a predominantly mobile base to become a multi-service telecom provider, the group is changing its name from MobileOne Limited to M1 Limited.