Author: tfwee
M1 – Phillip
FY2009 results
M1 reported operating revenue of S$781.6m (-2.4% yoy) and net profit of S$150.3m (+0.1% yoy) for FY2009.
Mobile telecommunications services revenue dropped to S$565.7m (-5.9% yoy). Due to lower voice usage and roaming revenue, there was a decline in post-paid revenue, which more than offset the increase in pre-paid revenue. Moreover, international call services revenue fell to S$128.4m (-6.3% yoy) because of the decrease in roaming traffic. However, fixed network and handset sales revenue rose to S$6.6m (+3,200.0% yoy) and S$80.9m (+30.2% yoy) respectively.
Operating expenses also dropped to S$601.9m (-1.2% yoy) because of lower facilities expenses, provision for doubtful debts and staff costs.
Net profit was slightly higher mainly due to lower provison for taxation of S$24.8m (-29.0% yoy). This was because of lower corporate tax rate.
Profit margin
Net profit margin increased from 18.7% in FY2008 to 19.2% in FY2009 mainly due to the decrease in provision for tax.
Changes in market share
M1 reported that the number of post-paid and pre-paid customers increased by 3.4% and 13.1% to 912,000 and 846,000 respectively. Its post-paid market share fell from 27.0% to 26.4% while its pre-paid market share rose from 24.3% to 25.0%. We are concerned about the decline in post-paid market share as M1 has lagged behind SingTel and StarHub in this segment. This is because M1 does not have Pay TV and is not able to offer bundled mobile, internet and Pay TV services.
Outlook for FY2010
M1 expects the earnings for FY2010F to be comparable to FY2009. Moreover, it believes that the launch of the Next Generation National Broadband Network (NGNBN) in 2Q10 will provide opportunities to offer internet services to retail and corporate customers.
Maintain Hold with fair value raised from S$1.78 to S$2.03
We raise the fair value of M1 from S$1.78 to S$2.03 as we expect M1 to report higher earnings in FY2010F. This is because it acquired Qala, an internet services provider for corporate, enterprise and public sector customers in Singapore, in FY2009. This is likely to boost its broadband revenue and profit in FY2010F. However, due to limited upside from the current share price, we maintain our hold recommendation.
SingTel – BT
Be more generous SingTel, you can afford it
LAST week an old rumour resurfaced which said that Singapore Telecommunications (SingTel) is planning to sell 25 per cent of its wholly owned Australian unit Optus. SingTel, as expected, declined comment. That speculation had made its rounds late last year and chief executive Chua Sock Koong then basically responded with a never say never, shedding no light on the issue.
Some analysts though are puzzled by the old chestnut as they cannot see a need for a sale and one even accused journalists of doing the rumour-mongering.
A check with a SingTel source found that the speculation originated in Australia, no surprises there. One commentary Down Under essentially said it would be an opportunistic way for the firm to unlock extra value from Optus.
It cited the rise in the Aussie dollar and Optus’ recent outperformance – which may not last – but which gives SingTel a nice window to cash out. It added that an IPO that could raise as much as A$4 billion (S$5.1 billion) could be used for potential acquisitions.
But SingTel does not need the cash, not for capital expenditure nor acquisitions. The telco would be able to raise money from the debt market cheaply if there is to be a multiple billion dollar purchase, one analyst noted. And the bulk of its capital expenditure is done or provided for.
SingTel, in fact, enjoys solid cash flows from recurrent earnings and dividends from its associates. Free cash flow for the six months ended Sept 30, 2009, was S$1.67 billion. It is expected to get slightly over S$1 billion in dividend contributions for the current financial year.
Rather than journalists, it is probably fee-seeking investment bankers who are dangling the story of an Optus sale to SingTel. The rumours offer two sale routes of either new or vendor shares.
It sounds sexy, especially to shareholders – not the idea of potential acquisitions – but the prospect of money being returned to them.
Said CIMB analyst Kelvin Goh on the listing rumours – ‘We would be positive if SingTel sell down its stake as the funds raised could be distributed as dividends.’
Stock return and dividend
SingTel has seriously underperformed the rest of the stock market of almost 50 per cent. According to Bloomberg, the one-year total return on the stock is 21.66 per cent. The Straits Times Index (STI) is up 68 per cent from a year ago.
The firm did cautiously increase its interim dividend by 11 per cent to 6.2 cents a share, representing a payout ratio of 52 per cent. Last year’s total dividend of 12.5 cents was unchanged from 2008.
Analysts are betting that there will be a higher final dividend, and projecting the full year to be at least 13.5 cents, achievable given the telco’s strong showing so far.
Nomura analyst Sachin Gupta said in a Jan 11 report that its solid momentum at wholly owned businesses should continue in FY10-11, which bodes well for cash flows.
While there are margin concerns for its Singapore business, SingTel will continue to maintain its market lead share in the wireless and broadband segments. As for Optus, the past four quarters have been the best since 2004, with 7-12 per cent year-on-year revenue growth. Its key regional associates, India’s Bharti and Telkomsel in Indonesia, have dominant positions in their respective markets and continue to gain customers despite intensive competition.
SingTel has been firing on all pistons – no doubt about it. No mean feat in a recession year and so last year’s underperformance has been disappointing.
Mr Gupta said the underperformance was across the board for Asia ex-Japan telcos because operational surprise was non-existent. In fact, SingTel was one of the better telcos last year.
For those with a bit of historical perspective, SingTel actually outperformed the benchmark index during the most dire period of the financial crisis. From April 1, 2008, to March 31, 2009, the stock fell 36 per cent against a 44 per cent decline for the STI.
Whichever route SingTel takes to increase dividend as long as it does not harm the value of the company, is what shareholders care most about. Many are retirees and hold on to their stock because they regard it as a safe investment and a bigger fillip once in a while is seen as a bonus.
SingTel does not need to sell a chunk of Optus to return money to shareholders though one cannot rule out parent Temasek’s requirements.
What the overly prudent management could do is widen its purse strings. The current dividend policy is to pay out 45 to 60 per cent of underlying net profit as ordinary dividends. That could be easily raised to say 55-80 per cent with no negative impact on its financials given its stable cash flows and impeccable rating. That would be a nice move to reward its legion of patient shareholders where dividend income is more critical in their retirement years.
M1 – OSK
Shifting to Higher Gear
M1’s FY09 results were largely in line with our and consensus estimates. Following this, we raise our FY10/11 forecasts by 0.3-3%, which accordingly increases our target price to SGD2.30 (from SGD1.90) based on DCF. M1 remains a good dividend play, with the re-rating catalysts coming from the NGNBN rollout in 2Q10, improved mobile spending and progressive capital management. Our recommendation is upgraded to a BUY from NEUTRAL given the 17% upside to our revised target.
In line. M1 reported 4Q09 and FY09 core earnings of SGD37.2m and SGD150.3m respectively, in line with our and consensus full-year forecasts of SGD148.7m- SGD150m. Core earnings grew 2% y-o-y (+8.5% q-o-q) in 4Q09, reversing 2 consecutive quarters of decline. This was against the 11% y-o-y revenue expansion (+14.7% q-o-q) led primarily by increased handset sales. Postpaid revenue rose 2% q-o-q, the fastest since 2Q07, alluding to stronger roaming revenue in line with the nascent economic recovery. EBITDA margin held up well q-o-q but was 1.6%-points higher at 44.2% in FY09 on lower bad debt provision and facilities expense, which more than offset higher overall cost of sales. The key takeaways were: (i) the more than doubling in handset sales, both y-o-y and q-o-q as it benefitted from the launch of the iPhone 3Gs in early Dec ’09, and healthy take-up of its Take 3 bundling program; (ii) improved mobile revenue traction as the economic recovery momentum gathered pace; and (iii) the 3%-points rise in non-voice as a percentage of service revenue. Management has proposed a 7.2 cents/share final dividend, which renders full year dividend at 13.4 cent/share net, consistent with the regular dividend payout commitment of 80%.
Capex not exceeding SGD120m for FY10. M1 intends to upgrade its current HSPA+ offering to reach 42Mbps in 2010. A live trial of LTE is slated for next month. The guidance is for capex of SGD100-120m for FY10 (FY09: SGD119m) with little incremental capex (approx. SGD10m) required for NGNBN implementation.
Capital management upside. We expect more proactive capital management and hence the return of surplus cash to shareholders. More clarity would follow that of the re-financing of a SGD250m debt due later this year.
NGNBN fillip. We see M1 gaining most from the rollout of NGNBN, especially within the retail/residential (ADSL/cable) and enterprise segments where it would be able to compete on a more level playing field. We have upgraded our FY10/11 earnings by 0.3-3% following the FY09 results, mainly to factor in the improved fixed and mobile revenue traction and handset sales. Management’s guidance is for FY10 core earnings to be on par with FY09. Our DCF target price has been nudged higher to SGD2.30 from SGD1.90 (WACC: 10.1%; TG:1.5%) previously. Upgrade to BUY.
M1 – CIMB
Mixed 4Q but rising expectations of capital management
• Upgrade from NEUTRAL to Outperform; results in line. FY09 core net profit formed 100% and 98% of our forecast and consensus. A final DPS of 7.2 cts brought full-year gross DPS to 13.4 cts (CIMB-GK: 13.7 cts) for a payout of 80%, also within expectations. We have trimmed our FY10-11 earnings estimates by 1-2% after some housekeeping. However, we maintain our DCF-based target price of S$2.07 (WACC 9.5%). M1 remains our top Singapore telco pick. We upgrade it to OUTPERFORM from Neutral on our view that there would be likely capital management in 2010 and market-share gains from NGNBN.
• Mixed 4Q. 4Q09 topline jumped 15% qoq on the back of a 2.4x surge in handset sales primarily from the sale of iPhones and full-quarter contributions from the broadband provider, Qala (now known as M1 Connect). Stripping away these items, service revenue improved a mere 1% qoq as postpaid revenue only rose 2% qoq while prepaid revenue was flat. M1 booked maiden revenue from Qala which resulted in a S$5.3m contribution to its fixed broadband business (S$0.6m in 3Q09). EBITDA margins were down 3.1% pts qoq in 4Q09, compressed by higher SACs from the usual festivities and its iPhone launch.
• Conservative 2010 guidance. While M1 aims to raise revenue and its mobile market share in 2010, it has guided for comparable earnings in 2010 vs. 2009, implying lower margins. We believe the guidance is conservative as M1 is concerned about rising competition from the launch of the Next Generation National Broadband Network (NGNBN), despite cost savings from its backhaul investments. We are more aggressive, projecting 11% net profit growth for FY10, on higher revenue driven by roaming and economic recovery and lower opex due to its backhaul.
• Clearest hint of capital management. M1 said it would review its capital structure following the re-financing of its S$250m loan in 1Q10 and amid more clarity on the sustainability of the economic recovery. Coupled with our projection that its net debt/EBITDA could fall to 0.4x by end-2010 (assuming no special dividend/capital reduction) from 0.8x in 4Q09, we are keeping our expectations of a special dividend or a capital reduction of 23.5 cts for FY10.
SingTel – BT
SingTel joins US$400m cable project
SINGTEL has joined a diverse group of industry players to build a US$400 million subsea cable system that will initially link Singapore, Indonesia, the Philippines, Hong Kong and Japan by the second quarter of 2012.
The 8,300 km system, dubbed the South-east Asia Japan Cable (SJC) system, has a design capacity of 17 Terabits per second (Tbps) – equivalent to 17 million Internet users simultaneously accessing a 1 Mb file in real time – and can be upgraded to 23 Tbps, making it the highest capacity system ever to be built.
The other members of the SJC consortium are Globe Telecom, Google, KDDI, Network i2i, Reliance Globalcom, Telemedia Pacific Inc and PT Telekomunikasi Indonesia International. According to a statement yesterday, the consortium may be expanded in future to include other carriers.
The SJC system will cater to the strong bandwidth demand seen in high growth Asian countries, said Mark Chong, SingTel’s executive vice-president for networks. The system will also be a boon to Singapore when the country’s national broadband network is rolled out.
‘As the SJC connects Singapore to other cable systems in Asia, it will provide access to other parts of the region and serve as an important cable diversity route. SJC is designed to avoid outage prone areas. It will also be linked to the new Unity cable network, thus enhancing SingTel’s ability to offer superior connectivity between Asia and the US,’ Mr Chong said.
Unity refers to the name of another subsea cable consortium that SingTel is involved in.
The six-member Unity consortium, which comprises Bharti Airtel, Global Transit, Google, KDDI Corp, Pacnet and SingTel, is building a 9,620km system that spans Japan and the US via the Pacific Ocean. This US$300 million system recently landed in Japan and is expected to be ready in the middle of this year.
The Unity cable system will add up to 4.8 Tbps of bandwidth across the Pacific between the US and Asia.
Before Unity and SJC, SingTel’s last involvement in funding subsea cable systems was in 2004, when it joined 15 other companies to build the 20,000km South-east Asia-Middle-East – West Europe 4 system, or SEA-ME – WE 4.