Author: tfwee
TELCOs – OCBC
Still key defensive stocks
Macroeconomic issues in 2009. Going into 2009, the whole stock market will continue to face many challenges, most of them coming from the macroeconomic front. Besides having to contend with a global economic slowdown, investors will also encounter continued uncertainty brought on by the financial meltdown and credit crunch, currency instability, and increased volatility in the stock markets. In such a highly unpredictable climate, we believe that a flight to quality is not enough – investors should also focus on defensiveness of earnings as well as sustainable dividend payout abilities and most of the Singapore telcos meet these criteria. As such, we continue to maintain our OVERWEIGHT rating on the sector.
Oct sell down brings value. Telco stocks have managed to hold their own for most part of the year, outperforming the STI index admirably. Since the start of the year to end-September, the STI index fell about 31.9%, but in comparison, SingTel was only down 18.8%, StarHub down 8.2% and M1 just 4.2%. However, following a chain of unfortunate events in October, both SingTel and M1 were sold down along with the overall market – SingTel lost about 25.2% of its value in that month alone, while M1 lost about 28.6%, versus the STI’s 23.9% fall. While most of them have recovered somewhat in November, SingTel is still trading around 38.3% lower YTD (Year-to-Date), StarHub is about 27.8% down, and 34.2% off for M1.
Healthy operating cashflows support dividends. While earnings are expected to take a slightly knock next year due to the recession, the slowdown should not have much of an impact, if any, on the telcos’ healthy operating cashflows. If anything, we expect more prudent capex spending and other cost-reduction measures to further improve operating cashflows and in turn, sustain the already attractive dividend policies. StarHub has committed itself to paying out at least S$0.18 of dividend (S$0.045 per quarter) this year and we expect the same, if not better, dividends next year. M1 has guided that it will pay out at least 80% of its recurring income as dividend – we believe this policy is sustainable in 2009. As for SingTel, it is seen as less of a dividend play but with its regional expansion strategy likely to adopt a more cautious approach, we see a higher chance of a special dividend – this was something that SingTel has consistently done in the past to return excess cash to shareholders.
ComfortDelgro – DBS
Taking comfort in our numbers
Story: Post 3Q08, we revisit our assumptions on ComfortDelGro arising from: (i) lower crude oil price; (ii) its A$149m acquisition of Kefford Group in Victoria, Australia (iii) changes to our forex assumptions (GBP and AUD, against SGD).
Point: Our revisions are as follows:
1. Crude oil price assumption lowered to US$60/bbl and US$70/bbl in 2009-10, from US$80/bbl. The net positive change is S$38.5m and S$21.8m.
2. Kefford Group acquisition. The A$149m acquisition was announced on 20 Nov. Our estimate of the net profit contribution to CDG is S$5.7m in FY09 and S$5.9m in FY10. We view this acquisition as positive and are in line with the Group’s strategy to achieve 70% revenue contribution from overseas by 2012. Its existing operational experience in Australia reduces operating risks for this venture, in our view.
3. Lower forex assumption. We revised our GBP and AUD (against SGD) down to S$2.30/GBP and S$0.98/AUD. These change our forecast by -S$41.5m and -S$45.5m for FY09F
and FY10F respectively.
The net impact is minimal on our FY09F earnings but our FY10F has been trimmed down by 8%, largely due to a smaller revision in oil price (to US$70/bbl vs US$60 for ‘09F).
Singapore bus/train ridership remain robust. Bus and train (NEL) ridership grew 4% and 16% y-o-y in Oct. YTD, ridership growth of 6% (bus) and 16% (train) is in line with our FY08F assumption.
Relevance: Despite the downturn, we believe the Group’s business will be relatively less affected given its exposure in the public transport. We also like CDG for its strong balance
sheet and healthy operating cashflow. Maintain Buy. Our TP is maintained at S$1.59, still pegged to 15x on FY09F.
SPH – JPM
Pressure on SPH’s earnings, but valuations should pull through
• Could there be repercussions from not reigning in DPS? We examine the risk of default at the Sky@Eleven property project given that recent sub-sale transactions have started to fall below the original average selling price of S$975psf. Most of the unit sales have been on a Deferred Payment Scheme (DPS) basis and from what we understand, none have been converted to progress payments, hence financing could become difficult later if asset prices fall at an unprecedented rate.
• Defaults would hit FY10E earnings but not SOP: If defaults arise when the Temporary Occupation Permit (TOP) is issued in 2010, we do see a significant hit to our FY10 estimates as SPH will have to write back earnings recognized before that point. However, we do not expect a significant impact to our Jun-09 SOP-based S$4.65 PT as the NPV of the project currently accounts for only 7% of our SOP. The bulk of value in SPH is still the publishing business at 60% of the SOP based on a historically resilient 12x trailing P/E. The Paragon mall supports 28% of SOP. Risk to our PT is a perceived de-rating in the publishing business in the form of lower circulation rates; SPH has differentiated itself from Western media which has succumbed to growth of the internet platform.
• The biggest hit from Sky@Eleven defaults would be on dividends: If anagement decides not to pay out the related property development earnings on perceived risk of defaults, dividends could be cut by as much as 10 cents per share, or 36%, in FY09 and FY10. A lower dividend yield could affect the stock’s ongoing outperformance. However, we believe it is too early to make such a call as the risk of DPS defaults, if any, will be marginal, in our view. Based on sub-sale transactions to date a substantial amount of capital has been committed by investors in Sky@Eleven and the fact that transactions have not ground to a halt and are taking place at lower levels, suggests there is the propensity for the speculation to clear.
M1 – DMG
Value emerges
Stock slides. Since our last note on M1 on 20 Oct 08, the stock has dived 26% on the back of weak sentiments in the market, as well as negative newsflow from the telecommunications industry. The other two telcos, particularly SingTel, painted a bleak outlook for the next few quarters. Consequently, despite the fact that the industry is largely seen to be defensive, the telco index FSTTC fell by 8% in the past month. Before the recent slump, M1 has been one of the most resilient stocks. It only fell 4% for the first nine months of the year, far outperforming the STI’s 32% slump.
Recapping results. While M1’s revenue fell a mere 1.7% to S$196.7m in 3Q08, earnings took a bigger 21.1% knock to S$34.4m due to higher acquisition and retention costs, following the introduction of mobile number portability in Jun 08. EBITDA margin came in at 42.5%, down from last year’s 45.2%. Gearing, at 128.2%, is seemingly high for M1. But this is not very much of an issue, considering that it has strong operating cash flows that will enable it to comfortably pay off its debts and reward shareholders. It has a Net debt/EBITDA of 0.8x (SingTel 1.1x, StarHub 1.2x), while its EBITDA/Interest stands at 40.6, an improvement over the previous year’s 33.1.
Recession’s not the main curse. Looking back at the past recessions, management revealed that the bad debts are quite insignificant – less than 0.5% of revenue. What investors need to be more worried about is competition. The aggressive marketing by all three telcos have led to surging subscriber acquisition and retention costs, and consequently margins being driven down. Our recent discussions with the telcos suggest that this intense competition will be dying down, at least for now.
Churn rate eased. In 3Q08, M1 was hit with a high churn rate of 1.8%, a jump from 1.2% in the previous corresponding period due primarily to SingTel’s launch of the iPhone. This should be reduced to the 1.5% level as competition tames.
Target price down, but value emerges. We have left our earnings estimates at S$160.1m for FY08 (-6.8% YoY) and S$149.1m for FY09 (-6.9% YoY). At S$1.25, it is trading at 7.0x FY08 and 7.5x FY09 P/E, which compares favourably against the industry average of 9.4x. The yields, at 12.2% for FY08 and 11.4% for FY09, are also the best among the three telcos. We have downgraded our target price for M1 from S$1.89 to S$1.58, based on our revised DDM model. We are upgrading the stock to a BUY despite cutting the target price, as it is looking attractive after the recent fall with a potential upside of 26% from current levels.
SPAusNet – CIMB
Steady as she goes
• Core within expectations. 1H09 core net profit of A$122.5m (+2.4% yoy) constitutes 66% of our FY09 forecast and 68% of consensus. This is within expectations as 1H is seasonally stronger. Revenue grew 8.9% yoy to A$636m, driven by favourable price changes with recent regulatory price resets, higher volumes on increased customer connections and higher usage stimulated by favourable weather. EBITDA margins rose to 47.7% from 45.7% a year ago on improved cost management. An interim distribution per stapled security of 5.927 A cts (+2.6% yoy) was declared, payable on 18 Dec 08.
• One-off adjustment. 1H09 accounts include a one-off non-cash impairment adjustment of S$30.3m after tax. This was due to a revised timetable by the Victorian government for the rollout of smart electricity meters by end-2013. Management has prudently taken an impairment charge for existing meters, as well as accelerated depreciation for these meters of A$7m per year until Mar 2014.
• No debt refinancing obligations until 2011. SPN had refinanced its obligations in early 2008, and will not have further refinancing obligations until 2011. While it may potentially miss out on benefits should interest rates fall, management’s long-term objective is to manage its long-term cost of debt, rather than be opportunistic.
• Outlook. SPN has locked in 100% of its regulated revenue until 2011, representing over 90% of group revenue and providing highly predictable cash flows. So far, it has not detected any weakness despite the bleak economic situation. Meanwhile, reductions in management performance fees, a new relationship with Jemena (100% owned by Singapore Power Int’l) should improve profitability from 2H09 onwards. Another potential growth area is SPN’s non-regulated services like testing, metering and communications support.
• Core forecasts maintained; maintain Outperform. We have adjusted our forecasts for the one-off impairment charge but maintained our core net profit forecasts. With the volatility of the A$-S$ rates in past months, we now peg A$-S$ at parity, which translates to a new DCF-derived target price of S$1.44 (WACC 10%), from S$1.71 previously. SPN is well supported by an attractive yield of over 10%.