Author: tfwee
Singtel – BT
SINGAPORE – Singapore Telecommunications Limited, Southeast Asia’s largest telco, said on Tuesday that the launch of iPhone 3G will hurt its earnings in the fiscal second quarter ended September.
SingTel, which owns Optus in Australia and stakes in several mobile phone operators across the region, said it had together with its associates sold over 170,000 iPhone packages during the quarter following their launch in July and August.
‘In line with the group’s policy, mobile subscriber acquisition and retention costs are expensed immediately on activations… Consequently, the successful iPhone 3G initiative will have a dilutive impact on earnings and margins in the near term,’ SingTel said in a statement.
In Singapore, this will reduce earnings before interest tax, depreciation and amortisation by about $27 million (US$18.26 million). In Australia, the drop in EBITDA will be approximately A$44 million (US$29.95 million).
SingTel also said its Indonesian associate Telkomsel had on Oct 31 issued a revised outlook and is now looking at low-single-digit growth in operating revenue as well as a decline in margins by about 5 per cent.
The Singapore firm did not say how the launch of iPhone will hurt results at its Indian and Philippine associate firms Bharti and Globe .
SingTel is scheduled to report its second quarter earnings on Nov 12.
SMRT – DMG
Ridership growth remains key positive
SMRT reported 2QFY09 net profit of S$42.6m, up 7.7% YoY, in line with expectations.
MRT is key contributor to operating profit. MRT revenue rose 13.7% YoY to S$122.8m, and accounted for a 54% revenue share. MRT average daily ridership was up 13% YoY to 1.44m rides. Higher electricity costs however, led to a slower 10.5% YoY increase in MRT operating profit, though this still accounted for a sizeable 70.5% share of total operating profit.
Bus operations was lacklustre. Bus average daily ridership grew 5.8% YoY to 809k rides. However, diesel costs rose 54.1% YoY to S$15.2m, and this contributed to bus operations recorded an operating loss of S$0.9m, versus the S$0.8m gain in 2QFY08.
Fare hike will drive revenue going ahead. The Public Transport Council has approved an average 0.6% fare adjustment on SMRT’s bus and train fares effective 1 Oct 08. Overall, SMRT expects to yield an additional S$3m in fare revenue over the next 12 months from 1 Oct 08.
Commercial space rental remains a star performer. Commercial space rental revenue surged 44.7% YoY to S$14.2m. Though this accounts for only 6.3% revenue share, its share of operating profit is a sharply higher 20.3%. Total lettable space has risen 11.7% YoY to 26,592 sqm.
Earnings forecast adjustments. We raised our FY09 net profit forecast by 7.1% to S$154.8m, due to expectations of higher revenue for 2HFY09. Our FY10 net profit forecast is also raised marginally by 2.6%. We are assuming CY09 average WTI price of US$70/barrel, which is lower than CY08’s US$100. However, SMRT’s 6-mth electricity contract till Mar 09 is at a higher rate (30% higher than the previous 6-mth contract), and therefore the benefits of lower electricity cost will only flow through from FY10 onwards. We have also factored in increased costs with the commencement of the Circle Line revenue service in mid-2009.
SMRT declared an interim dividend of 1.75S¢/share. We are forecasting FY09 dividends of 8.7S¢, based on a 85% payout ratio (versus 78% in FY08). This gives a dividend yield of 5.6%. As the recent market collapse has led to yields of many equities rising sharply, this 5.6% now appears less attractive. The market risk premium has risen from 9.46% in early Oct 08 to the current 10.78%. As a consequence, we are cutting our price target to S$1.65, from the previous S$2.03. Maintain NEUTRAL call on SMRT.
SMRT – CIMB
Supported by non-fare businesses
• Within expectations. 2QFY09 net profit of S$42.6m (+7.7% yoy) was within annualised market consensus (S$157m) and our estimate (S$167m). 1HFY09 net profit of S$82.9m constitutes 49.6% of our full-year estimate. 2Q revenue growth of 15.1% yoy to S$227m was ahead of our forecast, mainly driven by higher train and bus ridership, and rental income. Interim dividend declared was S$0.0175.
• Operating expenses. Operating expenses rose 16.9% yoy to S$186m on higher energy costs (+31.1% yoy) and other expenses (+38.6% yoy). Within energy, diesel costs rose 54.1% yoy to S$15.2m, while electricity costs rose 12.9% yoy to S$14.1m. Notably, diesel costs were lower than in 1QFY09 on falling global fuel prices. Staff costs rose 13.5% yoy on higher headcount, salary adjustments and higher CPF contributions. Depreciation was relatively unchanged.
• Operational review. Revenue from train and bus operations increased on strong ridership growth. Operating profit margins improved for all segments, although bus operations were hit by higher diesel costs while taxi operations bore the brunt of diesel subsidies, and higher repair and maintenance costs. Operating losses for bus and taxi operations were S$1m and S$0.5m respectively. LRT operations posted a maiden operating profit of S$0.1m and improved contributions from the Middle East in the Palm Jumeriah operations boosted engineering service revenue. Rental growth was boosted by increased net lettable space (+11.7% yoy) to 26,592 sq m with an average 99.4% occupancy.
• Outlook. We expect revenue to improve further with increased service frequencies to support higher train and bus ridership as more people switch to public transport, while also supported by non-fare segments in rentals and engineering services. We are also mindful of energy costs, although there has been a welcome reprieve with declining global energy prices.
• Upgrade to Outperform from Neutral. We reduce our FY09-11 forecasts by an average 1.6% to account for higher revenue but also higher expenses, resulting in a new DCF-derived (WACC 8.5%) target price of S$2.08 (previously S$2.09). The recent market sell-off has made SMRT attractive again, supported by a dividend yield of 5.7%.
StarHub – CIMB
A weaker 3Q?
Potential disappointment in 3Q
Earnings disappointment. We expect StarHub to report 3Q results (Wed, Nov 5th) that will disappoint both the market as well as our own forecasts. As was the case with M1, the lingering after-effects of MNP could dampen margins and cause an earnings disappointment. For 3Q, we project net profit growth of 0-5% qoq but a decline of – 17% to -21% yoy. Revenue should remain relatively flat qoq but gently climb upwards by 4% yoy. EBITDA margins in 3Q should come in at a range of 27.6-28% which would be a similar level to 2Q08 margins of 27.6% or slightly better.
MNP after-effects, not as significant as other two competitors. The after-effects of MNP will be a key theme in the quarter with attention particularly focused on subscriber acquisition and retention cost (SARC). Unlike its other two main rivals, our view is that StarHub will be less affected relative to the two. It does not offer iPhones at the current moment (though it will by year end) which allows it to save on further subsidies. Also, it has not been as aggressive as M1 in offering promotional activities (e.g, free 6 month subscription for users migrating from other operators, multi-line savers and per-second billings). The investment quarter in 2Q should herald a bottom in margins in 2Q and downside risk to margins should be limited in 3Q.
Tougher operating landscape. Singapore’s advance 3Q GDP numbers showed that it has gone into a technical recession. The government lowered its 2008 GDP forecast to around 3% from 4-5% versus our own forecast of 2.5% for the year. In the last few months, StarHub has voiced concerns over a cutback in spending on telecom services just as SingTel issued similar pronouncements as well. That said, StarHub was still sticking to its 7% yoy revenue growth for 2008 vs our own at 6%.
Expect a 4.5 cts dividend. On the dividend front, we expect another 4.5 cts for 3Q, consistent with the minimum 18cts guidance for FY08 and we do not expect substantial payouts or special dividends. This is predicated on the need to conserve cash for an expensive content battle in 1HCY09 and until the outcome of OpCo is known in 1QCY09. This would bring the total dividend declared to 13.5 cts.
Prepaid and fixed broadband less competitive. Competition remains hypercompetitive in prepaid but should have eased off slightly. We believe that prepaid ARPU is likely to have hit the bottom in 2Q. Similarly, although StarHub has lowered its rates in fixed broadband to match M1’s entry, competition has been fairly rational as competitors have not reacted in kind.
Mobile broadband, a more keen battleground. In the last few weekends, StarHub announced that it would upgrade speeds on its HSPA platform to 5.76 Mbps from 1.9 Mbps for uplink speed by end Dec while downlink speeds will be upgraded to 21 Mbps from 14.4 Mbps by end 2Q09. This ups the ante on mobile broadband in the sector where heavy promotional activities and discounting have been characterising this segment.
Valuation and recommendation
Maintain earnings forecast, target price and UNDERPERFORM. While 3Q earnings could disappoint, we make no adjustments to our numbers currently but will likely make downward revisions once 3Q numbers are released. Our numbers for FY08 are already conservative and below consensus forecasts. Our target price stays at S$2.30 (unchanged WACC of 7.5%) but changes to the target price will be made once 3Q results are announced as we roll forward our valuation horizon by a year. We maintain UNDERPERFORM on de-rating catalysts of concerns over weaker-thanexpected revenue and the spiralling cost of content, particularly that of football. We advocate a switch into M1 for less risk to earnings and cash flow and attractive dividend yield of 10.5%.
SMRT – DBS
A head above the rest
Story: SMRT’s 2Q results were within expectations. Net profit grew by 7.7% to S$42.6m on the back on a 15% revenue growth to S$227m, arising from increased ridership and rental revenue and others.
Point: The growth in revenue was offset partially by higher operating expenses. Electricity and diesel costs increased by 31% as a result of higher electricity consumption and higher oil prices in 2Q. The Group entered into a new electricity contact from 1 Oct till 31 Mar 09 and the rates are about 30% higher than the preceding contract. It has also hedged about 50% of its remaining diesel requirements at about US$110/bbl. We have already factored the higher cost of electricity into our forecasts and assumed an average diesel cost at a crude oil price of US$105/bbl for FY09F.
Other operating expenses increased by 38.6% due mainly to higher cost of diesel sold and higher operating fees. Its bus operations continued to make an operating loss of S$0.9m mainly due to higher diesel costs. Taxi operations registered an operating loss of S$0.5m, while LRT operations made its maiden operating profit of S$0.2m.
Acquisition of a 49% stake in Shenzhen Zona is expected to complete in 4Q09. Details of expected financial contributions were not shared and we have not factored this into our forecasts.
An interim dividend of 1.75 cents was declared, similar to 1H08.
Relevance: SMRT share price has outperformed the broader market in current times due to the strong ridership numbers, healthy operating results and fundamentals. In our view, the market has priced all these positive attributes in the share price. We pegged our TP at 14x FY10F PER – mid-point of its historical range – equating to $1.60. While we like the company for its defensiveness, we see limited upside for the share price at this juncture. As such, we downgrade to Hold.