Author: tfwee
SingTel – CIMB
Bharti’s 2QFY09 results
SingTel’s 30.5% associate Bharti’s 1HFY09 net profit of Rs40.7bn (+30.% yoy) came in within consensus estimates but was below ours (See Figure 2 overleaf). The result made up 44% of our full year forecast compared to 47% of consensus. That said, Bharti turned in a fairly strong performance as 1HFY09 revenue increased by 43% yoy on the back of robust subscriber growth of 58.5% yoy. The result was affected by forex loss of Rs5.8bn in the quarter (vs Rs1.5bn in 1Q) and a deferred tax income from a tax holiday of Rs3bn. Stripping that out, net profit would have grown 7.3% qoq and 41.3% yoy.
Revenue growth upwards. Bharti’s strategy of targeting rural users is paying off with steadily rising net adds. Bharti has been capturing a larger proportion of subscribers and extending its market share leadership to 24.6% (+0.4% pts qoq, +1.2% pts yoy), according to TRAI statistics (Figure 1). It captured 29.6% of net adds in Aug, the highest in the industry, compared with Reliance at 19.7% and Vodafone at 20.1%. This has helped it add 8m subscribers in the quarter – a record. This is a run rate that management believes is sustainable as the incremental subscribers are coming from small towns across the nation.
EBITDA margins impacted slightly. EBITDA margins came off slightly (-1.8% pts yoy, -0.5% pts qoq) due to higher network cost. This is attributed to the increase in network sites and the greater volume of consumption of diesel particularly as they pushed into rural areas where obtaining electricity to sites becomes a more drawn out process.
Competition and slower economy are surmountable. Bharti believes that new entrants, be it new or existing operators, would have difficulty in breaking in the market as tariffs are low and have little room to fall, branding would need to be built up and economies of scale are lacking. Although slowing economic growth and inflation is a concern, Bharti opines that telcos services are a substitute for travel. Mobile services are needed in rural areas where infrastructure is lacking and transportation is expensive.
Passive infrastructure. The passive infrastructure business recorded an EBITDA margin of 33.3% for 2Q vs. 36.6% in 1Q. It is in talks to sign up more tenants; Vodafone is already signed up and Idea is in the final stages. There are also ongoing talks with Telenor and Bharti is likely to sign them up given that much of their business model rests on sharing of towers. It has transferred 35,000 towers to Indus while keeping 24,000 towers on Infratel. Bharti highlighted that the listing of Infratel or Indus would only occur after 2 years (Mar 2010) once they have established themselves.
Other updates. Management noted that it had received new spectrum for 3 circles (Tamil Nadu, Bihar and Karnataka), which should alleviate congestion pressures. It has applied for more spectrum in 6 more circles. Bharti added that its Sri Lanka rollout was on track and should launch later on in the year. The recent DTH service launch in 62 cities has been encouraging thus far. It also turned free cash flow positive in the quarter, the first time it has done so.
Valuation and recommendation
Strong execution at Bharti. Bharti continues to deliver and extract profits from first time users in rural and poorer users. Subscriber momentum continues apace as its branding pull and economies of scale are clear advantages in a hyper-competitive market. We continue to view Bharti as one of the more reliable growth driver at SingTel. It is expected to contribute 22% to SingTel’s FY09 PBT.
Maintain earnings forecast, target price and UNDERPERFORM call. Pending the release of SingTel’s 2QFY09 results on Nov 12, we are maintaining our earnings forecast and SOP target price of S$2.37. We maintain UNDERPERFORM as we believe there could be more downside to the stock in the short term due to higher risk aversion towards emerging market assets and volatile currencies. However, we see value emerging over the longer term. Telecom is a resilient business, and SingTel’s key subsidiaries and associates have conservative balance sheets and generate free cash flows.
TELCOs – DBS
Some disappointments ahead
Story: Telecom sector earnings are considered relatively resilient as consumers continue to spend on telecom services. However, lower corporate spending and the potential outflow of workers and tourists (typical pre-paid subscribers) in a slowing economy, lower roaming revenues from corporates and tourists, and not-so-benign competitive environment due to mobile number portability (MNP) are major concerns for the sector.
Point: We have reviewed the outlook for telco stocks under our coverage. Below are the key changes:
SingTel – earnings preview and revised earnings. On Nov 12, SingTel might report 2QFY09F underlying net profit of c. S$875m (-4% y-o-y, +1% q-o-q) that could disappoint the market. We lowered our FY09F and FY10F earnings by 5% each, and they are now 10%-12% below consensus.
StarHub – earnings preview and revised earnings. On Nov 5, StarHub might report 3QFY08F net profit of S$77m (-5% yo- y, +20% q-o-q), towards the lower end of street expectations. We lowered our FY08F and FY09F earnings by 2% and 3%, respectively, and they are now 6%-10% below consensus.
M1 – revised earnings. Our FY08F estimate is unchanged, but we lowered our FY09F profit by 4%. Our revised earnings are 4%-12% below consensus.
Relevance: Although StarHub has a better track record than M1, the 50-60% EV/EBITDA and PER valuation gaps may not be sustainable. Our below consensus FY09F earnings already reflect low expectations for M1. Hence, we do not advocate a valuation gap of more than 20-30%. We upgrade M1 to BUY with a revised target price of S$1.57 (Prev S$1.65) pegged to 10x FY09F PER, and downgrade StarHub to FULLY VALUED with a revised target price of S$2.34 (Prev S$2.50) pegged to 13x FY09F PER. At the current price, M1 offers sustainable 9.7% dividend yield compared to StarHub’s 6.8% yield. Concerns about a possible bidding war for the English Premier League (EPL) in late 2009 is likely to overshadow StarHub’s share price. Our trough valuation for M1 and StarHub are S$1.17 and S$1.67 respectively.
We maintain a HOLD rating for SingTel at a SOTP-based target price of S$2.84. But if we use the current market price (instead of target price) for some of the listed associates, SingTel would be worth S$2.42. We advise investors to accumulate SingTel towards our trough valuation of S$2.25.
SMRT – BT
SMRT’s Q2 net rises 7.7% to $42.6m
HIGHER train ridership, as well as its rental and advertising business, helped propel SMRT Corp’s net profit forward by 7.7 per cent to $42.56 million for the second quarter ended Sept 30, 2008, compared with the same period a year ago.
Group revenue in Q2 grew 15.1 per cent to $227.03 million as total operating expenses also rose 17.9 per cent to $181.14 million due mainly to increased diesel and staff costs.
‘SMRT has continued to grow its profits in this quarter,’ said president and CEO Saw Phaik Hwa. ‘However, volatile energy costs, inflation and higher operational costs will have an impact on our performance.’
Earnings per share in the second quarter rose to 2.8 cents from 2.6 cents year-on-year.
SMRT operates Singapore’s biggest rail network, along with a smaller fleet of buses and taxis. In Q2, the average daily ridership on the MRT jumped 13 per cent to 1.435 million. During this period, revenue grew 13.7 per cent to $122.8 million, with operating profit increasing 10.5 per cent to $37.1 million.
The company added that LRT daily ridership had also increased – it grew 8.8 per cent to 45,300 in Q2, with revenue 10 per cent higher at $2.3 million. More significantly, it was in the black for the first time since operations started almost nine years ago – Q2 operating profit was $0.2 million compared with a loss of $0.1 million in the previous corresponding period.
But SMRT’s buses and taxis remained in the red in Q2 due mainly to diesel. Higher diesel costs dragged buses to an operating loss of $0.9 million despite improved ridership, while substantial diesel subsidies caused taxis to post a loss of $0.5 million amid declining revenue.
In Q2, diesel costs rose 54.1 per cent to $15.2 million for the group. Together with electricity, total energy costs were up 31.1 per cent at $29.3 million for Q2.
But the biggest component of operating expenses remained its staff and related costs. These were 13.5 per cent higher at $71.8 million. This is because SMRT has been ramping up recruitment since Q1 for the Circle Line, which will become operational in mid-2009.
Rental and advertising revenue in Q2 fared better, rising 44.7 per cent to $14.2 million and 25.6 per cent to $6.0 million respectively. Rental operating profits spiked up 39.3 per cent to $10.7 million, while advertising profit rose 19.9 per cent to $3.7 million.
Revenue from engineering and other services soared 97 per cent to $9.7 million in Q2 due mostly to higher diesel sales and consultancy revenue – derived from the Palm Jumeirah monorail project in Dubai – resulting in an operating profit of $0.9 million.
For the first half ended Sept 30, 2008, SMRT’s net profit rose 7 per cent to $82.87 million. Interim group revenue was 13.1 per cent higher at $442.97 million.
Earnings per share for the first half was 5.5 cents, up from 5.1 cents in the corresponding period. An interim ordinary dividend of 1.75 cents per share has been declared.
Looking ahead, the group expects the operating environment to be difficult in the next 12 months due to the global economic slowdown.
SingPost – DBS
Good numbers inspire confidence
Story: Singpost announced underlying net profit of S$38.7m up 11.4% y-o-y, near the upper end of our expectations. Costcontrol was the key again as expenses rose only 4.2% y-o-y compared to double-digit increase, which we saw in 2H08. As expected, interim dividend of 1.25 cents was announced.
Point: We want to highlight three key points.
1. Slowing economy is a concern, but not a big threat. Management revealed that Singpost was able to maintain flat revenues during the Asian financial crisis in 97-98 while revenue declined only 2% during the SARS crisis in 2003. In our view, a slowing economy could result in corporates cutting their spending, and we have modelled in a 1.3% decline in FY10 revenue, taking reference from previous crisis periods.
2. Singpost is tracking competition well. We believe that competitors have limited pricing flexibility due to the need to use Singpost’s network. Singpost launched several new initiatives in 2Q09 to further improve the quality and speed of its services. We think these initiatives should be effective in limiting the leakage of Singpost revenues.
3. Maintain FY09 estimates while reducing FY10 estimates by 6%. In 1H09, Singpost has already achieved 54% of our FY09 earnings forecast despite cost pressures from higher labor wages and oil price. Traditionally 2H is stronger than 1H due to more mail volume in the festive season. While there are challenges ahead, we believe that Singpost should be able to achieve the remaining 46% of full year net profits in 2H09. We have lowered our FY10 earnings estimates by 6% to factor the impact of the slowing economy and new competition.
Relevance: Maintain BUY with revised target price of S$0.85 pegged at lower 12x FY09 PER due to broader market de rating (Previously 15x due to historical trading range of 15-18x). Annual dividend of 5 cents is attractive. The stock is trading at 10x FY10 bear-case earnings, which implies limited downside.
SingPost – BT
SingPost commits to dividend policy
SINGAPORE Post announced yesterday that it remains committed to its minimum quarterly dividend policy of 1.25 cents per share, despite a 5.6 per cent year-on-year fall in net profit to $37.4 million for the second quarter ended Sept 30.
The weaker profit was due to a $1.3 million one-off expense from the winding up of an associated company in Q2 2008 and the inclusion in Q2 2007 of a one-off gain of $5.6 million largely from the disposal of a property. Excluding one-off items, the group’s underlying net profit was 11.4 per cent higher at $38.7 million.
Revenue for the quarter grew 4.1 per cent to $120.7 million on the back of improved performances across its three business segments – mail, logistics and retail. Earnings per share for Q2 were 1.943 cents, down from the previous corresponding quarter’s 2.065 cents.
For the first half of the financial year, net profit dipped 1.5 per cent to $76.88 million, from $78 million. Revenue rose 4.3 per cent year-on-year to $241.58 million.
Mail revenue for Q2 grew 2.8 per cent to $91.7 million as its various business lines – domestic mail, international mail, hybrid mail and the philatelic business – posted stronger contributions.
Logistics revenue was up 6.4 per cent to $18.8 million during the quarter as revenue from warehousing, fulfilment and distribution grew 28.9 per cent. vPOST also launched a new service, shop@Europe, during the quarter.
Continued growth in financial services such as remittances resulted in an 8.6 per cent increase in revenue to $16.6 million for SingPost’s retail business.
The group’s rental and property-related income also increased 39.3 per cent to $8.2 million due to higher rental income from Singapore Post Centre (SPC). The group is still continuing to review opportunities to unlock the value of SPC, it said.
Group CEO Wilson Tan said: ‘Like other companies, we face an increasingly challenging business environment. Cost containment becomes even more critical; we are taking additional measures to manage costs across the board. While we are focused on costs, we are not taking our eyes off our growth objective.’
SingPost closed at 65 cents yesterday, up 1.5 cents.