Author: tfwee
M1 – OCBC
Eyes lower FY08 earnings after poor 3Q08
Disappointing 3Q08 results. MobileOne (M1) reported a slightly disappointing set of 3Q08 results on Friday, with operating revenue down 1.7% YoY and also 4.2% QoQ to S$196.7m, which was much steeper than the 1.5% QoQ decline that we had expected, hit by lower service revenue. On the other hand, net profit tumbled 20.9% YoY and 16.1% QoQ to S$34.5m, below our S$40.6m estimate. The telco blamed it on higher acquisition and retention costs, although in absolute numbers, acquisition cost eased from S$218 to S$162, while retention cost fell from S$167 to S$155. For 9M08, operating revenue came up to S$605.9m, up 1.6% YoY, meeting 75.6% of our FY08 forecast, while net profit fell 15.2% to S$113.6m, or 70.0% of our FY08 estimate.
Lowest net add since 2Q06. M1 also posted the lowest net add of just 10k subscribers in 3Q08 – the lowest since 2Q06. Management explained that it was still feeling the impact of full MNP (mobile number portability), despite saying during its 2Q08 announcement that it had minimal impact and competition was easing. As a result, its monthly churn rate rose further to 1.8% – again the highest since 2Q06. M1’s inability to offer “bundling” of services was another reason for the higher churn. Also worrying, the easing of its post-paid ARPU (average revenue per user) from S$61.9 in 2Q08 to S$59.2 in 3Q08 – management cited its MNP promotion which offered free six-month mobile subscription upfront as compared to those offered by its competitors which gave them towards the end of the two-year contract period.
Defensive but earnings likely lower. Although we continue to believe that M1’s business is fairly defensive in an economic downturn, we believe M1’s earnings are likely to be lower, especially if the recent ARPU and margin trends continue. M1 has also guided for a single-digit decline in net profit in 2008, versus one of a stable operation earlier. For our estimates, we have eased FY08 operating revenue by 0.7% and earnings by 9.3%; FY09 operating revenue by 3.6% and earnings by 13.3%. This in turn pares our fair value from S$2.33 to S$2.12. With M1 still committed to paying out at least 80% of its underlying net profit this year and likely next year as well, we maintain our BUY rating.
M1 – BT
M1’s Q3 net dives 21% to $34m
Higher customer acquisition and retention costs dent profitability
The curtain raiser for the quarterly results of local telcos got off to a gloomy start yesterday, with MobileOne reporting a 21.1 per cent drop in third-quarter net profit and warning of a drop in full-year earnings.
Net income for the three months ended Sept 30 slid to $34.4 million from $43.6 million last year, as higher customer acquisition and retention costs dented profitability, M1 said.
Earnings per share dropped 22.4 per cent to 3.8 cents, while revenue eased 1.7 per cent to $196.7 million. M1’s gearing – debt-to-equity – ratio for the quarter was 128.2 per cent, down from 132.8 per cent last year.
‘Increased competitive activity prior to the launch of full mobile number portability on June 13, 2008 continued into Q3,’ said chief executive Neil Montefiore. ‘The combination of an increased take-up of new competitive tariff plans and continuing high acquisition and retention costs caused a decline in profitability in the quarter.’
Local telcos have seen profits suffer as a result of a full-blown marketing war to attract new customers and lock in existing subscribers in the wake of number portability.
M1’s customer retention cost soared 30.3 per cent in the third quarter to $155, while acquisition cost declined 6.9 per cent to $164, with the advertising and promotional blitz starting to show signs of cooling down.
Singapore’s smallest telco added 10,000 customers in Q3 to lift its total customer base to 1.621 million. Despite the increase, its overall market share had slipped to 26.1 per cent at end-July from 28.3 per cent a year earlier, as competitors chalked up bigger customer gains.
During Q3, M1 finally branched into the market for fixed-line broadband services by launching four new high-speed Internet access packages, thanks to an infrastructure leasing deal with rival StarHub.
The two companies also joined hands to bid for a government tender to build Singapore’s upcoming ultra-fast fibre-optic broadband highway, but the authorities awarded the contract last month to a rival consortium involving Singapore Telecom.
For the first nine months of this year, M1’s net profit dropped 15.2 per cent to $113.5 million, though sales edged up 1.6 per cent to $605.9 million.
With the worsening economic climate, the company is predicting a ‘single-digit’ decline in full-year earnings. However, it still expects its total cash distribution for 2008 to be at least 80 per cent of net profit. M1 shares closed six cents lower yesterday at $1.70.
Rivals StarHub and SingTel are expected to report their quarterly results in the coming weeks.
However, SingTel has already hinted of a possible slowdown for some parts of its Singapore business and has responded with cost-cutting measures such as a hiring freeze and advertising cutbacks.
SPH – DBS
Pressing on in uncertain times
Story: SPH’s FY08 net profit ended at S$437m, down 12% from FY07, largely due to a 67% drop in investment income, but mitigated slightly by a strong operating profit, which grew 16% – due to its newspaper/magazines and property divisions. Revenue was up by 12.1% to S$1.3bn on higher contributions from all business segments. Excluding an impairment charge of S$26.5m on investment in an associate company, SPH’s FY08 earnings would have been in line with our expectations.
Point: With the recent global economic events, while we expect its newspaper operations to be affected by slower print ad revenues and higher newsprint costs, this should be offset by the progressive recognition of its development property project – Sky@Eleven. We have assumed US$850/mt for newsprint costs in our model. Upside could come from lower newsprint costs as a result of lower global commodity prices. DBS economists revised Singapore’s ’09 GDP growth forecast down to 2.6% from 4.6%.
In line with this, we have also revised our AdEx growth assumption down to –2%, from a flat growth previously. As such, we trimmed our net profit down by 1.7% – 1.9% for FY09F – 10F. Our sensitivity analysis shows that at the last traded price of S$3.50, it is pricing in a c.18% drop in AdEx, assuming other factors constant.
Relevance: Buy, TP: S$4.25. Maintain Buy, TP adjusted down to S$4.25 based on sum-of-parts due to lower newspaper earnings and pegging a lower valuation for Paragon. While the economic outlook seems challenging with Singapore slipping into technical recession and the recent plunge in equities, we believe SPH should be relatively resilient given its defensive newspaper operations, diversified businesses and strong balance sheet.
Risks include sharper than expected drop in print ad revenues, continued surge in newsprint costs, and higher USD/SGD exchange rate.
Declared a dividend of 19 cents (9 cents final; 10 cents special). Coupled with interim dividend of 8 cents, total dividend for the year is 27 cents, amounting to 86% of recurring profit.
SPH – OCBC
Slowing core business in 2009
Slowing growth. Singapore Press Holdings (SPH) reported its 4Q08 results last Friday with flat operating revenue of S$351.6m while net profit dove 26.3% YoY to S$92.5m. The bad bottomline performance was primarily due to a non-cash impairment write-down of S$26.7m for SPH’s 35% owned associate, TOM Outdoor Media Group (TOM). On a full year basis, SPH delivered 12.3% YoY topline growth to S$1.316b but PATMI still fell 12.4% YoY to S$437.4m. The topline was helped by a stronger recognition of the Sky@Eleven project while the poorer bottomline was due to less investment income and the impairment charge.
Less adverts expected with a technical recession. MAS stated that “Looking ahead, the outlook for the global economy has deteriorated amidst heightened risk aversion and de-leveraging in the financial sector”. The official forecast of GDP growth projection was down to 3.00% (prev. 4-5%), adding that “the growth of the Singapore economy is expected to remain below potential in the period ahead”. Management has indicated that advert requests have been slowing in view of the macro environment.
Rise in print costs in next 3 quarters. Management has again highlighted rising newsprint costs. As such, we raise our newsprint costs by between 18-35% (ref recent quarter’s price) for the next 3 quarters in view of supply curtailment (lines shutting down) and escalating production costs on the back of high paper demand, partly due to the US elections. We will re-jig our costs estimates if we see a strong and sustained correction in prices. Cash preservation. While SPH has stepped up its dividend/share to S$0.27 for FY08, management has iterated that it does not have a dividend policy. We discount Sky@Eleven’s stronger revenue recognition as it is non-cash in nature in view of its deferred payment scheme. With the gloomy outlook, we have assumed that SPH will cut its dividend/share to S$0.24 in an effort to preserve capital. Despite the lowered assumption, yield continues at 6.9% in view of the massive correction in share price.
Maintain BUY. While the STI has deteriorated 31.9% YTD, SPH has demonstrated its resilience with a smaller fall of 11.6% YTD. We tweaked our FY09 estimates slightly as we gain more clarity on segmental revenue prospects (stronger non-cash revenue recognition of Sky@Eleven but slower Adex) as well as cost projections. Our SOTP is now S$5.14 (prev S$5.25). Maintain BUY.
SingTel – DBS
Domestic and regional woes
Story: SingTel is facing challenges on both the domestic and regional fronts.
Point: We want to highlight four key points.
1. Possibly disappointing growth at Bharti next year. The market seems to underestimate the impact of mobile number portability (MNP), to be implemented June 2009. We trimmed our FY10F and FY11F earnings for Bharti by 5% and 6%, respectively. Using higher equity risk premium, we lowered Bharti’s target price to Rs850. Bharti remains the most expensive telco in Asia-Pacific at 16x FY09F PER.
2. Revised forex assumptions. We lowered the AUD/SGD exchange rate assumption by 10% to 1.15, and expect it to average 1.10 in 2HFY09. We raised our SGD/INR rate by 5% and expect it to average 31.5 in 2HFY09. A 10% decline in the AUD, INR or IDR would lower group earnings by c.2% each.
3. Lower corporate spending in Singapore. The slowing economy could result in businesses postponing their expansion plans. SingTel has more exposure to corporate spending relative to other local telcos. We trimmed revenue growth for Singapore to 5% (from 6% earlier) for FY09F, and to 2% (from 4%) for FY10F.
4. Impact of National Broadband Network (NBN). NBN could result in some loss of revenue from leasing of local circuits, where SingTel currently has virtual monopoly. We estimate overall loss of earnings arising from the NBN at S$100-150m, or 2-3% of group earnings in FY11 and beyond.
Relevance: We lowered our FY09F and FY10F earnings by 5.5% and 7.5%, respectively; they are now 5% and 8% below consensus estimates. Maintain HOLD for SingTel, with SOTPbased target price of S$3.10. Our stress test indicates a bear case target price of S$2.58 if associates de-rate to their historical low valuations.