Author: tfwee
M1 – CIMB
Rising to the top
• Upgrade to OUTPERFORM from Neutral. We are upgrading M1 to OUTPERFORM from Neutral as we believe the worst from mobile number portability is over. The stock offers fairly strong dividends and an upgrade in its backhaul could conservatively save it S$20m p.a. starting end-FY09. M1 is the top pick in our sector for the above reasons and the fact that surplus cash could be released.
• Could return excess cash. The possibility of this is contingent on whether it bids for OpCo but assuming it loses/does not bid, we estimate that M1 could return up to an additional 17.8cts/share for a 9.3% yield by end-2009, if it pursues a net debt/EBITDA of 1.0x, the lower end of its 1.0-1.5x target. This is in addition to a recurring dividend yield of 8%.
• Earnings adjustments. We downgrade our FY08 earnings estimate by 2.7% after reducing revenue expectations for its mobile and handset divisions, partially offset by higher IDD expectations. For FY09-10, we raise our estimates by 0.9-14.1% on account of lower capex and depreciation as well as a conservative S$20m p.a. M1 could save on its network.
• Raising target price. Our target price rises to S$2.31 from S$2.15 following our earnings adjustments, still based on DCF valuation (unchanged WACC of 7.9%). Rerating catalysts could include capital-management initiatives and stronger-thanexpected earnings.
Transport – CIMB
Sheltered stations
• Strong outperformance. Since our last sector update in Sep 08, Singapore’s public transportation stocks continue to outperform as investors seek safe havens in the current market turmoil. On average, these stocks have outperformed the FSSTI by 29% and 43% over one and three months respectively. As a unique asset class, both CD and SMRT have operations that should remain quite insulated from weak demand and rising cost of operations. There is also relatively good earnings visibility while the continued decline in energy prices should improve profitability.
• Declining energy prices. Demand for energy has fallen in tandem with a slowing global economy. Crude oil prices are now below US$90/bbl, a 9-month low. While there were concerns earlier in the year about pressures from higher fuel prices for both CD and SMRT, these fears have now been put to rest. Lower fuel prices are positive as both CD and SMRT do not hedge their diesel fuel requirements.
• Ridership growth to boost revenues. Again, we reiterate the success of the Singapore government’s initiatives in inducing motorists to switch to public transport. Recent rises in electronic road pricing (ERP) charges, high fuel prices and a looming recession have all been boosting ridership. Even with the recent 0.7% hike in fares, public transport is still the most economical way to travel in Singapore. Rail ridership growth has been in the double digits for most of the year, despite high base figures.
• Maintain Overweight. We reiterate our Overweight position on the sector on the back of defensive qualities with limited downside risks in the current risk-averse environment. We maintain Outperform with an unchanged DCF (WACC 9.2%, TG 2%) target price of S$2.28 for CD, supported by prospective dividend yields of over 5%. SMRT remains a Neutral with an unchanged DCF target price of S$2.09 (WACC 8.5%, TG 2%) due to the limited upside to our target price.
StarHub – DBS
Negatives priced in
Story: The recent sharp decline in the stock prices have brought Starhub valuations to a more reasonable level given its stable earnings outlook and attractive 8% dividend yield. Margin pressure in broadband and cable TV is a concern, but that would be mainly felt in FY10 and is adequately captured in our below-consensus earnings estimates.
Point: We have three key points to highlight here.
(i) Competitive intensity to ease with SingTel signaling cost cutting. Competition seems to have eased, based on lower handset subsidies, which have come down from peak of about S$300 per handset in 1H08 to about S$100-150 currently. StarHub had won a handsome share of post-paid mobile subscribers in 2Q08. This should benefit the company over the next two years due to its policy of expensing handset subsidies in the same quarter rather than amortizing over a two-year contract period. Recently SingTel’s Singapore CEO Mr. Allen Lew said SingTel would freeze headcount and cut marketing expenses to focus on costs savings, which supports our view of easing competition. This may also imply that festive promotions in 4Q08, can be absent this year, leading to better margins.
(ii) StarHub could benefit marginally from price hike by SingTel. StarHub has extended its fixed line service for free to its pay TV customers after SingTel raised its fixed line service charges by c. 14%. Since this is a VoIP phone service, costs are minimal for StarHub, and it will gain from (i) one-time activation fee of close to S$40 (ii) more revenue from its international direct dialing (IDD) service and (iii) higher value proposition for its pay TV business and up-selling of more services.
(iii) Telcos are relatively immune to economic slowdown. Amid a slowing Singapore economy, telecom players like StarHub should continue to report stable earnings as consumers and business continue to spend on communications needs.
Relevance: We peg our target price to 14x average FY08-09F EPS, implying 20% premium to our target PER of 12x for M1, and at the lower end of Starhub’s historical PER range (13.3x-19.4x). Upgrade to HOLD with target price of S$2.50.
M1 – OCBC
Likely stable 3Q08 showing
Infinity consortium loses NetCo bid. Recently, MobileOne (M1) and its partners (StarHub, Qatar Investment Authority) from the Infinity consortium lost out on the NetCo (Network Company) tender to OpenNet (Axia, SingTel, SPH, SP Telecoms) consortium. Given that OpenNet can leverage on SingTel’s existing extensive ducting network and deliver the NGNBN at least 2.5 years ahead of the iN2015 vision schedule, the smart money was always on OpenNet winning the two-horse race, even before the surprise pullout of City Telecoms from the Infinity consortium in late August. Nevertheless, the decision will pave the way for M1 to concentrate on the Operating Company (OpCo) tender, whose deadline has been again delayed to 14 November. And we believe that M1 stands to benefit the most from this as it can broaden its service offering into the broadband space. We note that M1 has already started to make some headway in this area with its mobile and cable broadband services.
Slowing economy but earnings relatively resilient. But the greatest challenge facing the company is an economic slowdown, which the government expects to last for several quarters. While M1 is still expecting stable operations for this year, we believe that the pace of new additions in both the pre-paid and post-paid segments could slow in 2009. In addition, we can also expect some deterioration in ARPUs (Average Revenue per User) in both segments. However, we are not expecting a serious drop given that mobile communication has become well entrenched as a part of our daily lives. Hence earnings would remain relatively resilient even in an economic downturn. Furthermore, margins are likely to remain intact as we expect retention and acquisition costs to normalise as the MNP (true mobile number portability) has largely been a non-event for most subscribers.
3Q08 results likely stable. M1 will be announcing its 3Q08 results on 17 Oct after market closes. We are expecting revenue to be down 1.5% QoQ at S$202.2m, as subscribers wait for the usual year-end promotions, especially for the Apple iPhone 3G, before committing to a new contract. Net profit is likely to ease by a smaller 1.2% to S$40.6m as margins recover slightly. No dividend is likely to be declared in 3Q, but we continue to expect a final dividend of S$0.074 in 4Q, bringing the total payout to S$0.136/share (yield: 7%). We maintain our BUY rating and S$2.33 fair value.