Author: tfwee
SPAusNet – CIMB
20/20 visibility
• Regulated and safe. Based in Australia, SPN is a regulated natural monopoly which owns Victoria’s primary electricity transmission network, an electricity distribution network in eastern Victoria and a gas distribution network in western Victoria.
• Excellent earnings visibility. SPN offers defensive qualities in the current riskaverse climate where investors are searching for revenue and earnings assurance. Following recent revenue and tariff regulatory resets in 1H08, almost 90% of its revenue has been locked in until 2011.
• No refinancing issues until Sep 2010. Despite difficult credit-market conditions, SPN successfully refinanced A$320m of debt maturing in Nov 08 through a £250m 10-year bond to raise A$535m. It has also secured a A$1.55bn bank facility in Feb 08, demonstrating its ability to access competitively priced debt. It has an A1 credit rating from Moody’s and an A- credit rating from Standard & Poor’s.
• Initiate with Outperform. We like SPN’s high earnings visibility and predictability as well as its attractive yields per stapled security. Our DCF computation (WACC 10%, terminal growth 3%) values SPN at A$1.34 or S$1.59, which offers potential upside of over 30%, supported by distribution yields of over 11%.
StarHub – CIMB
Cautious tone
Bloomberg has reported StarHub’s CFO Mr Kwek Buck Chye as saying:
• Its users may scale back spending on telecom services because of credit tightening on corporate and small business customers, although he believes that consumers “will still use our services but less”. Despite this, StarHub is maintaining its revenue growth guidance of 7% yoy for the year.
• StarHub does not plan to refinance its S$142.9m loan which will be due within 12 months. “It’s not a question of availability for us; it’s a question of whether we want to go ahead and take that risk. I think the better time would be to wait six months to a year.”
Comments
StarHub’s cautious tone does not surprise us and is consistent with our negative view on the company. Also, by planning to repay the S$143m loan, we believe the chances of a special dividend or capital repayment are significantly reduced. StarHub had cash of S$102m and debt of S$828m as at 2Q08. When we downgraded our rating on StarHub to Underperform on 5 Sep 08, we highlighted, among other things, that: 1) consumers may downtrade on its services due to higher costs of living; and 2) StarHub may not undertake capital management in FY08 given a fairly high gearing of 1.41x , slightly below its long-term target of 1.5-2.0x.
Mr Kwek’s statements came on the back of SingTel’s recent comment that: “The tea leaves are indicating that things are going to be very uncertain” and it will “start to curtail some of our unnecessary spending and be a bit more cautious.”
Valuation and recommendation
Maintain UNDERPERFORM, with a DCF-based target price of S$2.30 (WACC 7.5%, terminal growth 1.7%). De-rating catalysts could include rising concerns over weaker-than-expected revenue, and the cost of content, in particular that of football.
As we head towards year-end, we expect investor attention to turn to events in 2009, and focus on the bidding war for the rights of both the World Cup and BPL in mid- 2009. We prefer MobileOne (M1 SP, Neutral, target price S$2.05) for its more visible earnings and attractive dividend yields of 8%.
SingTel – DBS
More Challenges Ahead
Story: In our view, StarHub’s pay TV and broadband business are going to face more headwinds in the medium to long term.
Point: We have three key points to highlight here.
1. Broadband business under pressure from declining ARPU. After comparing with Hong Kong, we think that broadband tariffs can decline by almost 50% in two to three years time. Currently, broadband business accounts for an estimated 23- 24% of StarHub’s EBITDA.
2. Pay TV business to experience higher cost of content. Two of the most popular contents – English Premier League (EPL) 2010-2012 and FIFA World cup 2010 are up for renewal in the middle to late 2009. With a more aggressive SingTel, the content cost could even double from an estimated S$150m for EPL in 2006. This could further escalate the losses of the pay TV business for StarHub.
3. Our revised FY08 and FY09 earnings estimates are 3.5% and 7.5% below consensus. We have lowered our FY08 and FY09 earnings estimates by 2.9% and 3.6% respectively. We think the key difference from consensus could be the EBITDA estimates for cable TV and broadband segment. We expect the margins to fall sharply in this segment as indicated in table on the next page. We expect mobile margins to fall gradually over the time.
Relevance: We peg our target price to 14x average FY08-FY09 EPS at 20% premium to our target PER of 12x for M1, towards the lower end of StarHub’s historical PER range (13.3x-19.4x) when it was considered a growth stock. We maintain FULLY VALUED with revised TP of S$2.50. Additional 6% yield from capital management assuming target of 1.5x net debt to EBITDA depends on the decision to participate in OpCo bidding.
M1 – DBS
Low beta stock for value buyers
Story: M1 being a pure mobile player, unlike its competitors, is not affected by (a) rising costs in the pay TV business as SingTel and StarHub fight over content rights (b) dwindling ARPU in the broadband business due to lower pricing plans and looming threat from National Broadband Network (NBN).
Point: We highlight three key points.
Mobile competition past its peak in 2Q08. After the introduction of mobile number portability (MNP) in Aug 08, competition in the post-paid mobile business has eased. An evidence is in SingTel’s introduction of iPhone at a significantly higher handset price of S$698 on the cheapest monthly plan. While competition in the pre-paid mobile segment remains intense, note that M1 has chosen margins over market share.
1. Likely to meet FY08 street estimates. With 1H08 EBITDA up 2.5% y-o-y despite MNP introduction, we think M1 should comfortably meet street estimates of flat EBITDA for FY08. Going forward, FY09 and FY10 stand to benefit from cost savings from building its own backhaul network.
2. Limited downside in the worst case. M1’s historical PER range (9x-13x) in the last five years suggests trough price of S$1.62 pegged at 9x FY08 EPS. With about 14 cents annual dividends, this implies limited downside even in the worstcase scenario.
Relevance: The stock is trading below 10x FY08 PER compared to 15x FY08 PER for StarHub and 14x FY09 (Mar year end) for SingTel. Based on M1’s historical PER of (9x- 13x), our TP of S$2.20 is pegged at 12x average FY08-FY09 EPS. We see 22% share upside complemented by 8% dividend yield. Share price catalysts are (i) More news flow on NBN as M1 is the only beneficiary, (ii) Additional potential 10% yield from capital management assuming target of1.5x
net debt to EBITDA depends on the decision to participate in OpCo bidding. Upgrade to BUY. M1 remains our top pick in the sector.
SingTel – BT
SingTel may cut spending, rates amid market turmoil
SINGAPORE Telecommunications Ltd (SingTel), South-east Asia’s largest telecommunication services company, may spend less than planned in its domestic market and cut rates as slowing economic growth and financial-market turmoil curb customer spending.
‘The tea leaves are indicating that things are going to be very uncertain,’ Allen Lew, chief executive officer of SingTel’s operations in the city-state, said in a Bloomberg Television interview broadcast yesterday. The company will ‘start to curtail some of our unnecessary spending and be a bit more cautious’, he said.
SingTel, whose operating expenses in Singapore rose 14 per cent in the quarter ended June, said it plans to cut costs and reduce some fees on concern that clients will delay orders.
The US government bailed out American International Group Inc for US$85 billion and Lehman Brothers Holdings Inc filed for bankruptcy this week, following the collapse of Bear Stearns Cos in March.
‘SingTel will have to be very aggressive in trying to cut costs and minimise the impact on margins as everyone else looks to delay orders now,’ said Voon San Lai, an analyst at Cazenove Asia Ltd in Singapore who rates the company ‘underperform’.
The phone operator ‘could also cut handset subsidies and staffing might be reduced’, he said.
Mr Lew, 53, declined to elaborate on the cost cuts. Operating expenses in Singapore rose to S$743 million in the three months to June 30, from S$652 million a year earlier.
SingTel on May 14 projected that capital spending in Singapore will rise to a ‘mid-teens’ percentage of revenue, as the company adds mobile capacity and upgrades its fixed-line network. It spent 8.8 per cent of sales for the 12 months ended March 31, compared with 8.5 per cent a year earlier.
The company had 10,651 employees in the city-state at the end of June, or about half of its total workforce. ‘We’ve a lot of corporate banking customers and you know these are the areas where there’re a lot of challenges right now,’ Mr Lew said.
SingTel is seeing some companies ‘being more cautious in terms of their capital expenditure and their expansion plans’, he said. The operator will consider cutting charges for business clients on a case-by-case basis, Mr Lew said.
Global economic growth will slow to 4.1 per cent this year and 3.9 per cent in 2009 from 5 per cent last year, the International Monetary Fund predicted in July.
SingTel joins Tata Consultancy Services Ltd and Infosys Technologies Ltd, India’s largest software-services companies, in expecting financial firms to delay orders.
Nortel Networks Corp, North America’s biggest phone-equipment maker, on Wednesday said sales will fall this year as companies hold back investments. Bloomberg