Author: tfwee
Macquarie – The Australian
Macquarie group hit hard on downgrade
SHARES in Macquarie Group were smashed yesterday after UBS downgraded the stock to neutral, predicting that a sustained downturn would put “substantial pressure” on the investment bank.
UBS targeted two main areas of vulnerability — Macquarie’s capital levels, as well as the ability of its asset-recycling business model to continue generating strong revenue as asset prices fell.
“Although we believe Macquarie is a strong franchise with strong, diverse businesses, a sustained downturn will place substantial pressure on its
operations,” analyst Jonathan Mott said.
In the stock’s biggest fall since January, shares in Macquarie slumped $4.44, or 9.6 per cent, to a four-year low of $41.61, as the bearish mood infected the satellite funds.
Macquarie Airports shed 14c, or 4.4 per cent, to $3.07, and Macquarie Infrastructure Group gave up 11c, or 4.9 per cent, to $2.12.
In his report, Mr Mott noted Macquarie had $7.1 billion of equity investments and assets held for sale on its balance sheet — equal to 70 per cent of shareholders’ funds.
Significant impairment charges were unlikely in the current half, he said, given the bank’s recent commentary that there were “no material concerns with carrying values”.
However, valuations could come under pressure if prices continued to fall. “Additionally, given equity accounting of a number of these positions, if the boards of these associates chose to write down asset values, it will be proportionally recognised by Macquarie,” Mr Mott said.
“This is consistent with many of the write-downs recently announced by Babcock & Brown.”
At the very least, he said, it was unlikely that Macquarie could repeat the 20 per cent of total revenue it generated from investment disposals in 2007, or even the 12 per cent of last year’s revenue.
Mr Mott also said that, while Macquarie was adequately capitalised, it had less flexibility than widely perceived.
The group has previously said it had about $3 billion capital in excess of its minimum requirements, including $2 billion in Macquarie Bank and $1 billion in the non-banking operations.
But UBS said the minimum was not an appropriate benchmark in a global environment of de-gearing of bank balance sheets.
After adjustments for “more appropriate ratios”, it estimated that group excess capital was closer to $500 million.
“Although we see Macquarie Group as adequately capitalised, we believe there is less flexibility than is widely perceived,” UBS said.
The investment bank downgraded its 2009 profit forecast for Macquarie by 2 per cent to $1.5 billion, and by 10 per cent next year to $1.52 billion.
Switching its recommendation from “buy” to “neutral”, UBS downgraded its 12-month price target from $60 to $48.
But the group was not friendless.
Argo Investments managing director Rob Patterson, holder of a $150 million-plus stake in the country’s biggest home-grown investment bank, said the share market had “completely overreacted” to the UBS report.
“An analyst is entitled to his point of view, but he’s guessing that financial markets won’t be any different next time Macquarie reports (its profit),” he said.
“Sure, Macquarie will struggle to beat 2008 earnings, as it has said.
“But we’re long-term investors and we’re not going to throw the stock out just because it has experienced peak-cycle earnings.”
Source : The Australian
SingPost – UOBKH
Competition worries receding?
Singapore Post (Singpost) has just submitted a modified Reference Access Offer (RAO), which details the procedures and charges on which other postal service providers can gain access to SingPost’s distribution network. Our preliminary reading of the papers suggests competition worries would recede if this modified RAO gets approved by IDA. We also like the company’s stable dividend yield, thanks to its strong operating cash flow. Maintain HOLD.
Competition worries receding? In response to comments by the Infocommunication Development Authority of Singapore (IDA), Singapore Post submitted its modified RAO papers yesterday. The papers detail the procedures and charges for postal service providers that want to gain access to SingPost’s distribution network. From our preliminary reading of the papers, we feel the modifications of access rate schedule are mild. For example, under the Postal Competition Code, SingPost will set its RAO rates to other mail service operators at the standard retail prices minus a discount (equivalent to costs avoided arising from higher economies of scale due to the processing of large quantities needed by operators). In the modified RAO, SingPost maintained its avoidable costs at 1% of its standard retail price. Previously, the feedback from other operators indicated that the rates proposed would not allow them to sell services profitably. Subsequently, competition pressure could ease for SingPost if the modified RAO offer gets approved.
Waiting to see how IDA would regulate RAO rates and execute new competition framework. IDA has not set a deadline for finalising the RAO papers. However, we expect IDA to finish reviewing SingPost’s modified RAO within one month, by Oct 08, like it did in the first round of review. It will likely take another 2-3 months for other operators to negotiate prices and terms with SingPost. We expect competition to kick in from 2009. As of now, four new entrants have been granted postal services licences.
We like the decent yield though. SingPost outperformed the market only in end-FY06 when it declared a special dividend of 10¢/share. The price catalyst from a special dividend, possibly from the sale of Singapore Post Centre, would be less likely in the near term against the backdrop of a softening commercial property market in Singapore
With its extensive distribution network and access to master keys, SingPost could still enjoy robust cash flow to sustain its dividend policy of 80-90% payout or a minimum of 5¢/share p.a. In 1QFY09, SingPost registered operating cash flow of S$52m, compared with a dividend payout of S$24m(1.25¢/share). We expect operating cash flow to dividend to be maintained at 1.4x in FY09-10.
We value SingPost at S$1.07, on a par with our DCF valuation per share (WACC: 5.7%; terminal growth rate: 0.5%). The stable dividend yield limits the downside risk under in the current volatile market environment.
SingTel – DMG
Snaps up rival SCS
SingTel announced yesterday that it acquired a 60% stake, or 93.1m shares, of Singapore Computer Systems (SCS) from Green Dot Capital. SingTel will be paying S$139.7m, or S$1.50 per share, for its stake. The purchase will be paid through internal sources. SCS has been one of the best performing counters of late. Its share price has surged close to 40% to S$1.31 since end Jul 08, after Green Dot’s revelation that it was going to review its stake.
Following the acquisition, SCS will become a subsidiary of SingTel’s information and
communications technology (ICT) services arm NCS – one of its fiercest competitor. In the most recent high profile contest – the S$1.3b SOEasy (Standard Operating Environment) contract in Feb 08, NCS lost out to the SCS’ One Meridian consortium. The acquisition would give it access to such contracts, as well as a more entrenched footprint in Southeast Asia (Indonesia, Thailand, Brunei). NCS’ overseas exposure is largely concentrated in Australia, China, Malaysia and the Middle East.
Over the past year, there have been two major M&As in this field – Frontline’s takeover by US-based BT and the privatisation of Datacraft by parent Dimension Data. This validates our earlier call that with valuations so low, many of our better tech companies will see M&A action. Based on the acquisition price of S$1.50, SingTel is pricing SCS at 11x P/E and 1.6x historical P/B. This is cheaper than both the Frontline (19.0x P/E, 2x P/B at takeover price of S$0.245) and Datacraft (16x P/E, 3x P/B at takeover price of US$1.33) deals.
We are maintaining our earnings estimates for SingTel as SCS will unlikely contribute
significantly in the near future. Based on our sum-of-the-parts valuation, we have a price target of S$4.05. Maintain BUY.
SingTel – BT
SingTel’s IT services unit set for shake-up
BY MAKING a swoop for SCS (Singapore Computer Systems), SingTel has netted an unassailable technology services lead in the local government sector, along with additional revenue streams from burgeoning IT markets across the region. What is left unsaid, however, is that the resulting duplication could well lead to a sweeping revamp of SingTel’s IT services operations in Singapore.
When the Republic’s largest telco reported Q1 profits that were below market expectations earlier this month, analysts were quick to question the company’s growth prospects in the near term. SingTel’s overseas associates such as Telkomsel and Optus both turned in lacklustre performances, while its mobile stronghold in Singapore continues to be hit by a double whammy of thinning margins and higher customer acquisition costs.
But instead of moving to address these concerns, SingTel chose to bolster its IT services bottom line yesterday by acquiring control of SCS through its wholly owned subsidiary NCS. The 60 per cent stake was bought from Temasek Holdings unit Green Dot Capital for $140 million. Green Dot has made known its intention to review its SCS stake since July 30 and the sale to home-grown NCS comes as no surprise. SCS is a major supplier of IT services to the Singapore government and the acquisition by locally bred NCS sidesteps possible security and confidentiality concerns, especially among sensitive departments such as the Ministry of Defence.
From a market share perspective, the SCS acquisition is a match made in heaven as it gives NCS an undisputed lead as the top technology supplier to the Singapore government. The two companies consistently rank among the top three IT service providers to the public sector and the consolidation can only solidify this market position.
More importantly, the acquisition will lift NCS’s sales and lost morale by putting it back in the driver’s seat for the $1.3 billion SOEasy (Standard Operating Environment) outsourcing contract, the largest deal ever dished out by the local government.
The eight-year agreement was awarded to SCS and its US-based partner EDS International in February this year even though NCS was tipped as the firm favourite to win the tender.
SCS’s order books for this year has already reached a record high of $720.1 million. This provides a valuable addition to NCS’s overall income as its parent SingTel braves stronger headwinds in its high-profile mobile and broadband businesses.
In addition, NCS, which has focused its overseas expansion largely in markets such as the Middle East and China, can now gain entry into more technology hotbeds in Asia.
Besides China and Malaysia, SCS has offices in Brunei, Indonesia, Thailand and the Philippines, IT markets that are widely tipped to buck the downward purchasing trend in US and Europe.
Besides these obvious merits however, a number of glaring issues remain unaddressed from yesterday’s announcement.
By gobbling its arch-rival, NCS now faces the issue of operational redundancy as there is a major overlap in both companies’ product offerings and business functions. NCS will need to move quickly to align SCS’s operations in order to maximise the benefits and synergies that the acquisition promises.
The buyout could also raise the ire of smaller IT service players here, given the firm grip that NCS will now have on the government’s IT purse strings. These could result in complaints to watchdogs such as the Competition Commission of Singapore, throwing possible roadblocks onto the acquisition path.
However, NCS can take comfort in the fact that it has now secured a seasoned problem solver through SCS chief executive officer Tan Tong Hai. The local IT industry veteran has been credited with many turnarounds in Singapore’s brief technology history.
He steered SCS back to profitability shortly after taking the helm in 2005 following years of losses, and the firm continues to dazzle the market with sizzling profits quarter after quarter.
He did the same for Pacific Internet (now known as PacNet). The winning of the government’s SOEasy tender this year comes as another major coup.
Given Mr Tan’s illustrious track record, a new steward for SingTel’s IT services arm could well be first of many changes that are set to follow.
SingTel – BT
SingTel buys 60% of rival IT company SCS
Mandatory offer for rest of shares to be made at $1.50
Singapore Telecommunications (SingTel) has bought a 60 per cent stake in Singapore Computer Systems (SCS) in a move that will cement its dominance in the local government sector and open the door to more IT services revenue from regional markets.
SingTel’s wholly owned subsidiary NCS said yesterday it has bought 93.1 million shares in mainboard-listed SCS from Green Dot Capital – a unit of Temasek Holdings – for $1.50 each. This is a 12 per cent premium to SCS’s price of $1.34 a share before a trading halt last Friday.
Green Dot told SCS it was reviewing its stake in the company on July 30 – a move that sent the share price up 22 per cent in the following weeks as investors reacted to an imminent deal.
NCS said yesterday it will make a mandatory offer for all remaining SCS shares at the same price of $1.50, valuing SCS at $233 million. NCS will delist SCS once the deal is completed.
SCS provides technology services such as systems integration, infrastructure management and business continuity and is widely viewed as the main rival to NCS in Singapore.
Both companies have a strong footprint in the local public sector, consistently ranking among the top three suppliers of technology services to government agencies here.
According to statistics from the Infocomm Development Authority of Singapore, SCS was the second-largest government IT contractor in FY 2007 by procurement value, while NCS was ranked third. The consolidation is likely to lift the SingTel subsidiary to top spot this year.
Through the acquisition of its arch rival, NCS is guaranteed a steady stream of local income for the next eight years from the largest IT contract ever awarded by the Singapore government.
This is because the One Meridian group, which comprises SCS and its US-based partner EDS, won the hotly-contested $1.3 billion SOEasy (Standard Operating Environment) contract in February this year.
NCS lost out even through it was tipped to be the front runner for the tender, which replaces the age-old hardware ownership model in the public sector with a long-term outsourcing approach for greater cost efficiency.
‘The acquisition provides SingTel with a larger role in the SOE project in Singapore, considering that SCS is part of the winning One Meridian consortium. It also strengthens SingTel’s position in the local IT services market,’ said Foong King Yew, research director of communications at technology analyst firm Gartner.
Besides lifting local sales, NCS will gain entry to new markets in South-east Asia as a result of the buyout. NCS’s overseas expansion has been centred on the Middle East, China, Malaysia and Australia.
SCS also has a presence in Malaysia and China but has additional offices in Indonesia, Thailand, Brunei and the Philippines, which collectively account for about 20 per cent of its overall sales.
‘This move is part of SingTel’s strategy to be a significant solutions provider to business customers in the Asia-Pacific region,’ said SingTel Singapore chief executive Allan Lew. ‘The combined IT capabilities and capacity of SCS and NCS will extend SingTel’s ability to deepen its relationships with its customers in Singapore and overseas.’
SingTel shares were up 1.7 per cent to close at $3.50 yesterday.