Author: tfwee
Thomson Medical – DMG
Stands to benefit from new Parenthood Package
Government initiatives to boost birth rates. The Singapore government announced a new enhanced parenthood package to encourage couples to have more children. Sweeteners to the package include enhanced tax benefits, baby bonus, and leave measures, as well as support for couples who have difficulties conceiving. The enhanced benefits take effect from 2009. The revised package also extends the relevant benefits to beyond the fourth child. The budget for the Parenthood Package is also expected to increase to S$1.6b when it is fully implemented, up from the current budget of S$800m.
We believe TMC stands to benefit the most. Parents stand to benefit from the enhance Package, from higher tax benefits to increased childcare subsidies. As such, couples would be encouraged to start having children soon, or have more children. On top of that, the increased benefits would free up more cash for parents. Hence, they may be more willing to spend on optional medical tests for their newborns, which could result in additional revenue for the hospitals.
In turn, this would benefit the three medical providers (Raffles Medical Group, Parkway and Thomson), as all three provide O&G services. However, with its focus on O&G services, we believe TMC would stand to benefit the most from the expected increase in demand for such services. The enhanced Package also bodes well for its Thomson Fertility Centre, as couples may be more willing to seek fertility treatments.
TMC offers competitive rates. Among the private hospitals, TMC’s average hospital bill is one of the lowest (based on 50th percentile bill size), making it an attractive private hospital to go to for baby deliveries. Coupled with the enhanced Package encouraging couples to have more babies, we expect the volume of deliveries at TMC to increase, boosting its revenue and earnings growth.
We maintain our earnings estimate of S$11.2m (EPS: 3.8 S¢) for FY08 and S$12.3m (EPS: 4.2 S¢) for FY09. We have a fair value of S$0.76 for the stock, based on 19x FY08/09 blended earnings. At the current price of S$0.57, this presents a potential upside of 33.3%. We maintain our BUY recommendation on TMC.
SPH – DBS
Strong July AdEx growth
Story: Nielsen Media’s latest AdEx figures show that SPH’s newspaper display and classified ad volumes for July 2008 grew by 12.6% y-o-y. For SPH’s 11 months to date for FY08 (September to July), Nielsen Media’s estimates indicate that SPH’s display and classified volumes have risen by 6.9% yoy.
Point: We believe that these figures indicate that SPH is right on track to meet our assumption of 7% yoy growth in display and classified ad volumes for FY08, reflecting robust domestic consumption spending in Singapore thus far. Whilst growth in advertising revenue is expected to slow down, we remain positive on the Group’s longer-term prospects given its monopolistic position in print advertising, attractive property asset i.e. The Paragon and strong balance sheet. All these translate to firm, growing cash flows for SPH, which should help to continue to support the stock’s generous dividend payouts.
We expect SPH to reports its 4Q and FY08 results around mid-October and are projecting the Group to propose a final net dividend of S 24cts (interim dividend was S 8cts), given continued growth in its core publishing business, higher property rental income and further revenue recognition from the Sky@Eleven residential development.
Relevance: We continue to like SPH for its attractive valuation and as a defensive stock, backed by a net yield of >7.5% (premised on 90% payout of EBIT; in line with last 6 years), and re-iterate our BUY call. Our sum-ofthe- parts valuation for SPH is S$5.75.
TELCO – CIMB
City Telecom pulls out of NGNBN NetCo Bid
A blow to Infinity
City Telecom (CTI) has ceased to be a member of the Infinity NGNBN Netco consortium, whom StarHub and MobileOne are also members. With CTI’s withdrawal, StarHub will be taking over the role of consortium leader. M1 will continue to play an active role and Qatar Investment Authority (QIA) has been tapped to replace City Telecom in the consortium. No reason was provided as to why CTI dropped out although we believe the direction and strategy of the bid could have prompted such a move. This comes soon before the winner of the bid is announced.
Who is City Telecom? Established in 1992, City Telecom (HK) is a provider of residential and corporate fixed network and international telecommunication services. It started off as an alternative IDD service provider in 1992, before obtaining a fixed line licence in 2000. In that same year, it set up its wholly own subsidiary, Hong Kong Broadband Networks (HKBN) which is a major fixed network service operator, providing the world’s fastest residential access, with speeds hitting up to 1Gbps.
Who is QIA? QIA was established on June 23, 2005 as the investment arm of the state of Qatar. The principal aim is the investment of surplus financial resources in regional and international markets, blue chip companies and projects.
Reduces Infinity’s chances
Key loss. CTI’s pullout caught us by surprise. With CTI’s pullout, we see less odds of Infinity winning the bid for NetCo as we find approximately 30% of the criteria of the NetCo RFP (25% from quality of network infrastructure and 5% of bidder’s track record and management expertise. See Figure 1 below.) being at risk with the loss of such a key partner as CTI. QIA, is in our view, more of a financial investor given limited experience in the telco space.
Prior to this announcement, we had already regarded the SingTel led OpenNet consortium as having the better odds of winning for three key reasons:
• proposition of rolling out 2 years before iN2015 vision would be welcomed,
• significantly lower cost of rollout from having a more extensive fibre network,
• likelihood of lower civil works disruption.
Extensive experience in rolling out broadband. CTI has extensive experience in rolling out broadband as it built up its network up from scratch to compete against the bigger boys of PCCW. Today, it standard product, offers much greater speed of 100 Mbps uplink and downlink versus the incumbent’s offering of 8 Mbps downlink and 1 Mbps uplink. More crucially, CTI’s experience in building the NBN in densely populated areas by using existing infrastructure such as bridges and drains while causing minimum disruption would have proven handy and would have been a key attraction of the Infinity-led consortium.
NetCo is mildly positive to SingTel. The much improved odds of securing the NetCo bid would be slightly positive for SingTel, in our view. This would negate them building an alternative network to rival the winning competitors on top of securing them the $750m grant to upgrade their existing network. Returns from the network should offset potential loss of revenue from lower revenue of leasing backhaul capacity to StarHub and M1.
Win or lose, NetCo is mildly positive for StarHub and M1. Win or lose, we believe StarHub stands to gain. If it wins, it gains three advantages, a) part ownership of the network, saving on rental costs for backhaul, b) grant of $750m, covers approximately 50% of entire capex and c) layering of income if multiple OpCos enter the frame. If Infinity loses, both M1 and StarHub would still benefit from lower leasing costs, access to commercial and residential homes and lower interconnect charges.
Valuation and recommendation
Maintain Neutral on the sector, and Neutral for all the telcos. The dogged determination of SingTel in pursuing market share gains overshadows the consumption growth and dividend stories and trains the spotlight on margin compression. SingTel’s diversified earnings base offers better downside protection with Singapore contributing about 30% of SingTel’s earnings vs. 100% of StarHub and M1. Between StarHub and M1, we prefer StarHub for its more diversified earnings base.
SingTel – DBS
iPhone and NBN
Story: We believe the iPhone launch on 22 Aug will not generate meaningful shake up in the market share as SingTel has priced it at a premium to the price in markets such as Hong Kong. We view the award of NetCo contract for National Broadband Network (NBN), expected in Aug-Sept 08 time frame, to be more significant.
Point: We highlight three key points for the sector.
(a) Margin recovery unlikely this year. Looking at current subsidies offered by StarHub and M1 on touch screen phones from Samsung and HTC, in anticipation of SingTel’s launch of iPhone, we believe that margin recovery would take time. Post-mobile number portability (MNP), we have not seen significant reduction in competitive intensity till now. Traditionally margins have always been lower in 4Q compared to the rest of the year due to festive promotions. This implies that, the earliest we can hope for margin recovery will be towards the beginning of 2009.
(b) NetCo award can have adverse impact on the whole sector. With the Netco award, market may focus on the fact that one of the two existing broadband networks can become redundant or obsolete due to NBN. With City Telecom’s exit from StarHub-led consortium, we have even higher conviction on SingTel-led consortium “OpenNet” winning the award due to its ability to upgrade SingTel’s existing network at lower costs. This implies that StarHub would be forced to run its existing network in direct competition with NBN. In the long run, even SingTel may see adverse impact on its broadband business (c.10% of group earnings) due to the regulated pricing environment.
(c) Capital management is the only silver lining in the sector. We understand that the magnitude of capex required by each player for NBN is quite limited as (i) capex spending would be spread over 2-3 years and (ii) each player has only 30% stake in the consortium. We have estimated annual capex spending by each player for NetCo layer to be around S$100m. We believe that M1 and StarHub can reduce their capital by 10% and 5% respectively with FY08 results. However, the likelihood of special dividends remains low as evident from their track record of preference for capital reduction.
Relevance: We prefer M1 to SingTel due to its attractive valuations and regular dividend yield of near 8%, which can be further enhanced by capital management. We think that M1 can easily meet FY08 street estimates, while SingTel may disappoint as management guidance of double-digit growth in earnings for associate is too bullish. StarHub is our least preferred stock due to its premium valuations of 14x FY08 earnings, which can only be justified for a company with double-digit earnings growth. We see slight decline in StarHub’s earnings this year and believe that large valuation gap between StarHub and M1 may no longer be justified.
M1, StarHub – BT
StarHub and M1 lose HK broadband bid partner
City Telecom pulls out of alliance; Qatar entity steps in as replacement
The two-horse race to the finish line of a mammoth government tender for building Singapore’s new broadband highway took a dramatic twist with Hong Kong’s City Telecom pulling out of its alliance with local operators StarHub and M1.
The withdrawal of the Hong Kong-based telecommunications conglomerate comes a month before the Infocomm Development Authority (IDA) announces the results of its ongoing NetCo (Network Company) tender evaluation.
This sudden development came to light yesterday afternoon when the IDA updated its website for this project. The regulator requires all bidders to seek its approval before changes can be made to their membership make-up.
City Telecom was previously leading the Infinity Consortium – a grouping which includes StarHub and M1 – in the bid to build the broadband highway. It was the only member of the grouping with hands-on experience in building a similar network. Singapore’s largest telco, SingTel, submitted the only other proposal as part of OpenNet, a group led by Canada’s Axia NetMedia which includes two other members – Singapore Press Holdings and Singapore Power subsidiary SP Telecommunications.
With City Telecom pulling out, StarHub will now take the helm at the Infinity Consortium. No reason was given for its sudden departure but StarHub said the void left by City Telecom would be filled by the Qatar Investment Authority (QIA), the investment arm of the state of Qatar.
Although it has not been officially announced, City Telecom was the likely majority shareholder in the three-party venture. This was because M1 and StarHub are unlikely to have more than a 30 per cent stake each in the NetCo. This is the result of an IDA clause to ensure fair and open competition in the Republic’s new broadband playing field.
‘From today, QIA becomes a long-term strategic partner through its participation in the consortium. QIA expects to provide the Infinity Consortium with substantial financial support and expertise in business operations and oversight of the management of the Next-Gen NBN rollout,’ said a StarHub statement.
Although the government is providing a subsidy of up to $750 million to lay Singapore’s new broadband foundation, market analysts have previously said the massive project could require a similarly large investment from the NetCo.
This would translate to each member of the winning group pumping in amounts in the region of hundred of millions.
While the inclusion of cash-rich QIA may ease the financial strain, industry watchers say the Infinity Consortium may not be able to replace the technical expertise that is lost with City Telecom’s exit. This is because the company has previously deployed a similar fibre-optic or FTTH (fibre-to-the-home) network in Hong Kong.
‘The withdrawal of City Telecom from the Infinity Consortium is likely to affect its chances for the tender as City Telecom is the only member in the consortium with a proven track record of implementing a nation-wide, FTTH broadband network,’ noted Kenneth Liew, a senior market analyst with technology research firm IDC Asia-Pacific. ‘Its replacement – QIA – may not have experience in implementing such networks but it will have the financial power to support such projects.’
‘It should be noted that IDA’s evaluation parameters (for the NetCo) include the level of government grant required, service pricing, terms and conditions, apart from the technical aspects,’ said Soh Siow Meng, a senior analyst at Current Analysis. ‘While it is not good to lose City Telecom, I don’t think we should rule out the Infinity Consortium just yet,’ he added.
IDA is expected to announce the winner of the NetCo bid by the end of next month.