Author: tfwee
SingTel – UOBKH
Intense Competition: Limited Upside in Investing in Parent
Competition in the telecommunications sector has remained intense with the launch of Mobile Number Portability (MNP). Singapore Telecommunications (SingTel) and StarHub both continued their aggressive marketing activities with high mobile phone subsidies while offering six months free subscription to re-contract as well as secure new customers.
High marketing and promotional expenses expected to continue. As highlighted in our strategy report, EBITDA margins for the Singapore telecommunications sector fell by 7.8% in 1Q08. The decline in margins for the sector is the largest on record due to aggressive marketing and equipment subsidies. We estimate equipment subsidies for SingTel (Singapore) at S$115m in 4QFY08, the highest level since 4QFY05. Cost of Sales (net of equipment sales) as a percentage of Services EBITDA was 58.1%, the highest level on record. We expect this to continue for the next two quarters given the continued high promotional activities.
Better off buying the associates? We estimate that the market has priced in a premium of S$0.63 for SingTel as a holding company at present, given the current market prices of its associates. Even if we were to use the highend of consensus estimates for SingTel and Optus of S$1.76, investors still pay a S$0.15 premium for SingTel as a holding company. Also, we estimate that investors are currently paying about 19x FY09PE for SingTel and Optus after stripping out the current market prices for SingTel’s associates, which is far higher than the industry average of 12-13x. Coincidentally, by imputing a PE of 13x for SingTel and Optus, we get a value of S$2.96 which is very close to our recommended entry level of S$3.00. Given the current disparity in value, investors can look to short SingTel and go long on the associates in
the short term.
Maintain HOLD recommendation, target price lowered to S$3.50 (previous S$3.76). We maintain our HOLD recommendation on SingTel and have lowered our target price from S$3.76 to S$3.50. We have adjusted our DCF valuation for SingTel and Optus from S$1.53 to S$1.28 as we have adjusted downwards our earnings for FY09, FY10 and FY11 by 4.4%, 1.8% and 1.4% respectively and adjusted our WACC from 8.5% to 8.9%. Together with our estimated dividend of S$0.125 for FY09, our recommended entry level for SingTel is below S$3.00.
SingTel – Phillip
Strong fundamentals
Recent price weakness. The share price of SingTel has dropped recently to S$3.51. This is in line with the fall in the equity markets due to increasing concerns over inflation and the sub-prime mortgage problems.
Portable mobile phone numbers. On 13 June 2008, mobile phone numbers become portable. This has led to the three telecommunications companies, SingTel, StarHub and M1, offering discounts and bundled services to existing and new customers. As a result, their marketing and retention costs will increase.
Discounts and bundled services. Both SingTel and StarHub have the advantage of offering discounts from the bundling of services including pay-TV, broadband and multiple mobile lines whereas M1 can only bundle services from multiple mobile lines as it does not have pay-TV and broadband services. However, M1 provides flexibility by allowing up to five family members to share unused talk time. For StarHub, it allows three family members while SingTel only allows parent and child to share unused talk time. Furthermore, SingTel and StarHub offer live Champions League and English Premier League matches on the mobile phones respectively
while M1 only provides MediaCorp shows on the mobile phones.
SingTel remains as the market leader. We believe that SingTel will be able to retain its market share and remain as the market leader in the Singapore market. We also expect strong profit contributions from Optus and the regional mobile associates. Fundamentally, this is a company that reports strong earnings and pay good dividends.
Ex-Dividend on 6 August 2008. Investors who hold the stock on 6 August will also receive final one-tier tax exempt dividend of S$0.069.
Maintain BUY recommendation, target price at S$4.01. We maintain the target price at S$4.01 and expect SingTel to report good earnings for 1Q FY2009. The recent price weakness presents a good opportunity to buy the stock. Based on its last done share price of S$3.51, there is potential upside of 14.2 percent.
SPH – DBS
A safe haven in uncertain times
Story: 3Q08 earnings were in line with expectations, as EBIT rose by 25% yoy to S$140m on revenue growth of 20% yoy to S$344m. YTD, EBIT is up by 25% yoy to S$388m on top line growth of 18% yoy to S$955m. PBT contribution from the Group’s publishing business was flat in 3Q08 due to higher staff costs but for 9M08, is up by 11% yoy, driven by an 8% increase in display and classified revenues. PBT contribution from the property segment grew by 155% yoy to S$103m as at 9M08, as the development of Sky@Eleven progressed. Meanwhile, treasury and investments saw a substantial decline of 71% yoy but is still ahead of our conservative forecasts.
Point: The Group is on track to meet our full year EBIT growth projection of 23% and whilst we are expecting a slow down in the next 1 or 2 quarters, we remain positive on Singapore’s longer-term growth (DBS Economics is forecasting 6.8% GDP growth in 2009). Even in the event that we are overly optimistic, SPH’s earnings are highly defensive given its monopoly on the publishing sector in Singapore and ownership of a premium retail asset like Paragon. The additional contribution from Sky@Eleven over the next 2 years will also help buffer any earnings downside risk for the Group.
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. We have adjusted our sum-of-the-parts target price to S$5.75, as we have raised our forward valuation for Paragon to S$2.1bn (cap rate of 4.5%). The latest valuation for Paragon is S$2bn.
ComfortDelgro – BT
Taxis to add 30-cent diesel surcharge per ride from Thursday
COMFORTDELGRO will introduce a diesel surcharge of 30 cents on the cost of all taxi rides from next Thursday due to rising diesel prices, and yesterday’s announcement by the market heavyweight led to SMRT Taxis following suit. ComfortDelGro operates the biggest fleet of taxis in Singapore with about 14,000 vehicles, or almost two-thirds of the total 22,000-plus cabs. SMRT is No 2 with about 3,000 taxis.
ComfortDelGro said that in the last six months, the net pump price of diesel here has risen by more than 50 per cent to $1.83 a litre on the back of all-time high global oil prices.
‘For the last six months, we have been absorbing a large part of the increase in diesel costs so that our drivers can enjoy a low rate of just $1.19 per litre of diesel,’ said Yang Ban Seng, CEO of the land transport giant’s taxi business. ‘But even at this subsidised rate, our drivers are still paying about 40 per cent more than what they were paying six months ago before the fare revision and the indications are that oil prices will continue to remain high.’
ComfortDelGro, which sells diesel to its drivers, said it incurred a $6.3 million loss on such sales in the first three months of the year alone. The company added that the diesel surcharge will increase drivers’ incomes by $9 per day, assuming each taxi makes about 30 trips daily. The surcharge, which will go to the driver, is a temporary measure to offset surging diesel costs. It will be removed when diesel prices fall back to $1.19 per litre, the market price on Dec 17, 2007.
Even CNG-powered taxis are likely to tack on the 30-cent surcharge. Smart Automobile, which has 180 cabs that run on compressed natural gas (CNG), said this is because the price of CNG has also risen as it tracks the price of high sulphur fuel oil. ‘The price of CNG is currently $1.59 per kg, before a 12 per cent discount for our drivers,’ said managing director Johnny Harjantho, whose subsidiary Smart Energy operates a CNG refuelling station. ‘In February, it was only $1.28 per kg.’
Smart, which also has about 650 diesel taxis, is one of two operators of CNG taxis, along with Prime Taxis. They will be joined later this month by SMRT, which will roll out Hyundai Azera CNG cabs.
SPH – BT
SPH net profit dips 15.6% in Q3; recurring earnings up 26%
Net investment income falls 66% amid volatility in financial markets
SINGAPORE Press Holdings (SPH) turned in a 26.2 per cent year-on-year jump in recurring earnings to $135.1 million for the third quarter ended May 31, but a drop in investment income resulted in a 15.6 per cent fall in net profit to $133.4 million.
The rise in profit before investment – which represents recurring earnings from the media and property businesses, including profits from the Sky@eleven development – came on the back of higher revenue contribution from the newspaper and magazine segment and the Sky@eleven project.
Volatility in the financial markets continued to exact its toll on investments, resulting in a 65.9 per cent decline in net investment income to $25.7 million. The drop in investment income was due mainly to higher profit on sale of investments last year. In addition, last year included income from the capital reduction exercise undertaken by an investee company, Mobile One.
The media group’s operating revenue rose 19.5 per cent to $344.4 million for the quarter. Revenue from its core newspaper and magazine operations rose 5.1 per cent to $268.9 million, with print advertisement revenue remaining the growth driver, jumping 6.3 per cent to $207.9 million.
In the property segment, revenue more than doubled to $67.3 million from $26 million a year earlier – with a $38.1 million contribution from Sky@eleven and a $3.1 million increase in income from rental and related services from Paragon. Property yield from Paragon is expected to be maintained at above 4 per cent based on an upward revaluation of the shopping centre, at $2 billion.
Total operating expenses went up by 15.6 per cent to $212.7 million. Property development costs for Sky@eleven accounted for $10.8 million, while staff costs were up $10.6 million or 13.8 per cent mainly due to increased headcount, annual salary increment and higher variable bonus provision. Headcount at end-May reached 3,874, up from 3,684 a year ago, as the group intensified its efforts to expand into new media and magazine businesses.
Other operating expenses increased $6.4 million or 15 per cent in tandem with the increase in business activity and inflationary pressures.
On a nine-month basis, net profit came to $344.9 million, a drop of 8 per cent from a year ago, while operating revenue was 17.7 per cent higher at $954.5 million. Profit before investment income, or recurring earnings, climbed 26.6 per cent to $373.4 million.
Q3 earnings per share (EPS) came in at eight cents, down from 10 cents, while EPS for the nine months fell to 22 cents from 24 cents.
Commenting on the outlook for the next 12 months, chief executive officer Alan Chan said: ‘The Singapore economy is forecast to grow at a more moderate pace in 2008. Advertising revenue, which has registered commendable growth and remained resilient so far, is expected to perform in tandem with the economy. Newsprint prices, which have seen sharp increases, are poised to rise further due to escalating production costs as well as supply and demand imbalances.’
He also said that the performance of the property segment continues to be underpinned by profit contribution from Sky@eleven and strong rental income growth from Paragon.
‘Barring unforeseen circumstances, the directors expect the recurring earnings for the current financial year to be better than the previous financial year.’
Shares of SPH ended one cent lower at $4.18 yesterday.