Author: tfwee
SingTel – CIMB
Bharti’s 4QFY08 results beats expectations
Above expectations. Bharti’s (SingTel’s associate, 30.5% stake) 4QFY08 earnings of Rs18.5bn (+37% yoy) beat consensus expectations by 5%. Full year FY08 earnings of Rs67.0 bn (+57% yoy) was 2.2% ahead of consensus. Key positive for this set of results was robust mobile subscriber growth (+67% yoy) which more than offset the ARPU decline (-12% yoy, flat qoq) as Bharti pursued first-time mobile subscribers in rural India. Group EBITDA margin for 4QFY08 held steady yoy. It should be noted that the 360bps yoy EBITDA margin slippage for mobile operations was primarily (approx 90%) due to the de-merger of passive infrastructure effectively converts passive infrastructure capex for mobile operations into opex.
Continues to pull ahead of rivals. Bharti extended its subscriber market leadership with a 23.8% (+140 bps yoy) share, bringing its mobile subscriber base close to 62m. Bharti’s subscriber market share is now ahead of Reliance and Vodafone by 6.4% pts and 6.9% pts respectively. The push to rural areas has been rewarded as rural subs now constitute 25% of overall customer base and 36-37% of net adds.
Passive infrastructure de-merger. Bharti hived off its passive infrastructure assets into its subsidiary, Bharti Infratel with effect from Jan 31, 2008. Bharti Infratel has over 52k towers, out of which 30k are transferred out into Indus Towers (a JV between Bharti Infratel, Vodafone & Idea Cellular) for 16 circles. Bhart Infratel owns 42% of Indus Towers. Bharti Infratel recorded a maiden two-month revenue contribution of Rs6.0bn and EBITDA margins of 37.1% on a 1.22x sharing factor.
Regulatory updates. Bharti has been granted additional spectrum in 6 of the 13 circles it is eligible in which is highly positive for the firm. Apart from that, the ADC charge removal and possible removal of AGR and USO fees is also positive as it would make services more affordable.
Comments
This set of results does not raise any key concerns over Bharti’s growth prospects in the near term. Instead, Bharti’s sustained market share gains over its key rivals, Vodafone and Reliance continues to highlight its unrivalled advantages in branding, distribution network and economies of scale. We believe that this positions Bharti to be the most likely winner with the rise of tower-sharing in India. Tower-sharing results in network infrastructure cost and coverage becoming common denominators in the competitive landscape, leaving branding, distribution network and economies scale as the key sources of competitive advantage.
No change to our earnings estimates and view that Bharti is the most reliable growth driver at SingTel. We are expecting Bharti to contribute 20% of SingTel’s pre-tax profits in FY09, up from 17% in FY08.
Valuation and recommendation
Maintain Outperform with unchanged sum-of-parts valuation of S$4.45. SingTel remains attractive for its reliable associates-led earnings growth following Bharti’s strong results and growth outlook. We also continue to like SingTel for strong prospects of attractive dividend announcement (CIMB est: 16 cts/share, 4.2% yield) in the upcoming results announcement on May 14. The key risk at SingTel lies with earnings delivery at Telkomsel which is facing increased competition on the back of aggressive price cuts by Excelcomindo.
STEng – UOBKH
Slower Growth At Aerospace Division
Uncertainties ahead. Management has categorised 2008 as a year of uncertainties in the latest annual report, citing poor economic conditions in the US as a cause. The aerospace division, which accounts for half of the Group’s pre-tax earnings, should see top-line compression as airlines rationalise costs in the wake of steep fuel cost hikes. We are also concerned with the rise in impaired receivables as shown in the latest annual report and have allowed for further write-downs in 2008.
CAGR of 6.8% and projected 95% payout. Despite the potential headwinds at ST Aerospace, we like ST Engineering (STE) for its diversified business units and also its growing track record of expanding into new markets. All the divisions, except for the marine division, are expected to show modest growth over the next two years. Overall, we are looking for three-year CAGR of 6.8% for the next 3 years, compared to the 15% achieved during the previous three years. Dividend payout is projected at 95% for the next three years.
Downgrade to HOLD. We have downgraded our recommendation from BUY to HOLD given the difficult operating environment of the aerospace division. Our fair value is pegged at $3.62 based on DCF valuation. Key attraction is STE’s ability to offer yield of 5% in lieu of low capex requirements. We suggest an entry price of $3.30, allowing for a 10% upside to our fair value.
M1 – Phillip
Q1 FY08 Results Within Expectations
Net profit dropped in Q1. For Q1 FY08, M1 reported operating revenue of S$203.9m (+3.8% yoy), profit before tax of S$46.8m (+2.6% yoy) and net profit of S$38.0m (-23.5% yoy).
The increase in revenue was due to service revenue growth as the customer base increased by 19,000 from the last quarter to 1,554,000. The decrease in net profit in Q1 FY08 was due to the adjustment for the reduction in corporate tax by 2% to 18% in Q1 FY07.
Outlook for FY08. M1 expects the operations for 2008 to remain stable. The introduction of full mobile number portability from 13 June 2008 is likely to cause increased competition, which may result in short term increase in acquisition and retention costs. However, there are opportunities for M1 to target specific market segments. Furthermore, StarHub Ltd has joined M1-City Telecom consortium to jointly submit a bid to design, build and operate the passive infrastructure layer for the Next Generation National Broadband Network (NBN).
Maintain Hold with fair value at S$2.16. Based on our valuation using the free cash flow to firm model, the target price is maintained at S$2.16. M1 remains a hold as the growth in revenues and profits are likely to be limited due to its focus on the domestic market.
M1 – OCBC
Pretty decent 1Q08 results
1Q08 results pretty decent. MobileOne (M1) posted a pretty decent set of 1Q08 results, with operating revenue up 3.8% YoY (down 1.4% QoQ) at S$203.9m, meeting nearly 25.4% of our FY08 revenue forecast. Although net profit fell 23.7% YoY (flat QoQ) to S$38.0m, meeting about 22.2% of our full-year earnings estimate, we note that the decline was mainly due to a higher tax of S$8.8m, versus a tax credit of S$4.1m in 1Q07, and a tax of S$6.4m in 4Q07. Looking at the operating level, profit was actually up 1.3% YoY and 4.9% QoQ at S$48.8m. EBITDA was also fairly stable at S$78.9m, up 3.5% YoY and 3.1% QoQ, although margin eased slightly from 43.4% in 1Q07 to 42.2% but was still above 4Q07’s 40.9%.
Mobile data usage growing steadily. On the operating front, M1 managed to add another 19,000 new subscribers (+1.2% QoQ) over the previous quarter, but we note that the bulk came from the competitive prepaid segment (+1.8% QoQ), while the more lucrative postpaid segment gained 0.8%. In addition, ARPU (Average Revenue per User) numbers were slightly disappointing, with prepaid down 7.7% QoQ at S$16.8 and postpaid down 1.3% QoQ at S$61.6. While acquisition cost fell 31.6% QoQ to S$143/user, and retention cost eased 7.5% QoQ to S$136/user, we expect them to rise again as competition is likely to heat up ahead of the implementation of full MNP (Mobile Number Portability) from 13 June 2008. On a more positive note, mobile data ARPU has not only remained fairly stable at S$31.7 (+0.3% QoQ), its contribution of service revenue has risen from 7.2% in 1Q07 and 9.6% in 4Q07 to 12.4% in 1Q08.
Focus on mobile broadband space. Going forward, we expect the data segment to increase its contribution, given the recent incentives by M1 to focus on the mobile broadband space. In addition, M1 has emerged as a serious contender in the NGNBN project, given that rival StarHub has recently joined the M1-City Telecom NetCo consortium and it will also evaluate the RFP details for the OpCo tender. Meanwhile, we retain our BUY rating and S$2.33 fair value as we continue to like M1 for its defensive nature, given its stable earnings stream and high dividend payout.
TELCOs – DBS
Reality about Mobile Number Portability
Full mobile number portability (MNP) to go live in Singapore on 13 Jun 08. MNP would allow mobile-phone customers to switch operators without changing their numbers. This has raised investor concerns on how the competitive landscape can change in Singapore.
Experience suggests that MNP experience in Singapore should not be drastic. Almost everywhere, except Hong Kong, where MNP has been implemented, the effects of portability have been relatively minor and unnoticeable. Our analysis suggests that there are at least five reasons why MNP should not have much impact on the competitive landscape.
(1) Operators have signaled “status-quo” intentions to each other.
(2) Post-paid contracts are likely to be honoured in Singapore unlike Hong Kong.
(3) Competitive environment is less crowded than Hong Kong and Australia.
(4) A more mature market than others where MNP has taken place.
(5) No pent-up demand, as partial MNP already exists in Singapore.
Potential impact on each player should be minimal. We think that there could be negative impact on M1 due to its customers churning to other operators. For SingTel, the impact should be slightly negative to neutral while for StarHub the impact should be neutral. We maintain SingTel as our top pick for the Singapore Telecom sector.