Author: tfwee
M1 – DBS
Tough time ahead
Comment on Results
Net- profit of S$38.0m was up 2.7% y-o-y if we exclude one-off tax credit of S$12.9m from last year profits. Revenue at S$204m was up 3.8% mainly due to growth in revenue from (i) mobile segment with increased contribution from M1 data plan; and (ii) international call services. EBITDA margin at 42.2% was slightly lower than 43.4% last year but in line with our expectations.
Further loss of market share across mobile while ARPU held up pretty well. Although M1 added 7K and 12K subscribers across post-paid and pre-paid segments respectively, market share was lower at 28.1% (28.4% in 4Q07) and 24.7 (Vs 26.1%) respectively. On the other hand, post-paid ARPU was fairly stable at $$61.6 (S$62.4 in 4Q07), while pre-paid ARPU was down at S$16.8 (S$18.2) due to stiff price competition.
Recommendation
Management re-iterated guidance for stable operations. Management is guiding for EBITDA margins around 44-45% for the whole year, similar to the margins of the last year, in the hope that cost savings from outsourcing of call centre operations, compensate for higher costs due to mobile number portability (MNP) in June 08. The company also revealed that 75% of its postpaid subscribers are contracted for one year plus. Capex guidance for the year is still intact at about S$100m as M1 invests into its own leased circuits in 2Q08.
We maintain HOLD with DCF based target price of S$2.20. Regular dividend yield of over 7% can be further complemented by special dividends or capital reduction as M1’s net debt-to-EBITDA at 0.6x remains far below its target of 1.5x. However, in our view, Mobile Number Portability (MNP) could be a significant risk for the company.
M1 – BT
M1’s Q1 profit down 23.5% at $38m
STRUGGLING to stem its market share decline, MobileOne yesterday posted a first-quarter net profit of $38 million, 23.5 per cent down due to a tax adjustment.
M1, the smallest of the three listed telcos here, said that pre-tax profit rose 2.6 per cent to $46.8 million for the three months ended March 31. It said that net profit was lower at $38 million because the previous corresponding quarter benefited from a two percentage point cut in corporate tax rate to 18 per cent.
According to a poll by Bloomberg, the median profit estimate of three analysts was $40.5 million.
Earnings per share came to 4.3 cents, 14 per cent down from five cents previously.
Although M1 showed growth in sales and added more customers, it came with higher costs while market share continued to slide. At end-February, market share came to 26.5 per cent, down from 27.4 per cent at end-November and 28.9 per cent at end-February last year
M1 said that operating revenue grew 3.8 per cent to $203.9 million, driven by an increase in service revenue. Post-paid revenue edged up 4.9 per cent to $136 million, while prepaid revenue climbed 14.4 per cent to $17.1 million. International call revenue rose 8 per cent to $33.7 million as total international retail minutes increased 83.6 per cent to 112 million.
Handset sales continued to fall, down 16.2 per cent at $17.1 million as M1 cut prices. Operating expenses rose 3.7 per cent to $155.3 million while cost of sales was up 2 per cent at $77.1 million. Free cash flow fell 6 per cent to $59.5 million.
This year will be a kind of watershed for mobile phone players because full mobile number portability starts on June 13. M1 and StarHub, the No 2 player, are expected to launch major campaigns to make inroads into the much bigger customer base of Singapore Telecommunications.
Neil Montefiore, M1 chief executive officer, said: ‘We expect the introduction of full mobile number portability in June will provide us an opportunity to target specific market segments but it may also result in a temporary increase in retention and acquisition costs. Overall, the company foresees its operations to remain stable for 2008.’
Separately, M1 said that it has picked Huawei Technologies to expand and upgrade its Singapore network.
The M1 counter closed two cents down at $1.93 yesterday on volume of 1.22 million shares.
TELCOs – CIMB
MNP goes live on 13 Jun
IDA announced yesterday that mobile number portability (MNP) will go live in Singapore on 13 Jun 08. MNP will allow mobile-phone customers to switch providers while maintaining their numbers.
This comes almost 20 months after IDA first announced its decision to roll out MNP in Singapore, in Aug 06. The June rollout date is within IDA’s latest guidance on 1 Jun 07. The date was previously scheduled for 4Q07 but was pushed back by delays in appointing the centralised database administrator.
Comments
Not expecting significant market-share shifts or spike in churns. We believe that all three mobile players had taken measures to retain their respective customers throughout 2007. This is evidenced by higher subscriber-acquisition costs (0-35% yoy) and relatively low churn rates of around 1% in 2007. Tactics included attracting valuable subscribers with generous handset subsidies for contract renewals, better IDD deals as well as bundled discounts (especially in the case of StarHub and SingTel) with other services such as broadband and pay TV. More recently, we noticed greater attempts at differentiating mobile package services with offers such as flat-rate plans, free bundled minutes/SMS and sharing minutes/SMS with family members.
Competition should remain relatively rational, with an eye on profitability and free cash flows. Competition is unlikely to break into an all-out price war but rather, on improving value propositions with greater differentiation in mobile-service plans, e.g. sharing minutes/SMS with family members, per second billing. Our view finds support in a Bloomberg article dated 16 Apr 08, which highlighted comments from Mr Quek Peck Leng (EVP of SingTel’s consumer division) that SingTel does not plan to engage in a “destructive price war” to keep its customers with the advent of MNP.
Not much downside for margins as a result of MNP. The big shift in cost structure had taken place last year when all three operators took proactive action to retain their customer base ahead of MNP. Costs will be structurally higher now but we do not expect significant downside on top of the margin adjustments observed in 2007. EBITDA margins slid 300-780bp yoy for the three players with M1 being the hardest hit, reflecting the competitive disadvantage of not providing bundled offerings with broadband and pay TV.
StarHub most likely to benefit, M1 most vulnerable in the longer term. StarHub has the smallest base of postpaid subscribers in Singapore with a market share of 27% vs. M1’s 44.6% and SingTel’s 28.4%. StarHub clearly has more to gain than lose from MNP in the longer run. We believe that M1 is the most vulnerable to losing out in the longer term due to its inability to provide bundled offerings (broadband and pay TV) which we believe are becoming more important to the buyers of telco services in Singapore.
SPH – CIMB
Still going strong
• In line. 2QFY08 earnings of S$99.6m (-6.2% yoy) were led by strong advertising revenues (+11.4% yoy) and a S$17m earnings contribution from sky@eleven. The strong core performance was partially eclipsed by weaker-than-expected investment income (-48% qoq) due to weaker financial markets. 1HFY08 earnings have now met 40% of our full-year forecast and consensus (SPH’s second half is typically stronger). An interim dividend of 8.0 Scts/share (+1.0 Sct yoy) was announced.
• Robust 18.9% yoy revenue growth. 2QFY08 core revenue (excluding sky@eleven’s S$24.2m contribution) grew 9.3% yoy, driven by strong advertising revenue (+11.4% yoy). This marked the fourth consecutive quarter of double-digit adex growth as SPH rode the tailwinds of a strong domestic economy. Property rental revenue grew 10% yoy as Paragon enjoyed rental reversions. Circulation revenue was flat (-1.1% yoy).
• 2QFY08 EBITDA margin expanded to 44.1% (+350bp yoy), benefiting from operating leverage at core operations and contributions from the higher-margin sky@eleven project. Robust topline growth helped SPH stay ahead of staff costs which rose 9.7% yoy on headcount increases and salary increments. SPH also benefited from weaker newsprint costs (US$575/tonne, -5% yoy) during the quarter.
• No signs of weakness yet. The impact of slowing global growth has yet to bite into adex demand. SPH continues to benefit from a tight labour market, as can be seen in its strong classifieds performance (+15% yoy). We believe Singapore’s economy remains well-supported by an immigration boom, the rollout of two integrated resorts and Singapore’s rise as a key global destination for business and leisure travellers.
• Reducing earnings estimate. Our FY08 earnings estimate has been trimmed by 5.5% to account for lower investment returns amid weakness in the financial markets and an intentional shift towards a more conservative portfolio.
• Maintain Outperform and sum-of-the-parts target price of S$5.20. In view of heightened market risk aversion, we continue to expect SPH to outperform the index on reliable earnings from its print-media monopoly, revenue recognition of sky@eleven, exposure to Singapore’s adex growth and a solid CY08 dividend yield of over 7%.