Author: tfwee
SingTel – BT
Optus deal loss bad for SingTel: JPMorgan
AN Australian government decision to cancel a broadband contract involving Singapore Telecommunications is a setback for the group as the deal would have strengthened it against rival Telstra, JPMorgan said in a client note.
Australia on Wednesday cancelled a A$958 million (S$1.2 billion) funding agreement with OPEL, a joint venture between SingTel’s Optus Australian mobile phone arm and Futuris Corp Ltd’s Elders business, as some conditions including prescribed coverage requirements had not been met.
‘The termination of the OPEL contract is a positive for Telstra and a negative for SingTel as the network build in regional areas would have created greater competition in markets where Telstra enjoys a competitive advantage due to a lack of competition,’ JPMorgan analysts said.
JPMorgan is keeping its ‘neutral’ rating for SingTel shares. Optus chief executive Paul O’Sullivan said on Wednesday that the government’s decision was ‘based on flawed data’, and ‘was bad news for rural and regional Australia and for competition in the telecommunications industry’. — Reuters
SPAusNet – Kim Eng
Maintaining distribution guidance despite shelving of cquisition
- SP Ausnet (SPN) cancelled its first and only post-IPO acquisition of Alinta‘s assets due to the deterioration of the debt capital market in Dec 2007. SP Power (owns 51% of SPN) acquired Alinta Limited in early 2007 under a Consortium. SPN has the first right of refusal to acquire the proportionate share of Alinta’s assets. We think that it was a pity as a successful acquisition will give SPN a larger market share (regulated asset base to double) and increase FY09 distribution to 12.14 cents. Nevertheless, SPN is maintaining its distribution guidance of 11.55 Aust cents (5.776 cents paid out in 1HFY08) and 11.8 Aust cents for FY08F and FY09F respectively.
Successful refinancing debt of A$1.55bn; no major need for refinancing till 2011
- SPN successfully refinanced its A$850m bridge facility together with A$600m of syndicated bank debt. The new A1.55bn facility comprises of 2 facilities of equal amounts which will mature in Mar 2011 and 2013 respectively. It also provides A$100m of undrawn but committed spare capacity. Some 95% of the debt is hedged (swapped floating for fixed) and hence minimize the company’s exposure to the fluctuating interest rate risk.
- The regulator assumes the cost of debt (in the building block revenue methodology) based on BBB+ rated assets plus a credit spread, while SPN carries a “A-“ credit rating from S&P. SPN will effectively benefit from achieving a return on its regulated asset base in excess of its actual funding costs.
Favorable regulatory decisions bolster stability and quality of distributions
- Favourable final decision at Gas Access Arrangement Review (GARR) & Transmission Regulatory Reset (TRR) secures and locks in around 90% of the revenue for gas and electricity transmission for the next 5 years till Dec 2012 and Mar 2014 respectively. Hence, in the near term, there is only the gas distribution scheduled for reset in Dec 2010. We can expect minimal surprises from now till 2010.
Not subject to the competitive retail electricity and gas market; provides stability to distributions
- SPN operates in the regulated privatized monopoly of electricity and gas transmission and distribution sectors where its revenue is highly regulated. This eradicates any downside risks, albeit at the expense of upside surprises. For instance, listed comparable AGL, which has a retailing arm, reported outstanding year-on-year results in FY07, but it is inevitably subject to market dynamics (i.e. demand and supply).
SPN ranks fairly high amongst high-yield comparables
- SP Ausnet is favoured for its stable and sustainable growth in distribution per stapled security due to its predictable cash flow from the regulated revenue. It’s a relatively “safe haven” stock to consider for its highly assured distribution payout. Notably, it guided for 11.55 Aust cents for FY08F and 11.8 Aust cents for FY09F. We do not foresee any likelihood of new acquisitions in the near term.
SingTel – CIMB
Termination of Optus JV rural broadband rollout
Australian government terminates funding for Opel
SingTel announced that the Australian government has terminated the A$958m funding agreement with Opel for the rollout of a broadband network serving rural parts of Australia. Opel is a 50/50 JV owned by SingTel subsidiary Optus Networks and Elders Telecommunications Networks. According to SingTel, the termination stemmed from the Australian government’s belief that Opel had failed to meet certain, unspecified conditions. Optus and Elders maintain that they have satisfied all the conditions.
SingTel will be taking a A$9m hit to its books for the capex it had incurred to date. This is in addition to the A$7m operating expenses related to the same project.
Comments
No material impact, marginally positive for cashflow. This does not have material impact on SingTel’s earnings, given that Optus has an earnings base of over A$500m. We see a mild positive from a cashflow perspective for 2009-2010 as termination of the project could potentially release around A$100m of cashflow over the period. Recall that the project involved an A$917m contribution from Opel to be matched by the government’s A$958m funding. Most of the A$917m contribution from Opel were in network and distribution assets, leaving only A$200m in actual cash outlay. As a 50/50 partnership, Optus was committed to providing A$100m cash to the project.
We had not factored in significant contribution from this project to Optus as we had questioned the profitability of the project. Hence, no change to our estimates.
Valuation and recommendation
Maintain Outperform with unchanged sum-of-the-parts target price of S$4.45. We continue to like SingTel for its liquid exposure to leading regional mobile operators, diversified earnings base and CY08 yield of over 4%.
SingTel – BT
Australia scraps US$871m broadband contract
SYDNEY – Australia’s government has cancelled a multi-million dollar deal with telco Optus and rural finance business Elders to build a broadband Internet network across the vast nation, the partners said on Wednesday.
Former prime minister John Howard announced the A$958 million (US$871 million) agreement last year, saying the Optus/Elders joint venture Opel would supply fast and affordable wireless broadband to hundreds of thousands of Australians living in remote areas.
But Optus, the Australian off-shoot of Singapore telco Singtel, and Elders’ parent company Futuris said that the new Labour government felt that the plan failed to meet coverage requirements and had cancelled the contract.
Optus and Elders dispute the assertion.
‘The Opel network is capable of meeting the objectives of the Broadband Connect Infrastructure Program and delivering improved broadband services to 889,322 underserved premises in rural and regional Australia within two years and at metro-comparable prices,’ Futuris said in a statement.
The government also said that the Opel network could duplicate a nationwide fibre-to-the-node (FTTN) broadband network proposed by newly elected Labour Prime Minister Kevin Rudd, the partners said.
Optus’ main rival, Australia’s largest telco company Telstra, welcomed the news as a ‘commonsense decision’.
‘The previous government’s decision was made as a result of poor process and delivered little for regional Australia,’ Telstra’s national group managing director Geoff Booth said in a statement.
The Howard government had planned for the OPpel network to deliver affordable broadband access to 99 per cent of Australia’s population of 21 million by 2009.
Labour has vowed to supply 98 per cent of homes with high-speed Internet services within the next five years and is hoping to attract proposals from a number of companies, including Telstra and SingTel, for the FTTN network. — AFP
STEng & SPH – OCBC
Sticking with Singapore’s Stalwarts
Continued choppy markets. With the see-saw vacillation of the market expected over the next 1-3 quarters, as a result of the domino effect from the subprime fallout, there is a de-rating of the market due to slowing growth. The increased risk premium will mean investors are less willing to pay higher multiples for uncertain growth stories. Investors are shifting into defensive stocks with high dividends, high earnings visibility and cash flow stability.
STE has underlying stability. Singapore Technologies Engineering (STE) posted a good set of results as revenue crossed the S$5b (+12.6% YoY) mark for the first time, while bottomline grew 13% YoY to S$503.5m. STE also declared a final dividend of 14.88 cents, bringing total payout to 16.88 cents for FY07. STE has a strong order book of S$9.5b, of which S$3.5b will be recognised in 2008, thus providing a back bone for earnings. We think that the USD-SGD rate concern is overblown as management estimates »S$1.5m loss in PBT for every 1 US cent fall, insignificant in the light of >S$500m net profit.
SPH has insulated monopoly. Despite slowing down, the Singapore economy continues to do well with the Ministry of Trade and Industry reporting a growth of 5.4% in 4Q07. A poll of economists projected Singapore to grow around 5.6% in 2008 despite the US slow down. Although limited to the local market, we expect SPH to ride its advantageous monopolistic grip in Singapore to turn in consistent net profits. We expect SPH’s largely local operations to continue to be relatively insulated from the slowing economies in the west.
Attractive price entry. STE has historically returned all of its net profits to shareholders, while SPH has historically paid out all of its recurring earnings from its print business. At current prices, STE (S$3.41) and SPH (S$4.60) have an attractive dividend yield of about 5.5% and 5.7%, respectively. While the STI has lost about 13.6% (average 3.4% dividend yield) since the start of 2008, STE’s drop in share price was less drastic at 10.8% and SPH remained a stalwart with a 2% rise.
BUY into stability. We upgrade our call to BUY for STE as valuations now look attractive (fair value: S$3.92) and maintain our BUY call for SPH (fair value: S$4.87).