Author: tfwee
TELCOs – CIMB
M1 and StarHub launch iPhone plans
iPhone pricing unveiled
Maintain Underweight on telco sector. Both M1 and StarHub announced they will be launching iPhones on 9 Dec. A quick scan shows that both have priced their phones below SingTel’s pricing. However, the telcos are rather rational by not straying too far from the incumbent’s pricing, thereby averting an all-out subsidy war, which had been our earlier concern. M1’s plans are a little more aggressive. We believe M1’s and StarHub’s margins will be depressed in 4Q09 and 1Q10 by the launch of the iPhones, which coincides with festivities. We remain UNDERWEIGHT on the sector given myriad risks and our house preference for cyclical sectors. Our top pick is still M1, rated a NEUTRAL with an unchanged DCF-based target price (WACC: 9.5%) of S$2.07, as we believe there is capital-management potential in 2010 and M1 has the greatest upside from NGNBN.
Comments
Fairly rational pricing. Both M1 and StarHub announced they will be launching iPhones on 9 Dec, well ahead of the peak sale period for Christmas. A scan of all three plans indicates that both StarHub and M1 have stayed fairly rational, which assuages our earlier concern that an all-out subsidy war could erupt. The handset pricing only varies by S$40 at the most, among the most comparable plans, with M1 being more aggressive, and very little differentiation in monthly subscription fees.
As an example, M1 offers the iPhone 3GS 32 GB for S$0-658 with a monthly commitment fee of S$36-198. StarHub offers the same phone at S$0-668 with a monthly commitment fee of S$38-205. SingTel is already offering the same device for S$0-S$678 with a monthly commitment fee of S$39-205.
M1 is the most aggressive, excluding its iPhone 3G 8 GB plan, offering the cheapest handset pricing and lowest monthly commitment fees. It is also the only operator to offer true unlimited plans providing unlimited voice/video calls, SMS/MMS and data surfing. M1 also offered the most data capacity until StarHub upped the ante 12 hours after StarHub’s initial launch by increasing the initial 1GB bundle to a 12 GB bundle
across three of their four plans.
We are not surprised by M1’s aggression as it has the smallest subscriber share and would want to make a bigger splash to lure more subscribers. During our recent nondeal roadshow with M1, we understand that about 10K of its existing subscribers are interested in migrating to the iPhone plans.
Limiting churns but hurting margins. While we see the iPhones as more of a defensive move by the two smaller rivals to cling on to subscribers, the iPhones should also help them acquire new customers and stimulate ARPU. However, the downside is that subscriber acquisition and retention costs (SARC) are set to rise and dent margins as marketing expenses rise in tandem.
We note that SingTel’s EBITDA margin fell 2.6% pts in 2QFY09 when it launched the original Phone 3G in Aug 08 and slipped 3.2% pts in Jul 09 when it introduced the iPhone 3GS. SARC rose to S$306 in 2QFY09 from S$256 in 1QFY09 following the launch of the iPhone 3G and to S$327 in 2QFY10 from S$304 in 1QFY10 when it launched its iPhone 3GS in Jul 09.
How will SingTel react? The thing to watch is counter-measures unveiled by SingTel. During its 2QFY10 conference call, SingTel said it would make both price and non-price responses such as offering more applications and improving its customer service quality to maintain its lead. Given still-fairly rational pricing, we do not expect SingTel to react aggressively when it launches a new iPhone plan this weekend.
Valuation and recommendation
Maintain UNDERWEIGHT with M1 as our top pick. While a subsidy war does not appear to be brewing, we retain our UNDERWEIGHT position on the sector in view of myriad other risks relating to competition and also our house preference for cyclical sectors. Among these risks are further ARPU erosion in broadband for SingTel and StarHub, higher content costs at SingTel, and risks of losing more compelling content at StarHub.
We maintain M1 as our top pick in the sector for its capital-management potential and upside from NGNBN. We rate it a NEUTRAL with an unchanged DCF-based (WACC: 9.5%) target price of S$2.07.
StarHub is our next preference, rated a NEUTRAL with an unchanged DCF-based target price of S$2.15 (WACC: 9.7%) as we like it for its attractive yields and strong free cash flow yields of 10-11%, offset by a lack of re-rating catalysts and a likely erosion in its residential broadband business.
Finally, SingTel is our least preferred stock due to expected weaker margins in Singapore and concerns over competition in India and Australia. We rate it an UNDERPERFORM with an unchanged sum-of-the-parts target price of S$3.30.
SMRT – DB
Ridership growth momentum to continue
Nov09 rail ridership figures continued to show a gradual pick up in rail ridership on a 3M rolling basis (+3.8% YoY). Bus ridership grew by 1.7% YoY in Oct09, a turnaround from -0.3% YoY in Sep09, -1.0% YoY in Aug09 and -1.2% YoY in Jul09.
Rail ridership is up 3.0% YoY vs our forecast of 3.5% YoY and bus ridership is down 0.4% YoY vs. our forecast of -0.5% YoY. To date, both rail and bus ridership is tracking in line with our expectations.
We believe that the overall ridership trend for the sector should continue to improve, helped by the recovery in the economy and the opening of two integrated resorts in the 1Q10. Our top pick for the sector is SMRT. Our TP of S$2.00 implies potential total return of 16%. SMRT also offers a defensive yield of 4.7%.
M1, StarHub – BT
iPhone to dock at StarHub, M1 tomorrow
SingTel to announce revised plans soon
IPHONE lovers will get to pick the Apple device from their ‘orchard’ of choice from tomorrow as the handset will finally be available from all three local mobile operators.
StarHub and MobileOne will launch the iPhone at their retails stores, along with four new mobile price plans.
Depending on the choice of iPhone, customers of the green camp will be able to get their hands on the device from $0 to $668. StarHub’s four monthly iPhone price plans range from $36 to $205.
They all offer 12 gigabytes (GB) of data for e-mail and Web surfing, except the top-tier offering that comes with an unlimited data bundle.
M1 subscribers can also pay nothing or $658 for the iPhone. It is trying to match StarHub by offering 10 GB of data for its basic $36 monthly plan – which is still 20 times what SingTel provides under its low-end iPhone plan.
When contacted, SingTel said that it would announce revised iPhone plans ‘within a few days’ in response to the heightened competition.
This is in line with market watchers’ predictions that the iPhone’s wider distribution could result in lower prices and sweeter subscription bundles.
SingTel was given first shot at selling the iPhone in 2008 and the exclusivity was extended to the latest model – the iPhone 3GS earlier this year.
StarHub and M1 clinched their iPhone deals last month, almost two years after they started talks with Apple.
StarHub – BT
Outgoing StarHub chief reveals his biggest regret
Network leasing deal with SingTel kept StarHub out of corporate broadband market
PUTTING pen to paper on a deal which led to a protracted lawsuit with its archrival and relegated StarHub to the sidelines of the lucrative corporate broadband market was the single biggest regret of StarHub’s outgoing chief Terry Clontz in his 10 years at the helm.
Singapore’s second-largest operator signed the network leasing agreement in question with Singapore Telecommunications in 2002 amid its merger with Singapore Cable Vision (SCV). This pact replaced a similar contract that SCV inked with SingTel back in 1995.
‘I was keen to get the (SCV) transaction completed after many months of negotiations, and in that haste, I unfortunately succumbed to the demands of our competitor (SingTel) to sign a network lease agreement that ultimately resulted in a time-consuming lawsuit,’ Mr Clontz told BT in an e-mail interview.
SingTel sued StarHub in 2003 for breaching the 1995 network lease deal as StarHub’s pay-TV unit had used its infrastructure to provide cable television services to 120 commercial and non-residential buildings.
What followed was a three-year legal tussle which eventually ended in SingTel’s favour as the courts ruled that the agreement was meant for serving residential customers only. The saga continued as SingTel appealed to recover damages and the matter was laid to rest only in 2007 after it reached an out-of-court settlement with StarHub.
‘What made it (the agreement) worse was that it contractually prevented StarHub from taking the benefits of a high-speed cable broadband network beyond the residential community,’ Mr Clontz said.
While StarHub could choose to lay its own cables to link up non-residential buildings, the prohibitive cost meant the firm largely stayed within its consumer boundaries in its first decade.
However, the operator will get a chance to banish old demons come end-2012 when Singapore’s new fibre-optic broadband highway – dubbed the Next-Gen NBN (National Broadband Network) – becomes fully operational.
StarHub currently has access to only 800 buildings within the central business district but this number will become 23,000 once the new network is up and running.
While Mr Clontz has set the wheels in motion for StarHub’s corporate push, the role of demon slayer will eventually be played by once-rival Neil Montefiore. The former chief of Mobile- One (M1) will take over the reins at StarHub from January after his predecessor retires and becomes a non-executive director with the telco.
‘I am not likely to take up another CEO role, as it would be difficult to find a position that I would enjoy as much as I have enjoyed working with the people in StarHub. But I may look for opportunities to use my international telecoms and media experience while spending more time with my family in the USA,’ Mr Clontz revealed.
‘I will not be active in the management of StarHub after Dec 31, 2009. Neil is more than capable to run StarHub without my help. In fact, I think it is important for any former CEO to step away completely and let the incoming CEO run the business as he or she sees fit.’
Although M1 and StarHub compete head to head on the mobile front, the two adversaries have increasingly been finding themselves on common ground in recent years.
For example, the duo joined hands last year to bid for the government tender for building the Next-Gen NBN. M1 is also leasing StarHub’s cable platform to offer its current residential broadband service.
However, the buck is likely to stop at such business tie-ups, and a much-speculated merger between the two is an unlikely outcome.
‘There was a time when I thought a StarHub-M1 merger made enormous sense for all the shareholders. That was when our combined market share was below 50 per cent, and before we each had built a 3G network,’ Mr Clontz said. ‘I think the difficulty now is that there would not be sufficient synergies in a merger to justify any transaction now.’
STEng – BT
ST Engg unit wins contract from major US airline
ST Aerospace, the aerospace arm of ST Engineering, has won a contract worth up to US$170 million to provide airframe maintenance services for a major US airline.
The deal includes a US$90 million contract to undertake C- checks and heavy maintenance visits (HMVs) on a fleet of Airbus A320 and Boeing 767 aircraft over three years, with an option to extend for two more years.
Including the option, the total contract value is about US$170 million.
The name of the client was not disclosed, at the request of the airline.
This is ST Aero’s second major contract from a US client in recent months.
In November, it clinched a multi-million-dollar deal to install a new onboard automatic fire-suppression system (FSS) in planes operated by global logistics giant FedEx Corp.
The work will be carried out at ST Aero’s facility in Mobile, Alabama, from the first quarter of 2010.
Commenting on the latest deal, ST Aero president Tay Kok Khiang said the contract affirms the company’s ability to bring value to airlines globally.
‘It extends our position as a preferred supplier of maintenance, repair and overhaul (MRO), and freighter conversion services to airlines large and small,’ he said.
ST Aerospace, which accounts for about half the income of its parent ST Engineering, is the world’s largest independent MRO operator, with a network with facilities in the Americas, Asia-Pacific and Europe.
With about 7,000 employees and technical specialists worldwide, it offers a spectrum of services that include airframe, engine and component maintenance, repair and overhaul; engineering design and technical services; and aviation materials and management services.
The latest contract brings the total value of new projects clinched by ST Aero this year to US$220 million.