Author: tfwee
M1 – DBS
Yield plus opportunities ahead
• Recovery in mobile business coupled with key cost saving initiatives, should drive single-digit growth.
• While M1 has surged 13% since our upgrade on 22 June, there is more upside potential given its aggressive
broadband plans as revealed by management.
• Our target price is raised to S$1.95, still pegged at a 10% discount to StarHub’s target PER of 13x. BUY for 8% yield, potential upside of 15% and 10%-20% capital management yield in FY10F.
Recovery in mobile ARPU coupled with cost saving initiatives. With pick up in the Singapore economy, we expect mobile ARPU and subscriber growth to recover before the broadband and pay TV segments. This was evident in 2Q09 results of both M1 and StarHub. We understand that negotiation of lower network maintenance fee and continued offshoring of call centre operations should lead to cost savings of about S$10m each year. Another S$10-15m cost savings should accrue as more traffic shifts from leased-lines to M1’s
own backhaul network in FY10F. As such, our forecast of 6% yoy growth in FY10F earnings may prove conservative.
M1 keen to defend mobile market share before attacking broadband market. M1 management disclosed its aim to achieve over 20% broadband market share by 2015, through the National Broadband Network (NBN) opportunity, translating into top line growth of about15-20%. However, we would wait to include any numbers from broadband until we see the execution plan. Meanwhile, M1 is committed to defend its mobile market share (25.4% currently) with initiatives such as “Take 3” plan targeting high-end customers.
Buy with revised TP of S$1.95. Our target price is pegged at 12x FY09F PER (11x earlier) still pegged at a 10% discount to StarHub’s target PER of 13x. Unlike its peers, M1 is not affected by falling broadband price and rising content costs.
StarHub – BT
StarHub lifts Q2 earnings 21% to $77m
THE ceasefire following last year’s all-out marketing war, coupled with higher sales from its mobile and fixed network businesses, helped lift StarHub’s second-quarter net income 21.1 per cent to $77.8 million.
Earnings per share for the three months ended June 30 rose to 4.55 cents, from 3.76 cents in Q2 2008, while operating revenue grew a marginal 0.2 per cent to $532.4 million.
Singapore’s second-largest operator has proposed an interim dividend of 4.5 cents per share, unchanged from Q1. It will need to top up another 9 cents or more to fulfil its commitment of paying at least 18 cents in dividends this year.
StarHub’s four businesses registered mixed fortunes in Q2, although they attracted more customers across the board.
‘We’re certainly not out of the woods yet when it comes to the impact from the economy,’ said StarHub CEO Terry Clontz.
The company’s mobile sales – which account for half its revenue – grew one percentage point to $271.9 million in the second quarter. While the operator continues to grow its pre-paid revenue, sales from its post-paid subscribers slid nearly 2 per cent during the quarter to $207.6 million.
Mirroring the trend in Q1, StarHub said some of its mobile customers are reining in their voice, roaming and IDD usage during the downturn.
The company added 34,000 new mobile users in Q2 to take its total subscriber tally to 1.85 million.
As with the previous quarter, StarHub’s fixed network business registered the biggest improvement during the April-June period. Sales from this unit rose 7.3 per cent from last year to $80 million.
However, revenue from StarHub’s broadband and pay-TV businesses both fell. Sales from StarHub’s broadband unit slid 3.2 per cent to $60.3 million in the second quarter with more customers going for cheaper broadband plans and subscription discounts instead of free gifts.
The operator’s pay-TV sales slipped 1.5 per cent in Q2 to $100.5 million. A lower take-up of its sports and premium channels, as well as higher subscription discounts, was cited as some of the reasons for the decline. However, it added 3,000 new customers during the period to lift its cable TV subscriber base to 530,000.
A star attraction in StarHub’s cable programming line-up – the Barclays Premier League (BPL) – is set to go under the hammer later this year and the company is confident that it can score another victory.
‘We understand that it (BPL) is a significant value driver for our business. We should be able to retain the rights,’ Mr Clontz said in a conference call yesterday evening. ‘If we don’t, I may have to opt for an early retirement,’ he quipped.
The StarHub CEO of 10 years officially announced his retirement last month. From next January, former M1 chief Neil Montefiore will become the operator’s new chief.
For the first half of this year, StarHub’s net profit rose 11 per cent to $160.3 million, while operating revenue slid 0.3 per cent to $1.06 billion. StarHub shares yesterday closed unchanged at $2.25 before its earnings were released.
STEng – CIMB
Unexciting quarter
• Below expectations. 2Q09 net profit of S$109m (-9% yoy) was 10% below our expectation and 14% below consensus. The shortfall was mainly due to lower-thanexpected interest and investment income. 1H09 net profit of S$194m forms 43% of our FY09 forecast and 42% of consensus. STE announced an interim dividend of 3 Scts, the same as in 1H08.
• Aerospace rebounded from 1Q09 but margins remained weak. 2Q09 PBT of S$61m (-18% yoy) rebounded from S$40m in 1Q09, thanks to the lack of one-off financial costs on interest-rate swaps and better efficiency in PTF conversion programmes. 2Q09 PBT margins shrank 3% pts yoy to 12%, due to: 1) a weak US$; 2) lower investment income; and 3) an unfavourable sales mix with lower component sales. Management guides for a better 2H09 as the B757 PTF programme for FedEx is expected to turn profitable by end-2009 with another seven aircraft for delivery.
• Flat FY09; order book unexciting. Management expects higher PBT for Aerospace and Electronics in 2H09, offset by weaker Marine and a flat performance from Land Systems. Overall turnover and PBT for FY09 are expected to remain flat yoy. Order book slipped by 3% qoq to S$10.7bn in 2Q09. YTD announced contracts were lower at S$465m (S$680m in 1H08). Competition for contracts in the aviation industry remains stiff due to the economic downturn and aircraft capacity cuts. While we believe an improving macro environment could ease the pressure in the aviation sector, we believe it could take another 12 months before orders pick up.
• Lower net cash. Net cash dropped to S$198m in 2Q09 from S$482m in 1Q09. We believe the recent US$500m raised from a 10-year bond could be used to fund working capital needs and M&As. We see a re-rating of the stock only if earningsaccretive acquisitions are made. There have been no major M&As since the acquisition of BR Lee in the US in 2006.
• Maintain Underperform and target price of S$2.38, still based on blended valuations. As management has guided for a stronger 2H09, we have kept our earnings estimates intact. Valuation of 16x CY10 P/E looks rich against its generally flat outlook and uncertainties in the aviation industry.
STEng – DBS
Improved showing in 2Q09
• 2Q09 net profit of S$109m (down 9% y-o-y, up 28% q-o-q) in line with estimates
• 2H09 should be better, on the back of increasing contribution from B757 PTF redeliveries for Fedex
• Interim dividend of 3Scts declared, FY09 yield of 5.4% looks secure, barring significant M&A
• Maintain HOLD, TP revised up slightly to S$2.60
Sequential revenue growth across all segments. Topline grew 7% q-o-q and 8% y-o-y to S$1,409m – with the Electronics and Marine segments continuing to outperform. Group PBT, while weaker 8% y-o-y, was up 25% sequentially as well. Profitability wise, Aerospace was the star performer as margin recovered from 8.7% in 1Q09 to 12.2%in 2Q09. There could be further upside in 2H09, given that the PTF programme has turned around and will be increasingly accretive, with 7 more deliveries scheduled for the rest of the year. Land Systems PBT slipped 35% q-o-q, as weapons exports slowed.
Orderbook slips slightly to S$10.7b. YTD, STE has announced S$463m of new orders, compared to S$2.67bn new orders in FY08. While there is no near term pressure on revenues – as STE is poised to recognise about S$2.1bn of its existing orderbook in 2H09 – we believe long-term growth can be only be fuelled by M&A or investing in new capacity.
Defensive, at best. Despite a US$500m bond offering, concrete forward-looking steps are yet to be visualised. So, while earnings look secure – with management guiding for comparable revenue and PBT in FY09 vis-à-vis FY08, re-rating possibilities at 18x FY09 P/E are limited by concerns over growth. Maintain HOLD, in light of the 5.4% dividend yield – TP revised up to S$2.60 in line with
a slight revision in EPS numbers.
STEng – OCBC
Improving sequentially
Improved quarter. Singapore Technologies Engineering’s (STE) 2Q09 topline grew to S$1.41b (+8% YoY, +7% QoQ) while PATMI was S$108.7m (-9% YoY, +28% QoQ). Sequentially, STE’s improved performance came from all its businesses except for Land Systems (lower forex gains, lower gross margin due to product mix). STE continues to iterate its guidance for a “comparable” turnover and PBT for this year. STE declared interim dividends of 3 S cents.
Aero division to perform in 2H09. One MD-11 PTF and four B757 Passenger-to-Freighter (PTF) were converted this quarter giving a positive QoQ uptick in the Aero Division’s performance. Management indicated that the 757 PTF program will now be completely accretive (vs loss making learning phase in last few quarters) and will be delivering another seven conversions in 2H09. STE is confident that its geographical spread, diversified business segments and broad customer base will help sustain its topline. New programs that have been initiated a few years back (PTF and CFM engine) will be coming online to provide volume and a stable base load.
Encouraging orderbook. STE maintained its orderbook at S$10.7b where it recognised about S$800m in its 2Q revenue while replenishing about S$500m of the orderbook through small contracts. S$2.06b will be delivered over the next two quarters. STE’s geographic and business diversification showed with contracts secured by all its divisions for work in various countries. China’s infrastructure spending will help to directly boost performance from its speciality vehicle business in the mainland.
2H09 must perform. While making marginal upward progress, STE’s share price continues to trade in a tight range without large contract wins that typically served as share price catalysts. The first tranche of US$500m raised through its Medium Term Note program has not been slated for specific use despite market expectations of M&As. Should an acquisition occur, we feel it would not be significantly earnings accretive companies but smaller “bolt-on” companies to contribute technology platforms or distribution networks to the group. We are retaining our estimates and fair value of S$2.46 based on a blended 16x FY09/10F EPS. With limited share price upside along with a challenging 2H09 to navigate, we are maintaining our HOLD rating.