Author: tfwee
Telecom – OCBC
Likely muted World Cup demand
Likely muted World Cup demand. The month-long 2010 World Cup campaign kicked off in South Africa last Friday. As a recap, both SingTel and StarHub have managed to secure the broadcast rights for all 64 matches of the month-long 2010 World Cup event in South Africa; this was done via two separate non-exclusive contracts after their earlier joint bids were repeatedly rejected by FIFA. However, various media reports suggest that the take-up rate for the subscription packages could be muted. For example, a quick poll done by The StraitsTimes just a day before the kick off found that only 37 among the 625 HDB households (6% take-up rate) it surveyed had signed up for the package – the high pricing of the packages was given as one of the stumbling blocks.
Pricing may be the sticking point for home viewers. As mentioned previously in our May report, we believed that the higher pricing of S$88 before GST (nearly 4x more expensive than the 2006 World Cup) would be a sticking point for home viewers. According to data compiled by Bloomberg, the charges make Singapore one of the most expensive places to watch the World Cup. We noted that the packages were also higher than our back-of-the-envelope calculation of around S$40.Conversely, a dip in the take-up from home viewers could see better response from the business segment, as F&B establishments use the "live" telecasts to attract viewers who are not subscribing for the event. Assuming that the telcos paid a total of S$20m for the rights and that the average subscription price is S$70/subscriber, the telcos would probably need to sell 280k packages to break even (before advertising revenue).
WC costs felt in 2Q and 3Q. In any case, we expect to see higher content costs being booked in the second and third quarters, leading to slightly depressed margins for both SingTel and StarHub. However, if the take-up rate comes in worst than expected, we note that there is a risk of seeing further margin compression. On the other hand, we see M1 Ltd emerging as a better bet (at least in the near term) as it is not going to face this risk of a World Cup disappointment in the coming two quarters. That said, we continue to like the telcos for their defensive earnings and high dividend yields, especially in the increasingly volatile market. Maintain OVERWEIGHT.
SMRT – SGX
DISPOSAL OF 50% SHAREHOLDING INTEREST IN TRANSIT LINK PTE LTD
SMRT Corporation Ltd (“SMRT”) wishes to announce that its wholly-owned subsidiary, SMRT Trains Ltd, has today completed the disposal of its 50% shareholding interest in the issued and paid-up share capital of Transit Link Pte Ltd (“Transit Link”) to the Land Transport Authority (“LTA”) for a cash consideration based on 50% of the audited net asset value of Transit Link as at 31 March 2010 (“Audited NAV”), being the amount of $1,731,446. The Audited NAV of Transit Link is in the amount of $3,462,892. Transit Link will thus cease to be an associated company of SMRT.
Transit Link is a Transit Acquirer for the public transport fare collection system. As the LTA has been assigned to take on the role of Transit Acquirer by the Minister for Transport, it has been mutually agreed that the sale of Transit Link to the LTA would serve the interests of all parties involved.
The above disposal is not expected to have any material impact on the net tangible assets per share and earnings per share of SMRT for the year ending 31 March 2011.
None of the Directors of SMRT has an interest, direct or indirect, in the above transaction. As far as the Directors are aware, no controlling shareholder of SMRT has an interest, direct or indirect, in the above transaction.
M1 – BT
M1 Limited posted a 6 per cent year-on-year decline in net profit for Q1 2010, from $41.9 million to $39.3 million.
Excluding the tax adjustment that had boosted Q1 2009's bottom line, M1's net profit for Q1 2010 saw an increase of about 8 per cent.
Revenue for the quarter increased 33.6 per cent from $186.4 million to $249 million.
Earnings per share for the quarter fell 6.4 per cent to 4.4 cents.
Starhub – SGX
Telecommunications ‐ StarHub's (STH SP) long‐term shareholder MediaCorp has distributed its remaining 128m shares in StarHub to Temasek Holdings as payment in lieu of a cash interim dividend for the financial year ended March 31, 2010. With the distribution of the dividend in specie, which represents around 7.5% of StarHub's issued share capital, the broadcaster is no longer a StarHub shareholder.
Temasek Holdings has in turn sold the new StarHub shares to Aranda Investments, a wholly‐owned subsidiary of Temasek Capital unit Seletar Investments, at $2.29 apiece.
SingTel – CIMB
3QFY10 results preview
A stronger quarter
Bolstered by Telkomsel and A$; but maintain Underperform. We do not expect any surprises from SingTel’s 3QFY10 results, which are scheduled for release on 9 Feb. Core net profit should grow 1-4% qoq on higher contributions from Telkomsel and a stronger A$, despite seasonally higher subscriber acquisition costs (SAC) in Singapore and Australia, and weaker contributions from Bharti due to stiff competition in India. Core net profit should be 14-18% higher yoy because of a low base a year ago as regional currencies plunged. We maintain UNDERPERFORM on SingTel, with an intact sum-of-the-parts target price of S$3.30. We see de-rating catalysts from stiff competition and a likely heated auction for 3G spectrum in India, high content costs in Singapore and potentially rising competition in Australia.
The details
We expect SingTel’s 3QFY10 core net profit to be S$960m-990m, up 1-4% qoq and 14-18% yoy due to higher contributions from Telkomsel and a stronger A$. This is consistent with consensus expectations of S$970m. The qoq strength would defy seasonally higher subscriber acquisition costs in Singapore and Australia, and weaker contributions from Bharti. The strong yoy growth would reflect a low base due to a plunge in the A$ and rupiah. Results are scheduled for release on 9 Feb.
Seasonally higher SACs. We expect SingTel Singapore and Optus’s EBITDA margins to remain depressed by higher SACs from year-end festivities. M1’s 4Q09 EBITDA margins shed 3% pts qoq respectively. SingTel’s 2QFY10 margins were weighed down by subsidies for the iPhone 3GS. SingTel Singapore and Optus should contribute an estimated 29% and 22% respectively to group FY10 PBT.
Further weakness from Bharti; Telkomsel to improve. The performance of India’s largest cellco, which contributes about 20% to group PBT, was weighed down again by tough competition. Core net profit plunged 14% qoq and 13% yoy and will drag down SingTel’s overall results. The impact would be partially blunted by SingTel’s higher stake in Bharti during the quarter from 30.4% to 32%. However, we anticipate a stronger performance from Telkomsel on the back of easing competition in Indonesia and higher effective tariffs.
Currencies in SingTel’s favour. Regional currencies continued their march north, favouring SingTel. The A$ and rupiah strengthened 5% qoq and 2% respectively against the S$, while the Indian rupee weakened 2% during the quarter.
Issues to watch out for. During its results conference call, we will look forward to greater clarity on the impact of the cost of broadcasting the Barclays Premier League exclusively on SingTel, plans (if any) to launch its own OpCo under the Next Generation National Broadband Network (NGNBN), and its rumoured plans to list Optus. We will also be watching for further signs of competition in the residential and commercial broadband/data space ahead of the launch of NGNBN in Singapore.
Valuation and recommendation
We reiterate our UNDERPERFORM rating on SingTel, with an unchanged sum-of-theparts target price of S$3.30. We see de-rating catalysts from intense competition in India, higher content costs in Singapore and a likely escalation in competition in Australia. The delay in India’s 3G auction process from February to August-September is a short-term relief but remains an issue.