Author: tfwee
SingTel – BT
What lies behind SingTel’s latest music foray?
THE problem with chasing a runaway hit is that you will always be seen as playing catch-up. In this light, SingTel’s latest music foray will undoubtedly draw comparisons with Apple’s vastly popular iTunes store and be viewed as yet another wannabe giant-slayer.
However, if you look behind yesterday’s glitzy launch and the marketing rhetoric, it’s not difficult to discern SingTel’s true intent behind its new business venture.
For the near term, at least, the company’s new Amped music portal is less about uncovering a new revenue stream but more about cementing its longer term mobile dominance.
All three telcos saw a weakness in their local mobile earnings in the first quarter as consumers kept within their subscription bundles and avoided making long-distance calls.
M1 lost 11,000 mobile subscribers during the first quarter and the exodus pulled its market share down to 25.4 per cent. StarHub’s mobile revenue dipped 3.1 per cent to $264.7 million in the same period.
SingTel managed to eke out a 9.1 per cent gain in mobile revenue during the period because it managed to add 34,000 new customers and coax more of them to go for mobile data and higher-value bundles.
As it stands, Singapore’s mobile penetration rate is already at 133.2 per cent and this translates to 6.45 million cellular subscriptions in a country with a population of only 4.5 million.
Simply put, there simply isn’t much room left for telcos to grow their local subscriber count substantially in the coming years.
Against this backdrop, sustainability will rest upon getting current customers to use more services, or snagging all the new subscribers and defectors you can get your hands on.
SingTel’s online music foray seems squarely aimed at addressing the latter.
As a free service offered alongside selected mobile plans, it is clear that the new Amped service is not meant to be a revenue-generating platform. Add Universal Music into the mix and the revenue-sharing pact makes it even less attractive from a sales and margin perspective.
However, the prospect of free unlimited music downloads does give kids, teenagers and young adults who are accustomed to all things Internet an additional reason to ‘see red’. This user group represents the future of mobile consumption in Singapore and SingTel is clearly trying to start them early.
As with SingTel’s exclusive iPhone arrangement, the Amped service also gives consumers an additional reason to consider defecting under Singapore’s new number portability regime.
With voice being the lowest common denominator among the telcos, a free musical buffet could prove to be the thin line separating a customer gain from a loss.
For record labels such as Universal, striking such pacts with telcos also cuts them in on revenue they would have otherwise lost to piracy. The International Federation of the Phonographic Industry estimates that 95 per cent of online music downloads from the Internet last year were pirated.
Both SingTel and Universal could be seeding users for the future by getting them used to legal downloads now. If the piracy scourge is eventually reduced with stricter enforcement, it will undoubtedly drive more users to seek out legitimate alternatives, a win-win situation then for both the record label and the red camp.
In the game of business, one must think ahead to stay ahead. In this respect, Singapore’s once-lumbering telecommunications giant is now showing signs that it is becoming more nimble by the day.
SPH – CIMB
Risks have declined
• Shift to laggards. Equity markets have been rallying in recent months. As we are expecting a pullback in the near term given expectations of less-positive economic data from the US, we would advocate a return to defensives like SPH. Furthermore, SPH has been a laggard in the recent rally, underperforming the STI by 36% despite gaining 22% since Mar 09.
• Ad demand has bottomed. Our page count indicates that print advertising revenue bottomed out early this year. The page count for the latest Saturday edition was 218 pages, above Jan 09’s low of 169 pages. However, it will take time for SPH’s advertising revenue to recover to boom-time levels. Yoy, the Saturday edition page count was down by 68 pages to 200 in May 09. Even so, with sell-side analysts still adopting the previous recession for forecasting media revenue, we believe there could be upside if ad demand stays resilient.
• Recent rally reduces earnings risks. Concerns over buyers defaulting on Sky@eleven residential units should ease now that property prices have risen. The last transacted price for this project was above the launch price of S$975psf. Also, investment losses booked in 1H09 could turn into gains in 3Q09, given recent market rallies.
• Outperform. We have raised our FY09 earnings estimate by 5% to account for lower investment losses. Our sum-of-the-parts target price remains S$3.52.
SPH – DMG
Sky@eleven fears debunked
Twin DPS fears over Sky@eleven unfounded; Maintain BUY. The market has been worried over the possibility of default over the deferred payment scheme as well as dividend payout beyond Sky@eleven. We believe that such fears are unfounded. The condominium project is a bonus to SPH, and following the project’s TOP, investors will continue to enjoy good yields. Maintain BUY with a SOTP-based price target of S$3.40.
Deferred payment scheme (DPS) to hit this year’s payout? The market is speculating that SPH may hold back on paying out the earnings from Sky@eleven till the money comes in upon TOP, dragging payout ratio down to 70% (90% in FY08). In our view, that is unlikely and we expect payout to be at 90%. SPH has stated that it will pay out a “high percentage of recurring earnings” and not cashflow. It has the capability to do so, given its healthy balance sheet (net gearing of 12%) and low capex requirements. We believe that default risk is low for the project, and have gotten even lower with the revival of the property market. CDL’s The Arte, which is also located in the Thomson area, saw keen interest and units were sold at an average of S$1,000 psf (S$975 psf for Sky@eleven). Should buyers default, SPH actually stands to benefit as it has already collected the first 20% as down payment.
Dividend per share (DPS) beyond Sky@eleven to dive? Contributions from Sky@eleven account for 30-35% of dividends over the next two years. In FY11, there will no longer be any contributions coming through from property development when the project TOPs. We believe that Paragon, which has seen its rental space expand 6% to 700k sq ft after its recent renovation, will partially make up for the vacuum. We have assumed a 10% average rental growth to S$14.9 psf/month by 2011, which we believe to be a conservative figure given the successful remaking of Orchard Road. This will raise rental from Paragon by 17% from FY08. Coupled with its core newspaper business, SPH should be able to dish out at least S$320m in dividends (or S$0.20 per share) post Sky@eleven, and more during good years. At current share price, this works out to a palatable yield of 6.3%.
STEng – DB
Successes in military, new fees from Boeing a positive
Successes in military; about S$1.2bn unannounced orders won in 1Q09
STE has seen strong order inflows from its military business and we expect this strength to continue. Sensitive in nature, military orders by the Singapore Armed Forces are often not disclosed but the difference between FY08 and 1Q09 order books (considering 1Q09 recognized total) suggests new orders worth c. S$1.2bn were won in 1Q09, the bulk of which we think are liekly military related. Maintain Buy on what we see as attractive valuation.
Capable, well-regarded military products
STE manufactures products that are well regarded as indicated by the successful UK Bronco sales, continued orders for its 40mm ammunition, and the group previously being the front-runner for potential Indian howitzer order (now put on hold pending an investigation of a retired ordnance official by the Indian authorities). According to STE, its participation followed India’s processes.
Boeing’s new fees on unlicensed PTF players a positive
Effective on or after 15 April 2009, for operators of aircraft converted by non- Boeing licensed converters, a fee of US$150-250k/year/plane will be charged by Boeing. ST Aerospace, being a Boeing licensed partner, will fall under a special category with lower fees paid by operators. This move is positive in our view as it effectively raises the price of PTF work done by non-licensed players and may lead to future potential business flowing to licensed parties such as ST Aero.
Maintain Buy; record orders, net cash, high ROE/dividends; risks
STE is sitting on a record order book of about S$11bn (as at 1Q09), providing healthy long-term visibility. The group is in a net cash position which places it strongly for any potential M&A activities. Our DDM-based target price of S$3.00 is based on a 7.4% cost of equity, (2.6% RFR and 4.8% ERP). Downside risks relate to project execution, greater-than-expected US$ depreciation, and worse-than expected aircraft grounding.
SMRT – OCBC
Circle Line to provide new chapter of growth
Circle Line to boost ridership growth. After months of grueling trial runs and safety checks, the Circle Line Stage 3 (CCL3) was finally opened for passenger service on 28 May 2009. SMRT Corporation, the operator of CCL, is excited about the growth opportunities the new rail line will provide. According to management, this orbital line, which essentially links up the existing radial lines, is likely to lead to offer better connectivity, higher ridership for the group, and reduced travel time and fares for commuters. We are equally optimistic, as passengers are likely to see greater incentives to take rail transport, and may switch from bus to train for reliability and frequency reasons. We understand from Land Transport Authority (LTA) that it is expecting 55,000 people to use the five CCL3 stations each day. As more stations along the CCL are progressively opened in 2010, we expect significantly better ridership, and in turn better revenue for SMRT coming from enhanced accessibility and bus-rail integration initiatives by LTA.
Leveraging track record for local and overseas opportunities. Apart from the higher ridership growth that SMRT is expected to enjoy, the group also said that successful operation of the CCL would further build on its widely-proven track record and better position itself for opportunities both locally (e.g. bid for Downtown Line) and overseas. In fact, during our visit to SMRT’s Kim Chuan (CCL) Depot a month ago, management revealed that the depot has been strategically built to be able to house 70+10 trains – enough capacity for trains meant for the Downtown Line. Should the group win the bid to operate the new network, it has already in place plans for achieving synergies with its main lines. This, in our view, is a clear testimony of SMRT’s far-sighted goals and dedicated management team.
Reiterate BUY. We see SMRT as a stock offering good growth potential but it has to a certain extent been neglected as investors switch from defensive to higher-beta plays. Despite our seemingly over-optimistic view on the group, we note that our FY10-12F earnings are not aggressive (still 1-4% below consensus). With consistently generous dividend payouts of at least 60%, backed by strong operating cash flows, we keep our BUY rating and S$1.81 DDM-derived fair value on SMRT. Key risks to our valuation include lower-than-expected average fares resulting from fare-reduction package and potential adverse effects from H1N1 influenza outbreak.