Author: tfwee
M1 – DBS
Don’t expect much from NBN
• A saturated broadband market and the lack of a pay TV platform means that M1 has little chance of benefiting from the National Broadband Network
• M1 is trading at similar valuations to StarHub now, compared to 20-30% discount to StarHub before. M1’s FY09F yield is 8.2% versus StarHub’s 9.4%.
• M1 has reached our target price, downgrade to HOLD.
M1’s entry into broadband may be too late. By mid 2010, household broadband penetration would have crossed 110% (near 100% already) in Singapore. M1 does not have content expertise, unlike its competitors who have gained valuable experience from their pay TV business. In our view, content expertise is a must, as (i) attractive content will lure subscribers, and (ii) content ARPU will compensate for declining bandwidth ARPU, to a large extent. The IPTV business may not be an option for M1; there has not been a profitable IPTV business model in Singapore. Other players have compelling pay TV platforms already (though not very profitable), and M1 may not be able to compete with their bundled offerings. As a broadband retailer, through NBN, M1 could gain subscribers by offering the lowest price, which may further dent its profitability.
Valuations not compelling anymore. M1 is trading at 10.2x FY09F PER vs StarHub’s 10.4x, compared to 20-30% discount to StarHub before. And M1’s FY09F projected yield of 8.2% is lower than StarHub’s 9.4%.
Downgrade to HOLD. At our target price of S$1.60, including 8.2% dividend yield, there is limited upside for M1. Hence, we downgrade M1 to HOLD. Management has ruled out capital management in FY09, which removes a key rerating catalyst.
StarHub – BT
StarHub Q1 profit up 3% at $82.5m
But customers now paring mobile phone usage, opting for cheaper Net plans
STARHUB’S net income for the first quarter rose 3 per cent to $82.5 million on the back of a tax gain as well as higher revenue from its fixed network and pay-TV businesses.
However, the firm’s mobile and broadband services are starting to feel the pinch from the economic crunch with some customers already reining in their mobile phone usage and migrating to lower-end Internet plans.
‘Two to three years ago, this (result) would have been unsatisfactory. Today, we are glad that operations have been relatively stable,’ said StarHub chief executive Terry Clontz.
Diluted earnings per share for the period ended March 31 grew 3 per cent from last year to 4.8 cents, while Q1 operating revenue slid to $530.6 million, down marginally by 0.8 per cent from 2008.
Singapore’s second-largest operator has proposed an interim dividend of 4.5 cents per share, unchanged from last year. Despite the tough economic outlook, StarHub expects to keep its full-year cash payout at 18 cents or more.
The firm’s Q1 performance was partly helped by a tax gain of $0.8 million due to a reduction in Singapore’s corporate tax rate. Excluding this tax credit, the firm’s Q1 net income would have been 2 per cent higher at $81.7 million.
On the business front, StarHub’s fixed network business registered the biggest improvement in Q1 with revenue rising 9 per cent from last year to $79.1 million. This growth was largely due to a 13.4 per cent increase in sales from wholesaling bandwidth as well as providing connectivity services to corporate customers in some 800 buildings in the central business district.
When Singapore’s new fibre-optic broadband network becomes operational in 2013, StarHub has the opportunity to break SingTel’s ‘monopoly’ by extending its corporate reach into more office locations, Mr Clontz told reporters in a conference call yesterday.
Besides its fixed network segment, the company’s pay-TV business also registered an improvement in Q1, with revenue rising 5 per cent to $102 million.
StarHub added 3,000 new cable television customers during the quarter to bring its total pay-TV base to 527,000, or around 46.1 per cent of all local households.
However, sales from the operator’s mobile business, which accounts for nearly half its total sales, slid 3.1 per cent from last year to $264.7 million.
This was attributed to a reduction in post-paid subscriber revenue with some users cutting back their voice calls as well as IDD and cellular roaming usage amid the downturn.
The firm added 16,000 mobile customers to bring its total cellular subscriber base to nearly 1.82 million at the end of Q1.
Revenue from StarHub’s broadband business also fell in Q1, dropping 2.6 per cent to $62.4 million.
This is because more customers are opting for upfront subscription discounts instead of free gifts due to the ongoing recession.
In addition, there is also some migration towards lower-speed broadband plans during the quarter, explained StarHub’s chief operating officer Tan Tong Hai. At the end of Q1, the firm’s cash and cash equivalents stood at $244.7 million while borrowings totalled $924.4 million.
For the full-year, StarHub expects revenue from its telco and Internet services to come in at around $2.03 billion, unchanged from last year.
Ebita margin is forecasted to be roughly 32 per cent of this number, while capital expenditure will be less than 11 per cent of total operating revenue in 2009.
StarHub shares closed 2.1 per cent higher at $1.92 before it released its Q1 results.
STEng – CIMB
Valuations still above previous crisis
• Below expectations. 1Q09 profit of S$85.2m (-30% yoy) forms 19% of our FY09 estimate and 18% of consensus. The shortfall was mainly due to weaker-thanexpected performances from Aerospace and Electronics. Poor results provide further justification for our negative view.
• Aerospace dragged down by poor sales mix and one-off financial costs. Aerospace PBT of S$39.8m (-52% yoy) was 30% below our expectation mainly due to: 1) no MD11 freighter conversion redeliveries in 1Q09 which fetch better margins, 2) one-off financial costs of S$6.5m to unwind an interest-rate swap in the CERO business; and 3) no investment income from the EMS business. PBT margins shrank yoy and qoq to 8.7%. Management guided for comparable turnover but lower PBT for 1H09 vs. 1H08. We believe margins for Aerospace could remain weak due to a challenging aviation outlook and losses from PTF conversion projects in 1H09.
• Electronics: weaker-than-expected margins. While Electronics turnover of S$338m was above our expected S$293m, PBT was S$21.7m was below our expected S$26m due to higher operating expenses. PBT margin dropped from 8.2% in 1Q08 to 6.4% in 1Q09. However, we believe the division will catch up from 2Q09, with the help of stronger project milestone recognition for the LTA’s Circle Line, Taiwan MRT projects, communication products as well as software systems. This is in line with management’s earlier guidance of better PBT for FY09.
• Outlook for FY09. Management expects overall FY09 turnover and PBT to be comparable to FY08. Order book grew 4% qoq to S$11bn. Our earnings estimates are intact as we expect a pick-up in 2H09.
• Maintain Underperform and target price of S$2.38, still based on blended valuations. Current valuation of 16x CY10 P/E is still above previous crisis valuations of 13-14x. Widely perceived as a defensive stock, the stock has started to lag recently when the market surged. We believe that the poor results adds a new catalyst for further underperformance, especially since this is one of the most widely owned stock in institutional investor’s Singapore portfolio. We continue to see limited catalysts in the near term.
SingTel – BT
SingTel to hive off bulk of Internet assets by 2014
Telco could reap huge returns from divestment over next five years
Singapore Telecommunications has been given the deadline of April 2014 to divest more than 75 per cent of its local Internet assets – a move which could yield substantial returns for the operator over the next five years.
The telco is required to hive off its so-called passive broadband infrastructure such as underground ducts and manholes to a neutral party called the AssetCo (Asset Company) under OpenNet’s winning proposal for building the Republic’s new fibre-optic cyber highway.
OpenNet, in which SingTel has a 30 per cent stake, received the official nod from the Infocomm Development Authority of Singapore (IDA) for its construction plan earlier this week.
‘The AssetCo, as proposed by OpenNet in its NetCo Request-for-Proposal submission, will own and control the relevant underlying passive infrastructure assets that are used to support OpenNet’s deployment. These underlying assets, which include central offices, ducts and manholes, will be transferred from SingTel to AssetCo,’ IDA said in a statement.
By reusing SingTel’s existing investments, OpenNet promises to complete the job of wiring up Singapore two years ahead of IDA’s initial schedule. This time advantage was widely viewed as one of the key factors behind OpenNet’s victory over the Infinity Consortium, a group fronted by rival telcos StarHub and MobileOne.
Besides expediting deployment, the IDA said this arrangement will ensure there is ‘minimal disruption when civil works begin later this year’ as activities such as underground excavation will be cut down during network rollout.
Under the regulator’s new mandate to curb unfair competition by splitting up broadband infrastructure owners and service providers, SingTel will need to reduce its stake in the AssetCo to less than 25 per cent within 60 months from April 2009, IDA revealed.
According to industry estimates – which could not be confirmed – SingTel’s existing Internet assets could be worth nearly $2.8 billion. By divesting more than 75 per cent of these to the AssetCo, SingTel could stand to receive substantial compensation over the next half a decade. Industry sources estimated that this could easily amount to more than $1 billion.
With IDA’s new broadband regulations, players such as SingTel can no longer have complete ownership of broadband pipes and provide Internet services at the same time. Instead, they will need to lease bandwidth from an intermediary called the Operating Company (OpCo) if they wish to provide broadband services to consumers and businesses.
A new StarHub subsidiary called Nucleus Connect clinched the government tender to be Singapore’s first OpCo last month. This contract, which comes with a $250 million subsidy, was officially signed on Monday evening.
If SingTel decides against buying bandwidth from its rival, the firm has the option of setting up another OpCo as the StarHub deal is non-exclusive.
However, SingTel will not be entitled to any government funding if it proceeds with its own OpCo venture.
STEng – BT
ST Engg Q1 profit falls 30.4% to $85.2m
The company increases its order book to an all time high of $11.03b
SINGAPORE Technologies Engineering’s net profit for the first quarter ended March 31, 2009, fell 30.4 per cent to $85.2 million, from $122.5 million a year earlier.
The defence and aerospace group said sales were largely flat, rising just 0.2 per cent to $1.32 billion. Earnings per share fell to 2.84 cents, from 4.11 cents a year ago.
Chief executive officer Tan Pheng Hock said the company increased its order book to ‘an all time high’ of $11.03 billion, while maintaining operating cash flow of $351 million and held $1.38 billion in cash and cash equivalent at the end of the quarter.
‘Barring unforeseen circumstances, the group expects, based on the order book and schedule deliveries, to achieve comparable turnover and (profit before tax) for FY2009 against FY2008,’ Mr Tan said.
ST Engineering also disclosed it received ‘other’ income of $9.4 million from the Jobs Credit scheme.
Much of the fall in profitability came at the group’s key aerospace division, where profit before tax halved to $39.8 million, from $82.6 million in the first quarter last year.
The company said that this was due to the absence of freighter conversion re-deliveries, reduced sales, no investment income and higher financial expenses due to recognition of fair value of an interest rate swap following refinancing of a bank loan.
Profit before tax at its land systems division fell 20 per cent to $26.4 million on lower sales in the United States, while its marine and electronics arms recorded profit growth of 19 per cent and 8 per cent respectively.
For the first half of the year, aerospace is likely to see similar sales but lower profits, while electronics and marine could see more of both sales and profit, the company guided. Sales and profits for land systems are expected to be lower compared to H1 2008, ST Engineering said.
The company had total borrowings of $912.7 million at the end of the quarter, from $881.4 million at Dec 31. However, the amount repayable within a year halved to just under $250 million, from $586.7 million three months earlier.
ST Engineering also recorded as a current asset on its balance sheet that amounts due from ‘related corporations’ were almost $600 million, from $234 million three months earlier.
Included for the first time as part of changes in the financial reporting standards was a statement on other comprehensive income. The company said it booked total comprehensive income of $127.1 million for the quarter, up 70 per cent from $74.7 million a year ago. Much of the increase was due to $39.6 million gain from foreign currency translation, against a charge of $20.2 million in the year-ago period.
The counter gained six cents, or 2.3 per cent, to $2.63 yesterday on volume of 6.6 million units, matching the gain in the benchmark Straits Times Index.