Author: tfwee
SingTel – CIMB
Regional boost expected in 4Q09 results
Further recovery expected in 4QFY09
SingTel is scheduled to announce its 4QFY09 results on 14 May 09. We expect its core net profit to decline 13-14% yoy to S$3.35bn-3.38bn, a little ahead of our existing forecast of S$3.32bn. We estimate a core net profit of S$850m-880m, up 1-5% qoq but down 9-12% yoy, for 4QFY09. This should take SingTel on a path of earnings recovery since results bottomed out in 2QFY09. Key characteristics are expected to be:
Economic weakness to be felt in Singapore. We expect SingTel Singapore’s revenue and PBT to be flat qoq, with weaknesses from mobile roaming and small/medium enterprises offset by robust wired and wireless broadband take-up. SingTel is likely to have gained mobile revenue market share from MobileOne, whose revenue fell 4% qoq.
Seasonal weakness in Australia. Optus’s revenue should decline 2-3% qoq, consistent with previous seasonal weakness. However, margins should improve as the impact of iPhone subsidies should have been largely felt in the previous two quarters.
Bharti may weaken, but Telkomsel should strengthen further. We expect Bharti’s profitability to come under pressure during the quarter. Reliance ratcheted up the competitive heat in India with the aggressive launch of its GSM network nationwide in Jan 09. Reliance threw in free minutes although call rates have remained on par with its competitors’.
However, the reverse is happening in Indonesia where competition is easing for Telkomsel, indicated by industry tariffs creeping back up. Average on-network and offnetwork rates rose 9% and 3% respectively between Nov 08 and Mar 09. All in, we expect Telkomsel’s core net profit to improve qoq.
Stronger regional currencies. A key momentum behind SingTel’s stronger core net profit qoq is the stronger currencies of its associates. Figure 2 shows the relevant currencies for SingTel gaining by 1-5% qoq. This was a small reversal from the sharp declines in 3QFY09.
6.9ct final dividend. We expect SingTel to maintain its absolute payouts by raising its payout ratio from 50% in FY08 to about 60% in FY09. We expect a final DPS of 6.9cts to bring the total to 12.5 cts for the year. Although FY09 core net profit is expected to be lower than FY08’s, we expect SingTel to retain its absolute DPS of 12.5cts.
Mirroring 1HFY08, SingTel paid out 5.6cts/share in 1HFY09, suggesting that payouts would be maintained. Optus’s failure to clinch the Australian NBN mandate has relieved the group of any substantial increase in capex. Our DPS estimates are backed by SingTel’s free cash flow/share of 15.4cts, 16.4cts and 19.1cts estimated for FY09-11.
Valuation and recommendation
Maintain OUTPERFORM and sum-of-the-parts target price of S$3.05. Key rerating catalysts could include qoq improvements in core net profits at its key units, strengthening regional currencies and further signs of an easing price war in India. SingTel is our top telco pick in Singapore for its exposure to high-growth telcos followed by M1 for its attractive dividend yields.
M1 – CIMB
Highlights from roadshow
Roadshow in Singapore
We hosted a non-deal roadshow for M1 on 17 Apr following the release of its 1Q09 results on 16 Apr. M1 was represented by Ms Karen Kooi (CEO), Mr P Subramaniam (Chief Marketing Officer), Mr Lee Kok Chew (Director of Business Development) and Mr Ivan Lim (GM of Business Development and Investor Relations). We scheduled group and one-on-one meetings with eight investors. Key discussion points were its poor 1Q09 revenue, the outlook for 2009, NGNBN and capital-management initiatives.
Mobile experience is not representative of 2009
Poor 1Q does not signify a trend. M1 was at pains to highlight that 1Q09 revenue softness was not representative of the trend for 2009. To recap, revenue fell 9% yoy and 4% qoq on a combination of a slowing economy (lower roaming and IDD) and a loss of postpaid subscribers (to bundles and exclusive handset deals). It will be making a concerted effort to boost the topline through stimulating higher sign-ups of higher-bill plans (Take 3 is a good example), increasing take-up and boosting its prepaid business.
Defending market share. While M1’s focus has always been on profitability and not market share, it did concede that it would be prepared to defend its subscriber base more vigorously as it does not wish to see further erosion with the subscriber base approaching its internal threshold. Note that M1’s total market share has hit an estimated 25.4% or a loss of 1.1% pts yoy, the lowest in four years.
Boost to topline but margins would potentially be driven down. M1 signalled that it would be more aggressive on subscriber acquisitions and retention (SARC) in an effort to stem the erosion in its market share. It will be targeting more market segments (youth, young professionals, higher-end/corporate customers) while offering more services in 2Q-3Q. However, boosting revenue would come at the expense of margins as more aggressive handset subsidies are thrown in. It noted that SARC costs are at uncomfortably low levels currently and would trend upwards in subsequent quarters. It would be managing cost lines closely to stabilise the bottom line although we see very little room for costs to be cut further.
Take 3 take-up quite strong. Take-up for this programme has been quite strong with 20% of its sign-ups opting for the programme. The key attraction is giving customers the option of exchanging their handsets after nine months of sign-up or to those who have completed at least 20 months of their 24-month handset contracts. Take 3 aims to attract mid-to-higher-end customers who wish to upgrade their phones before their contract periods expire. It is also hoped that this programme would lift M1’s postpaid ARPU (-8% yoy, -4% qoq in 1Q09), which has been sliding. Customers who opt to keep their handsets would have to pay a fee.
Well-placed for NGNBN
Well-placed and prime beneficiary. M1 is well-placed to be a retail service provider (RSP) as it does not have an existing fixed broadband business to cannibalise and is excited at this prospect. Incremental costs for setting up as an RSP are minimal except for international bandwidth although that is not a major cost item. M1 can leverage its relationships with sister companies while it already purchases international bandwidth for its wireless broadband business. Unlike other RSPs, it also has its own billing and customer service systems in place. In fact, the main cost for M1 would be regulated wholesale pricing, which is very low and attractive.
Wholesale pricing to fall. M1 believes that broadband pricing will cascade downwards given the relatively low wholesale pricing. The bulge bracket will progressively move from lower to higher speeds and subscription fees should fall i.e. pricing per megabyte will fall.
Setting up OpCo. Once M1 reaches a critical mass of subscribers (20% of market share), M1 may set up its own OpCo to enjoy greater flexibility in managing bandwidth and resources. It likens the experience to its current backhaul build-out where data traffic has surged and building its own backhaul would help it save on leased circuit costs. It is confident of capturing a 20-25% market share in the fixed broadband space over the medium term although no timeframe has been provided. Note, however, that this is more of a secondary and longer-term objective.
Competing OpCo? Although not an official view, M1 believes that SingTel could set up its own OpCo as it has a critical mass of subscribers to tap on. Our conversations with industry executives suggest that SingTel would likely roll out its own OpCo where it could use some existing equipment.
Thoughts on NetCo and OpCo. For NetCo, M1 considers SingTel’s win as a win-win proposition for all. On its part, M1 will gain open access while SingTel will be able to monetise and protect what would have been a stranded asset had Infinity won. That said, returns on NetCo for SingTel are not very exciting and M1 pointed to the worldwide infrastructure projects as a gauge, which typically fetch returns of below 10%.
For OpCo, it views the margins there as extremely thin as they are sensitive to the subscriber base. OpCo is more of a strategic win for StarHub. Either way, M1 is satisfied with the outcome. Had it won, M1 would have secured returns at wholesale levels with an exclusivity period as it commands less than 25% of the market.
Other comments
No capital-management initiatives in the near term. Despite a low gearing of 0.6x net debt/EBITDA in 1Q09 (below its 1.0-1.5x target and rivals’ 1.2-1.3x), M1 will not be returning additional cash this year. It believes that it would be more prudent to keep cash on the balance sheet given the current economic climate and tight credit conditions. It will only consider further capital-management initiatives once the economy stabilises or shows no signs of further downward pressure.
Valuation and recommendation
Maintain OUTPERFORM, earnings forecasts and target price. M1 is a prime beneficiary of NGNBN, we believe, as NGNBN can help to produce a new revenue stream for the telco. For exposure to yields in the Singapore telco sector, we would advocate M1 over StarHub. StarHub faces the prospect of an intense bidding war with SingTel over football content rights and compression in its broadband business. If SingTel launches its own OpCo, this would further challenge StarHub’s OpCo. For those looking for growth, we prefer SingTel.
Our OUTPERFORM rating and DCF-based (WACC: 8.3%) target price of S$2.13 for M1 have been maintained on possible re-rating catalysts from: 1) a reversal of marketshare loss; 2) qoq improvements in earnings; 3) strong dividends; and 4) the favourable outcome from OpCo.
M1 – BT
Yet another lady at the helm of a telco
M1 promotes its own chief financial officer Karen Kooi to be its new CEO
MobileOne’s exhaustive search for a new leader eventually ended in its own backyard with the operator promoting veteran chief financial officer Karen Kooi as its new CEO.
Ms Kooi, who has been M1’s interim boss since the departure of former chief executive Neil Montefiore in February, will take on the role permanently and concurrently become a director of the company from today.
She will relinquish her CFO position and a replacement will be announced at a later date, M1 said in a statement yesterday.
Her appointment comes after a two-month manhunt, with M1 roping in recruitment agencies to help shortlist candidates locally and abroad.
‘Karen has very strong leadership credentials and financial experience, along with significant expertise in the telecommunications industry. She has been an outstanding CFO for the company, and was intimately involved in several strategic decisions for the company,’ said M1 chairman Teo Soon Hoe.
Ms Kooi, a Fellow Chartered Certified Accountant with an MBA in Investment and Finance from Britain’s Hull University, joined M1 as its CFO in 1995 after stints with other listed companies such as Singapore Press Holdings and City Developments.
Her promotion mirrors the move from rival Singapore Telecommunications when it appointed then CFO Chua Sock Koong to succeed Lee Hsien Yang as chief executive in 2006.
‘This is not surprising. It’s identical to what SingTel did more than a year ago,’ said DBS Vickers analyst Sachin Mittal.
The appointment of a company veteran could mean M1 is favouring ‘continuity’ over the need to hire externally for a ‘fresh perspective’, he said, adding that Ms Kooi has a ‘tough job’ in store as the new M1 chief.
Besides staring at Singapore’s worst recession in history, the smallest of Singapore’s three operators continues to fall prey to mobile number portability.
According to M1’s first-quarter results, it lost 11,000 mobile subscribers in the first three months of this year. Its cellular market share slid to 25.4 per cent from 26.5 per cent in 2008, with StarHub and SingTel chalking up bigger gains now that consumers can carry over their phone numbers.
Ms Kooi will also have to engineer M1’s foray into unchartered territories such as broadband and even pay-TV businesses over the coming years. The company is now leasing StarHub’s cable platform to offer fixed-line Internet access but it plans to strike out on its own once Singapore’s new fibre-optic network is fully-operational in 2013.
Ms Kooi has previously said she is using the StarHub arrangement as a dipstick for her firm’s future broadband foray and that M1 could even launch a television-related service in the near future.
TELCOs – OCBC
1QCY09 results likely steady
Likely steady results from SingTel and StarHub. Based on the relatively steady results from MobileOne (M1) last week, we are also looking forward to similar showing from SingTel and StarHub when these companies report quarterly results over the next few weeks. As a recap, M1’s 1Q09 results were mostly within expectations; topline slipped 8.6% YoY and 4.3% QoQ to S$186.4m, but net profit jumped 10.4% YoY and 14.5% QoQ to S$41.9m, albeit due to one-off accounting adjustment for the 1%-point corporate tax rate reduction; EBITDA service margin was steady at 44.6%, despite suffering a near-12k drop in subscribers.
Associates – main concern for SingTel. On 14 May 2009, SingTel will announce its 4Q09 results. We expect revenue to show a modest QoQ decline (<5%) as we expect the economic slowdown to exert a slight toil on its business; the weaker AUD is also expected to negatively impact its consolidated revenue. But the biggest concern will still be its regional mobile associates – SingTel had earlier guided for lower overall pre-tax contributions. As such, we are looking for a slightly larger fall (<10% QoQ) in 4Q09 earnings, buffered by the inclusion of contributions from recentlyacquired Singapore Computer Systems (SCS).
OpCo – medium-term positive for StarHub. On 7 May 2009, StarHub will announce its 1Q09 results – we are pencilling in a modest QoQ (<5%) drop in both revenue and earnings due to the impact of the economic slowdown. And we do not expect any changes to its stated S$0.045/quarter dividend policy, despite StarHub landing the OpCo bid for the NBN; based on our estimates, its strong operating cashflow should be sufficient to fund most of its higher capex requirements (likely to kick in from next year onwards). In any case, we see the OpCo win as a medium-term positive for StarHub and have adjusted our numbers recently.
Keeping sector as Overweight. Despite the recent rally in the overall market, where there has been a shift towards higher beta stocks in the belief that the worst of economic/financial crisis is behind us, we are not convinced that there will be a rapid recovery. We believe that investors should continue to hold on to some defensive stocks such as telcos for their less vulnerable earnings and stable dividend payouts as a means of portfolio diversification. As such, we maintain our OVERWEIGHT rating on the sector.
M1 – Phillip
1Q FY2009 results
1Q FY2009 results. For 1Q FY2009, M1 reported operating revenue of S$186.4m (-8.6% yoy), profit before tax of S$44.1m (-5.8% yoy) and net profit of S$41.9m (+10.3% yoy).
There are four main revenue segments: telecommunication services, international call services, fixed network services and handset sales. Telecommunication services registered 8.4% ecrease in revenue to S$140.3m. Postpaid revenue fell by 9.9% to S$122.6m while prepaid revenue ncreased by 3.5% to S$17.7m. Moreover, international call services posted 5.0% drop to S$32.0m while handset sales fell by 18.7% to S$13.9m. Fixed network services was a new segment that contributed revenue of S$0.3m.
Operating expenses also decreased to S$141.3m (-9.0% yoy) due to lower handset costs and staff costs. M1 benefitted from the Jobs Credit Scheme, paid lower bonus and hired fewer staff.
Despite the drop in revenue, net profit increased mainly due to the 75.0% decrease in provision for taxation from S$8.8m in 1Q FY2008 to S$2.2m in 1Q FY2009. This was a result of the reduction in corporate tax rate from 18% to 17%.
Profit margin. Net profit margin increased from 18.8% in 4Q FY2008 to 22.5% in 1Q FY2009 due to the tax adjustment. Based on a year-on-year comparison, it rose from 18.6% in 1Q FY2008 for the same reason.
Decrease in market share. M1 saw a decrease in the number of prepaid and postpaid customers from 748,000 and 882,000 in 4Q FY2008 to 740,000 and 879,000 in 1Q FY2009 respectively. Its market share for the prepaid and postpaid segments has also decreased from 24.4% and 27.2% in 4Q FY2008 to 23.9% and 26.8% in 1Q FY2009 respectively. As M1 does not have Pay TV, it is unable to offer bundled services to customers. This is a concern as it is likely to lose market share to SingTel and StarHub.
Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. Despite the economic downturn, it expects operations to remain stable. Moreover, its dividend policy for 2009 is to pay 80% of net profit after tax as dividend.
Maintain Hold with fair value at S$1.67. Based on our valuation using the free cash flow to firm model, the target price is at S$1.67. M1 remains a hold due to its limited focus on the domestic market and the lack of Pay TV services. The dividend yield of M1 is 8.8%.