Author: tfwee
SingTel – BT
Near-term cheer for SingTel shareholders
IN the cut-throat business world, companies often find joy in their rivals’ mishaps. In the case of Singapore Telecommunications, however, it could be well be the company’s shareholders that end up cheering the failure of the group’s recent broadband bids.
The absence of a major foreign acquisition, coupled with SingTel’s failure to capture recent broadband tenders in Singapore and Australia, means that the firm is now freed from major capital commitments. In all likelihood, this could set investors up for a higher cash payout when SingTel releases its results for the financial year ended March 31, 2009 next month.
The company had previously stated that its dividend payout ratio for the year would be 45-60 per cent of underlying earnings. With concerns of major capital expenditure allayed, shareholders should find themselves at the higher end of this reward spectrum.
In 2008, SingTel put a halt to its payment of special dividends, a move that prompted market talk that it was conserving cash to support the bid for South Africa’s MTN Group by its Indian associate Bharti.
The demise of the deal a few months later meant SingTel drew a blank on the foreign acquisitions front in 2008. Its local purchase of Singapore Computer Systems aside, the war chest that has been set aside for funding its overseas ambitions has remained largely untapped.
Apart from the MTN bid, SingTel’s involvement in broadband projects in Singapore and Australia were also seen as other likely burdens on the firm’s capital resources.
Top on this list was SingTel’s attempt to land the NetCo (Network Company) and OpCo (Operating Company) bids in Singapore, two separate contracts covering the building of the nation’s new fibre-optic network and the wholesaling of bandwidth on the new broadband pipes.
In particular, there was much uncertainty over the degree of financial drain from the NetCo project, an undertaking which was projected to cost nearly $3 billion.
SingTel won this bid last September as part of a four-member consortium called OpenNet. But instead of having to make a substantial cash outlay, SingTel is to be compensated $1 billion over the coming years for surrendering its Internet assets to OpenNet to speed up network rollout.
The operator then went solo in the OpCo bid but it lost out to rival StarHub, which snagged the deal for operating Singapore’s new high-speed broadband network earlier this month. For SingTel, the loss meant that additional spending on OpCo-related equipment has also been averted.
Beyond local shores, SingTel’s Australian unit Optus was involved in a similar bid to build and operate a high-speed National Broadband Network (NBN) Down Under.
Due to Australia’s large land mass, the project was expected to cost over A$40 billion (S$43.3 billion) and it prompted speculation that SingTel may have to increase borrowings or slash dividends should Optus land the contract. Both worries have been dispelled with the Australian government turning down all four bids this month on the grounds that they were not up to par.
Instead, the authorities will take on the job of wiring up Australia themselves, a move described by some analysts as the ‘best-case scenario’ for SingTel. This is because it is now freed from the capex commitment but Optus can still benefit under the country’s more open broadband regime. As a result, some market watchers now expect SingTel to exceed its stated dividend payout ratio.
Since the onset of the recession, SingTel has consistently been hailed as one of the storm shelters for panic-stricken investors. With no major investments on the cards and the additional breathing space created by the recent upswing in regional currencies, there is no better time to show investors that they have made the right call by playing it safe.
SPAusNet – BT
SP AusNet update on bushfire damage
SP AUSNET, the Australian power distributor which is part of the Singapore Power Group, yesterday said that damage from the severe bushfire crisis experienced in the state of Victoria in February is lower than originally expected.
The company also said in a filing with the Singapore Exchange that there has been no material impact on previous earnings guidance for the year ended March 31, 2009, as a result of the fires.
‘SP AusNet has now been able to access all fire-affected areas to assess the scale of damage to its electricity distribution network and is pleased to advise that the damage is lower than originally expected, with less than one per cent of these assets being damaged by the fires,’ the company said.
The electricity firm is also facing a lawsuit from Australian wildfire survivors, who have launched a class action lawsuit alleging that a downed power line set off a fire that killed at least 100 people.
With regard to these legal proceedings, SP AusNet said yesterday that on April 16, 2009, it was served with the writ previously filed in the Supreme Court of Victoria, which alleges that ‘faulty and/or defective power lines’ caused loss and damage.
SP AusNet believes the claim is ‘both premature and inappropriate’, and intends to vigorously defend the claim. As it has previously stated, the firm intends to give its full support and assistance to the Royal Commission of Inquiry, which is set to commence public hearings on May 11.
SingTel – BT
Clouds fading away
SingTel has underperformed STI by 6% year to date. The good news is that regional currencies have rebounded back and risks due to Aussie National broadband Network (NBN) have subsided. The bad news is that Bharti witnessed its first ever market share decline in March 09. With more positives than negatives, we raise our FY10 earnings forecast by 6% but our numbers are still 3% below consensus. Upgrade to HOLD with revised target price of S$2.75, incorporating higher valuation for regional associates. We would be monitoring Bharti’s results and outlook on 30 Apr, for further update on SingTel.
The good news (i) Regional currencies (AUD and IDR) have rebounded back by 8-10% versus SGD in the hope of broader economic recovery, which is inline with our house view of recovery in 2H 2009 (ii) Aussie government decided to build NBN itself, which implies that SingTel dividends are secure, as it does not have to commit funds for NBN, in case it had won the award.
And the bad news (i) Latest data released by Cellular Operator association of India (COAI) shows that Bharti’s GSM market share declined for the first time in March 09, from 33.5% in Dec 08 to 32.5% in March 09, as Vodafone, BSNL and Reliance increased their market share (ii) Telkomsel has been gaining market share in Indonesia, but ARPU may weaken in ex-Java region, which account for more than half of its business, due to lower usage.
4Q09 earnings preview We expect SingTel to report net underlying profit of S$826m (-15% yoy, -1.5% qoq) on 14 May 09, lower than consensus’ S$887m, due to (i) impact of weak AUD, INR & IDR during the quarter (ii) lower roaming revenue in Singapore. (iii) Bharti faces headwinds due to tariff wars.
Upgrade to HOLD with revised target price of S$2.75. We have replaced market price of associates with target prices to reflect higher risk appetite. We narrowed holding company discount to 5% from 10% previously to reflect lower currency risks.
M1 – CIMB
Good cost-control amid revenue pressure
• Within expectations. 1Q09 core profit was spot on, making up 24.9% and 25.3% of our full-year forecast and consensus respectively. Reported profit includes a S$5.5m tax adjustment for a lower corporate tax rate from 18% to 17%. 1Q was characterised by topline fatigue, steady margins and continued market-share loss. No dividend was declared, as expected.
• Weak revenue. Top line slipped 9% yoy and 4% qoq due to competition, lower roaming and reduced handset sales. Postpaid revenue dropped 9.9% yoy and 4.4% qoq from fewer subscribers due to competitors’ bundling and exclusive handset offerings and M1’s own per-second billing and multi-line savers which eroded its ARPUs. Roaming accounted for 15% of mobile revenue, and usage has been coming off due to a slowing economy.
• Cost-controls masked by Take3. EBITDA margins ticked up 0.6% pt qoq and 2.3% pts yoy from more active cost-control, particularly of handset (-24.3% yoy) and staff costs (-20.8% yoy). However, lower handset costs were masked by its Take3 programme which amortises handsets over the life of contracts vs. expensing under other schemes.
• NGNBN pursuit. M1 is intent on its transformation into a full-service operator. This should gain momentum once NGNBN is operational. Strategies have not been revealed but M1 has been gaining experience from reselling StarHub’s broadband access. Consistent with our view, M1 sees downward pressure on retail broadband tariffs from low wholesale pricing.
• Guidance reiterated. M1 held on to its FY09 guidance of stable operations, implying stable PATs despite a challenging economic outlook. This also implies a stable DPS for FY09, in our view.
• Reiterate OUTPERFORM, earnings forecasts and target price. While we retain our OUTPERFORM rating, we flag growing concerns over its market-share loss, postpaid weakness and the scope for further cost-controls. For now, we retain our earnings forecasts and DCF-based (WACC: 8.3%) target price of S$2.13. Re-rating catalysts could include a reversal of market-share loss, qoq improvements in earnings, strong dividends and a favourable outcome from NGNBN.
M1 – DBS
Good results for a weak quarter
Excluding exceptionals, 1Q09 net profit of S$36m (-4% y-o-y, flat q-o-q) exceeded our expectation despite significant lower revenue, due to effective cost control. Including dividends, M1 outperformed the STI by 2% YTD, but its solid 9% yield is the key attraction. M1 remains a BUY although we nudged up our estimates, and target price to S$1.60. There is potential upside to our FY10F earnings because of S$15-20m backhaul cost savings.
Earnings better than expected despite revenue contraction. Excluding S$6.6m exceptional income (S$5.5m in tax credit and S$1.1m from interest rate swap), net profit of S$36.4m (-4% y-o-y, flat q-o-q) exceeded our expectation of S$34m. This was despite a larger than expected 8.6% y-o-y drop in revenue; the company registered higher EBITDA margin because of (i) lower staff costs due to job credit scheme and lower facilities expenses due to lower rentals, (ii) lower handset costs as M1 started to amortize handset subsidies over a longer contract period instead of fully expensing it in the quarter under its new promotion “Take3”.
Market share loss coupled with decline in churn rate. M1 lost more market share than expected which management attributed to a spike in competitive intensity and weak economy. Meanwhile, postpaid ARPU also fell more than expected, due to promotions on bundled mobile plans by M1. Management hopes to arrest market share loss with its new promotion “Take3” that was launched in late Feb09. On a positive note, churn rate declined for the third consecutive quarter to 1.6%.
Management reiterates stable FY09F earnings. But they hesitated to guide for stable top line. Lower staff and facilities costs should continue to benefit the company. We maintain a BUY rating for M1, with a revised target price of S$1.60 based on 10x FY09F PER. There is a potential upside to our FY10F earnings arising from S$15-20m backhaul cost savings.