Author: tfwee
M1 – DMG
No big surprises
Operational earnings down, in line with expectations. In the first quarter to Mar 09, revenue declined 8.6% to S$186.4m while earnings rose 10.3% to S$41.9m. The improved net margins were largely a result of tax adjustments for reduction in corporate tax rate. Taking out the tax impact, the results would be within our expectations.
Balance sheet improves further. Due to strong cash flows, M1’s key leverage ratios have improved. Net gearing now stands at 0.68x, against 0.85x a year ago. EBITDA/Interest, at 45.2x, is the highest among the telcos, and an improvement over the 37.6x it recorded in the previous corresponding period. Some concerns. M1’s post-paid market share fell from 27.2% in 4Q08 to 26.8% in 1Q09. While the level of competition tapered off in 4Q08, it intensified again in the past few months. From the tone of the management, we gather that should its market share continue to fall, it will retaliate aggressively. M1 has already introduced innovative programmes like Take3 to win over new customers. One other concern investors may have is the vacuum at the top after the departure of Neil Montefiore in Jan 09. Acting CEO and CFO Karen Kooi indicated that the new CEO will be unveiled “very soon”.
NBN plans. M1 believes it will benefit from the NBN when it becomes operational in 2Q10. In our view, it may not be as rosy. We expect SingTel and StarHub to launch aggressive campaigns to lock in customers later this year, pushing market penetration past the 90% mark by then. Morever, the low wholesale prices will attract new players, which will place pressure on broadband prices.
Maintain estimates and call. We are maintaining our earnings estimates for M1, with a 5.6% contraction to S$141.6m in FY09 and a growth of 4.6% to S$148.1m in FY10. Based on DDM, we attain a target price of S$1.52. Given the limited upside, we maintain NEUTRAL on M1.
StarHub – BT
Funding capital spending a key issue at StarHub
FEARS that StarHub could initiate a cash call sparked a flurry of questions from shareholders about the operator’s capital expenditure (capex) plans for the year at its annual general meeting (AGM) yesterday.
Minority shareholder Tan See Peng got the ball rolling with a barrage of queries revolving around the group’s outstanding bank loans of $914 million and whether there are plans for major cash outlays in 2009.
‘I’m just afraid you (StarHub) will turn to us (for cash),’ he quipped. His concern could stem from the right issues called by other corporate titans such as DBS Group, CapitaLand and Chartered Semiconductor in recent months.
Moreover, StarHub recently landed the government’s OpCo tender for operating the nation’s upcoming fibre-optic broadband network and there may be some uncertainty about the investments required for this project,
‘This (OpCo) will have some requirements on capex, but we have sufficient resources, as well as lines of credit to fund the expenditure,’ said StarHub chairman Tan Guong Ching.
The operator has previously said that it expects to pump in $100 million over the next few years to set up its OpCo venture. The new unit is projected to require an annual capital spending of around $40 million over the next 25 years.
‘We have a very strong cash flow. It’s more than sufficient to pay for capex as well as for the repayment of loans,’ he assured shareholders.
StarHub’s AGM typically attracts a smaller crowd compared to rivals Mobile One and Singapore Telecommunications as the stock is largely owned by institutional investors.
While the annual gathering is usually wrapped up in less than hour, yesterday’s AGM stretched to nearly 90 minutes with queries about the pay of StarHub directors prolonging the latter part of the question-and-answer session.
They were mostly fielded by shareholder Tony Tan, who also owns shares in M1. Armed with a detailed analysis of the two companies’ financial statements, he quizzed StarHub’s rationale for paying its directors a remuneration package of $1.078 million, a figure which he said is ‘2.8’ times higher than that of its competitor.
In addition, he queried StarHub’s need for having a large board composition of 13 members when rival M1 was doing the opposite by shrinking its directorate pool.
‘We have diversified revenue. The experience needed for some of these (segments) is very different. The complexity of their (M1’s) business is different from ours,’ StarHub CEO Terry Clontz explained.
This is because StarHub is among a handful of operators capable of offering a complete suite of Internet, telephony and pay-TV services, he added.
‘This (diversification) will cushion us against a downturn in any particular sector,’ said StarHub chairman Mr Tan, adding that its mobile business is already seeing signs of a slowdown due to Singapore’s saturating mobile phone user base.
M1 – BT
M1’s Q1 profit up 10.3%, helped by tax adjustment
Results show underlying weakness in core cellular business
A TAX adjustment helped lift MobileOne’s first quarter net income up 10.3 per cent to $41.9 million but the gain failed to mask the the underlying weakness in its core cellular business.
The increase was largely due to a reduction in Singapore’s corporate tax rate, M1 said in its regulatory filing yesterday. The move translated to a 75 per cent reduction in M1’s Q1 tax provision to $2.2 million, from $8.8 million a year earlier.
The firm’s earnings per share for the period was 4.7 cents, 9.3 per cent higher than 2008.
The ceasefire following the all-out marketing war between the three local telcos as a result of mobile number portability (MNP) last year lent M1 some reprieve in Q1.
Customer acquisition and retention cost in Q1 was $121 and $113, down 15.4 per cent and 16.9 per cent respectively year-on-year.
Cost of sales also dropped 6.7 per cent to $71.9 million in Q1 compared to the previous corresponding period. The conclusion of festive promotions also led to a 30.4 per cent sequential decline in advertising and promotion expenditure to $19 million for the quarter.
However, the company continues to be a victim of MNP, losing 11,000 customers in the last three months to end Q1 with a mobile customer base of 1.62 million.
While the number is 4.2 per cent higher than the tally last year, the growth is lower than rivals StarHub and SingTel.
This means that M1’s market share has now dipped to 25.4 per cent from 26.5 per cent in 2008. Churn rate, or the number of customers leaving M1, stood at 1.6 per cent in the first quarter, up from 1.3 per cent last year.
M1’s post-paid revenue slid 9.9 per cent year-on- year to $122.6 million as a result of aggressive bundling by rivals StarHub and SingTel, as well as exclusive deals for handsets such as the Apple iPhone. Its prepaid sales however, increased by 3.5 per cent to $17.7 million.
The ongoing recession also crimped customer spending on services such as international calls, with revenue from this segment dropping 5 per cent to $32 million in Q1.
One positive trend amid the gloom is the uptake in other M1 services such as its broadband offerings. The firm’s non-voice sales now account for 25.1 per cent of total service revenue, up from 23.2 per cent last year.
The company’s first-quarter operating revenue came in 8.6 per cent lower at $186. 4 million.
Earlier this month, M1 lost the bid to operate Singapore’s upcoming fibre-optic broadband network to StarHub, but it maintained the desire to move from pure mobile play to become a ‘full-service operator’ when the new Internet highway is in place.
‘Based on the current outlook, and taking into consideration the benefits arising from the government measures announced in Jan 09, we continue to expect operations to remain stable for the year 2009,’ the company said.
M1 shares closed unchanged at S$1.47 yesterday before its earnings were released.
SPH – DBS
Results within expectations
2Q09 results came in 3% lower than our estimate but still within our expectations. This arose from lower revenue recognition at its Sky@Eleven project. As expected, ad revenues were down. Interim dividend of 7 cents was lower than last year. But, management indicated that there is no change to their target of maintaining a high payout ratio for full year. Current price has only c.10% total returns upside, after 25% increase since our upgrade. Downgrade to Hold.
2Q09’s operating profit down 15% y-o-y. 2Q09’s operating profit ended at S$99.4m. This is just 3% below our expected $102.5m, but still within our tolerance. The slight variance is largely due to lower revenue recognition from its property development project (Sky@Eleven). Total revenue for 2Q ended at S$287.2m, down 4% y-o-y. Staff costs were down 14% on lower bonus provisions.
Display and classified ads revenue fell 18% y-o-y in 2Q. Not surprisingly, display ads fell 15.9% y-o-y to S$82.8m. Classified ads revenue fell by a larger 26% y-o-y to $49.3m. Drop in both segments accelerated from 1Q09’s drop (c.4% and 17% y-o-y, respectively). We have assumed a 20% fall in ad revenues for FY09F.
Interim dividend of 7 cents, from 8 cents in 1H08. The cut in interim dividends to 7 cents arose from a lower operating profit. Management, however, indicated their target to maintain a high dividend payout ratio (80% to above 100% of operating profit). Our 20 cents DPS for FY09F is unchanged.
Downgrade to Hold; TP: $2.97. We adjust our TP up slightly as we now assume a lower newsprint costs of US$780/mt vs US$800/mt previously. The positive impact of this on our net profit is however offset by a higher interest expense on a higher debt level. Share price has appreciated by 25% since our upgrade on 13 Mar. This leaves only about 10% total returns upside (to our TP, including dividends). As such, we downgrade to Hold.
Risks. (i) Further significant and protracted deterioration of the economy; (ii) increase in newsprint costs; (iii) significantly lower dividend payout versus our expectations.
SPH – CIMB
Still in good stead
• In line with our forecast but below consensus. 2Q09 net profit was S$87.0m (- 13% yoy) vs. our forecast of S$88.2m, accounting for 26% of our full-year estimate. While operating revenue was in line with our expectations, operating expenses were higher than expected on high newsprint costs. Net profit was within our expectation thanks to a lower-than-expected tax rate, as deferred tax benefits previously not recognised were utilised. SPH announced an interim dividend of 7cts/share, down from 8cts/share in 1H08.
• Operating revenue down 4% yoy. Newspaper & Magazine revenue, including print ad and circulation revenue, fell 14% yoy to S$204.6m. Property revenue rose 33% yoy to S$72.2m, boosted by S$16.3m from Sky@eleven, which is on track for a temporary occupation permit in 2010.
• Print ad revenue decline approaching previous recessionary levels. Led by a 26% fall in recruitment ad revenue, print ad revenue declined 18.8% yoy to S$145.9m, in line with our expectations. Circulation revenue rose marginally by S$1.5m, thanks to cover-price hikes. Our assumption of a 20% decline for print ad revenue – pegged to previous recessions – for FY09 remains unchanged. However, instead of a 4% decline in circulation revenue for FY09, we now project flat growth. There are also signs that adex is close to bottoming out. In Jan 09, AC Nielsen estimated that newspaper adex declined 23% yoy and 14% mom. However, the latest figures show that while newspaper adex fell by 3% mom in Feb 09, it only fell 1% yoy. As such, we are projecting a faster recovery for print ads in FY10-11.
• Investment income could beat expectations. We now forecast investment losses of S$40m (previously S$60m) for FY09, vs. the 1H09 loss of S$33m. There could be upside to our FY09 earnings estimate, if capital markets continue to rally in 2H09.
• Maintain Outperform. All in all, we have raised our FY09-11 earnings estimates by 6-12% on better-than-expected investment income and higher media earnings. Looking ahead, we believe SPH’s dominant position in newspaper advertising in Singapore will serve it well. While newsprint prices are unlikely to retreat in FY09, SPH guided for a moderation in charge-out rates in FY10. Maintain Outperform with a higher sum-of-the-parts target price of S$3.52 (from S$3.38) following our earnings upgrade.