Author: tfwee
StarHub – GS
Stable free cash flow; potential near-term catalyst if wins OpCo bid
What’s changed
StarHub’s recent 4Q results were better than expected and management guided for “low single digit” revenue growth for 2009 despite the sharp slowdown in Singapore’s economy. We have raised our 09/10/11 earnings forecasts by 4%/4%/2% on the back of higher revenue expectations and increase our 12-m SOTP based TP to S$2.51 (from S$2.45). Although we think that there is risk to StarHub’s revenue growth guidance given macro uncertainties, we are more confident that it will be able to maintain its free cash flow (FCF) to support its S$0.18 (9% curr yield) minimum dividend guidance, due to its low capex and stable margins.
Implications
A potential upside risk to StarHub’s FCF would be if it wins the right to build the “OpCo” portion of the National Broadband Network (NBN). The winner should be announced this month. Although building OpCo would increase StarHub’s capex over the next several years, we nevertheless believe it could be a positive catalyst for the stock, as we think the project will be value accretive. Importantly, StarHub’s management has said that it is confident it could still meet the S$0.18 annual dividend even if it is building the OpCo. In the event that StarHub does not win the bid, we do not believe there is meaningful downside risk to the stock, as the market does not appear to have priced in any potential OpCo upside.
Valuation
StarHub trades at 2009E FCF/equity and FCF/EV yields of 11.7% and 9.6%, respectively, which we view as attractive relative to its regional peers’ yields of 8.7% and 8.5%. Furthermore, we think that downside risk to the share price is limited, as it should be supported by its high dividend yield of 9%. We derive our TP by capitalizing our estimate of StarHub’s 2009E normalized FCF at 13.4x. We maintain our Buy rating (on Conviction list).
Key risks
A large demographic shift in which foreign workers leave Singapore.
SingTel – DBS
Competition, capex and currency
Street expectations from Bharti are too high and likely to disappoint in the wake of heightened competition in India. We cut our SingTel’s FY10 earnings forecast by 5% and our revised numbers are 9% below consensus, suggesting that earnings may decline for another year. Maintain FULLY VALUED with lower target price of S$2.25. 4Q09 results are likely to be lower than street expectations. Another risk is dividend cut due to high capex for National broadband Network in Australia.
Where we differ? (i) Street is feeding 28-30% YoY net earnings growth (INR) from Bharti into SingTel FY10 numbers, despite Bharti’s consensus numbers suggesting only 18% growth, which is again higher than our 13% forecast. Weak share price of Bharti also suggests that consensus could be behind the curve (ii) Street may have ignored the worsening outlook for Indian rupee (iii) Street expects single-digit growth for Telkomsel, compared to our forecast of slight decline.
Lowered FY10 pre-tax profit for associates by 3.3%. Our new forecast for SGD/INR is 35 (prev 32) due to high fiscal deficit of India and credit rating downgrade by rating agencies. Besides, we project AIS to register 3% YoY decline from 5% growth earlier.
Reduced FY10 EBITDA estimates for Optus by 11%. We have adjusted AUD/SGD exchange rate to 1.00 from 1.12, as AUD may not rebound back due to weaker than expected
Aussie economy.
Lowered FY10 EBITDA estimates for Singapore by 3.5%. We forecast it to be flat YoY as potential decline in roaming revenues and prepaid subscriber base may offset benefits from lower competition and higher data revenue due to iPhone launch.
Maintain FULLY VALUED, with lower SOTP-based target price of S$2.25. In 4Q09, we expect net underlying profit of S$826m (3Q09 was S$838m) versus consensus’ S$887m, as (i) Bharti faces headwinds due to tariff wars from Rcom & Vodafone (ii) INR & IDR have deteriorated further. Another risk is that SingTel could limit its payout to 45% of earnings, in case of winning NBN award in Australia, implying 4% yield.
SMRT/ComfortDelgro – DMG
Land Transport Sector: ComfortDelgro and SMRT to join STI
ComfortDelgro (BUY\S$1.32\Target S$1.78)
SMRT (NEUTRAL\S$1.61\Target S$1.65)
effect from 23 Mar 09, with the next review scheduled for 10 Sep 09.
The changes reinforce our OVERWEIGHT stance on the land transportation sector. Positives
include public transport ridership growth in 2009 (although at a slower pace than in 2008) and lower crude oil prices, which will reduce diesel and electricity costs. Within the sector, we prefer ComfortDelgro, which has better potential for long term growth through its overseas operations – 42% of ComfortDelgro’s 2008 revenue came from overseas. Australia (7% revenue share) and China (8% revenue share) are potential growth drivers for ComfortDelgro.
SPAusNet – CIMB
Concerns overdone
• Bushfires and a writ. Bushfires in Victoria, Australia on 7 Feb 09 affected about 1% of SPN’s electricity distribution assets and caused power outage to 6,000 customers. Weather and arson were cited as the culprits. However, a court writ was filed against SPN for “faulty and/or defective power lines”, alleging that strong winds felled a stretch of its power lines, sparking fire in a nearby pine forest.
• Legal issues. SPN believes that the claim is premature and inappropriate, given the establishment of a Royal Commission of Inquiry into the Victorian bushfire crisis. It also says that it will vigorously defend itself against any claims.
• Asset damage and lost revenue. We estimate that SPN may have to bear the replacement and repair cost of up to 3,478 poles, amounting to A$17.4m, which will affect our FY10 net profit forecast by 8.2%. Lost revenue from the 6,000 customers is insignificant, at only 0.6% of our FY09 net profit forecast.
• Maintain Outperform, lower target price of S$1.31 (from S$1.44). We have reduced our FY10-11 net profit forecasts by 3-9% to account for the repair of damaged assets, translating to a lower DCF-derived target price of S$1.31 (WACC 10%). SPN continues to be well supported by an attractive yield of over 10%.
SPH – OCBC
Attractive valuation. Upgrade to BUY
Falling revenue… Our checks in the industry have indicated that Singapore Press Holding’s (SPH) print advertising took a heavy hit in Nov/Dec period despite the last ditch advertising efforts by retailers to bring the year end to a less dismal sales closing. The lack of major events in Singapore in the first two months along with the dismal job market in the private sector did not help. As such, we expect adex and classified revenues to be negatively impacted. We initially expected print revenue to register a 3.6% YoY fall for FY09F but now knock it down to a 6.7% YoY drop to factor in the cratering economy. Circulation numbers should remain flattish for FY09 as we do not expect heavy subscription cancellations.
…But controlling costs. As shown from its historical operating data, SPH has three consecutive quarters of falling newsprint consumption while charge out prices (Exhibit 2 & 3) have been going up. With the volumous usage for the US presidential elections over, charge prices have thankfully started to tail off since the start of the year. Unfortunately, as SPH historically buys its raw materials on a 6 months forward basis, we are expecting high newsprint costs from Jan – Jun 2009. On the staffing front, SPH’s forge into new media businesses have been moderated by aggressive wage cuts announced yesterday.
Mark-To-Market losses might continue. We believe that SPH has not changed its equity and bond portfolios with its external fund managers since the last quarter. With the volatile equity and bond market, our initial assumptions of a return to a positive accretion from its investments are likely invalid in view of potential MTM losses overwhelming dividend income that it will receive from its investments.
Silver lining: Paragon and Sky@Eleven. Thankfully, SPH’s two property plays keep its head above water against a drowning property market. Paragon continues to sustain almost full occupancy even after its S$45m upgrade to add 29,000 sqft of space and Sky@Eleven’s progressive contribution will buffer its earnings.
Attractive valuation. SPH fell 23% since the downgrade in our last report. While we have lowered our SOTP fair value to S$2.84 (prev: S$3.13) as we align its valuation peg with its peers, we are upgrading SPH to BUY based on attractive valuations with dividend yield at ~9%. We are also impressed by the swift action taken to contain staffing cost, its highest expense
component.