Author: tfwee
Transport – DBS
Fare cuts
PTC announced a fare reduction of 4.6%. This is inclusive of a 2cents fare rebate and a 10cents increase in transfer rebate. We were hoping for a 2-3% cut instead. The total cost to transport operators is $80m, of which savings from the Budget measures will cover $37m. We trimmed our profit forecasts by 2% – 6%. Our TP for SMRT is now $1.70. Downgrade to Hold on limited upside.
Overall fare reduced by 4.6%. The Public Transport Council (PTC) announced yesterday that there would be an overall bus and train fares reduction of 4.6% from 1 April 2009. The fare reduction comprises of a fare rebate of 2cents per trip and a 10cents in transfer rebates.
Total costs to operators is $80m. The fare reduction will costs the public transport operators about $80m over a period of 15 months from 1 Apr 09 to 30 Jun 2010. The 2cents fare rebate amounts to $52m, of which about $37m are savings from the Government Budget 2009. The 10 cents increase in transfer rebates is estimated to cost operators $28m.
Trimming profit forecasts. We trimmed our forecasts for SMRT (FYE Mar 10) and ComfortDelGro (CDG) by 6% and 2%, respectively. The adjustment to SMRT is larger as it derives almost all its revenue from Singapore. CDG, on the other hand, derives c.57% of its profit outside of Singapore.
Downgrade SMRT to Hold. Our TP for SMRT is adjusted down to $1.70 (still pegged to 14x FY10F earnings), equating to a 6% upside. As such, we downgrade SMRT to Hold. Whilst we like SMRT for its defensive features, we would prefer to accumulate at a lower level (c.$1.40).
Maintain Buy for CDG. We maintain our Buy call for CD for its international exposure and relatively limited impact from this round of fare cuts. Our TP for CDG is trimmed slightly down to $1.55 (from $1.57).
M1 – Phillip
FY2008 results
Net profit declined in FY2008. For FY2008, M1 reported operating revenue of S$800.6m (-0.3% yoy), profit before tax of S$185.0m (-4.9% yoy) and net profit of S$150.1m (-12.6% yoy).
There are three main revenue segments: mobile telecommunication services, international call services and handset sales. Mobile telecommunication services registered 0.2% increase in revenue to S$601.4m as the customer base increased by 10,000 and 96,000 from last quarter and last year respectively to 1,631,000. Postpaid revenue fell by 1.6% to S$529.8m while prepaid revenue increased 16.2% to S$71.6m. Moreover, international call services posted 7.9% rise to S$137.1m while handset sales fell by 18.4 percent to S$62.1m.
The introduction of full mobile number portability from 13 June 2008 resulted in increases in both its acquisition and retention costs. This caused the operating expenses to rise by 1.1% to S$608.9m. However, other revenue and finance costs dropped by 65.5% and 20% to S$1.0m and S$7.6m respectively. As a result, profit before tax fell to S$185.0m. Net profit decreased by 12.6% to S$150.1m in FY2008 mainly due to the absence of tax adjustments, which occurred in FY2007.
Profit margin. Net profit margin increased from 17.5% in 3Q FY2008 to 18.8% in 4Q FY2008 mainly due to lower staff costs. Based on a year-on-year comparison, it fell from 21.4% in FY2007 to 18.7% in FY2008 because of higher retention and acquisition costs.
The actual revenue and profit were 4.4% and 9.6 percent below our forecasts respectively. This could be attributed to the introduction of mobile number portability that resulted in higher costs.
Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. It has submitted a bid as the Operating Company to build and operate the active infrastructure of the Next Generation National Broadband Network. The announcement of the winning bid is expected to be in 1Q 2009. Despite the crisis and barring unforeseen circumstances, it expects operations to remain stable. Moreover, its dividend policy for 2009 is to pay 80% of net profit after tax as dividend.
Chief Executive Officer (CEO) stepped down. In January 2009, M1 announced that its CEO, Neil Montefiore, would step down from 1 February 2009. The present Chief Financial Officer (CFO), Karen Kooi Lee Wah, would be the Acting CEO in additional to her duties as CFO while M1 searched for a new CEO. We believe that it would take three to four months before a new CEO could be appointed.
Maintain Hold with fair value cut from S$2.16 to S$1.67. Due to the worse-thanexpected results and the challenging outlook, we have reduced our earnings estimates for 2009 and 2010. Therefore, based on our valuation using the free cash flow to firm model, the target price is cut from S$2.16 to S$1.67. M1 remains a hold due to its limited focus on the domestic market. The dividend yield of M1 is 8.2%.
StarHub – Phillip
FY2008 results
FY2008 results. StarHub reported FY2008 operating revenue of S$2,127.6m (+5.7% yoy) and net profit of S$311.3m (-5.8% yoy). It also declared a final dividend of S$0.045 per ordinary share, bringing the total dividend for FY2008 to S$0.18 (+12.5% yoy) per share. This was higher than the total dividend of S$0.16 last year. Net profit dropped because of higher acquisition and retention costs. This was a result of mobile phone numbers becoming portable on 13 June 2008. In addition, tax expenses were higher in FY2008 because there was credit adjustment for deferred tax assets and tax adjustment for revision in corporate tax rate in FY2007.
Performances of the various business units. StarHub reported strong growth in most of its business units: mobile revenue was S$1,079.0m (+4.0% yoy), Pay TV revenue was S$398.2m (+16.5% yoy), broadband revenue was S$253.2m (+2.5% yoy) and fixed network service revenue was S$299.9m (+7.1% yoy). This was because StarHub was successful in attracting new customers to its services. As at 31 December 2008, the number of customers for its mobile, Pay TV and broadband businesses were 1,765,000, 524,000 and 373,000 respectively. Pay TV outperformed as there was higher take-up of premium channel and strong growth in the subscriber base.
However, sale of equipment fell to S$97.3m (-9.8% yoy). We felt that this could be due to consumers turning more cautious in their purchases during the economic slowdown.
Profit margin. Net profit margin increased from 15.2% in 3Q FY2008 to 16.3% in 4Q FY2008 mainly due to higher mobile, Pay TV and broadband revenue. Based on a year-on-year comparison, it fell from 16.4% in FY2007 to 14.6% in FY2008 because of higher cost of services and operating expenses.
The actual revenue and profit were 5.4% and 2.3 percent below our forecasts respectively. This can be attributed to the economic slowdown, which resulted in the number of new customers below our expectations. Moreover, the introduction of mobile number portability resulted in higher costs.
FY2009 Outlook. StarHub will upgrade its mobile networks and promote its Demand TV service to attract new customers. It expects growth in its operating revenue in FY2009 to be a low single digit. Furthermore, it intends to pay a minimum cash dividend per quarter of S$0.045 per ordinary share, bringing the total to S$0.18 for the full year.
HOLD recommendation, target price cut from S$2.99 to S$2.14. In view of the worse-than-expected financial results and the negative impact from the recession on future earnings, we have reduced our target price from S$2.99 to S$2.14 under the discounted cash flow (DCF) model.
Although StarHub offers its services only in Singapore, it continues to be an attractive stock as it offers dividend yield of 8.7%. We kept our Hold recommendation because of limited upside in the share price to our target price of S$2.14.
STEng – CIMB
Weak quarter, lacks near-term catalysts
• Below expectations. 4Q08 net profit of S$85m (-42% yoy) is 33% below our estimate and 31% below consensus. The weakness was due to impairment in the value of long-term quoted investments in Electronics and Land System amounting to S$23m and higher-than-expected provisions for doubtful debts of S$22m. 4Q08 net profit also included a tax write-back of current and deferred tax of S$18m. Stripping out the tax reversal, 4Q08 net profit would have been S$67m or 47% below our estimate, while FY08 net profit would have been S$434m or 15% below.
• Expect continued weak margins for Aerospace. 4Q08 PBT of S$43m (-51% yoy) for Aerospace was 45% below our expectation mainly due to lower-than-expected contributions from associates on lower volume and higher-than-expected provisions for doubtful debts. FY08 PBT margin was only 14% (FY07: 19%). We believe the weakness could persist into FY09 on lower MRO volume due to a challenging aviation industry, higher depreciation expense and losses from PTF conversion projects in 1H09.
• Outlook for FY09. Management expects group turnover to be higher in FY09 and comparable PBT. While Aerospace PBT is expected to be stable, the remaining divisions are expected to perform better. Management is hopeful about defence exports citing high enquiries. Order book was a record S$10.6bn (FY07: S$9.5bn) with about S$3.6bn for recognition in FY09.
• Earnings estimates cut by 9-11% for FY09-10, to reflect guidance. We lower our utilisation rate and margin assumptions for Aerospace and sales growth expectations for Land and Marine. We also introduce FY11 estimates.
• Lack near-term catalysts. STE remains in excellent health with net cash of about S$200m. It has also maintained its 100% dividend payout with a total of 15.8cts declared for FY08. While management continues to be on the lookout for acquisitions, we see limited near-term catalysts. Should credit markets worsen, we believe its key attraction of 100% payouts could be compromised by the funding of sizeable acquisitions. Valuation of 14x CY09 P/E is not attractive enough against peers and its muted growth.
• Maintain Underperform; target price reduced to S$2.38 from S$2.61, following our earnings downgrade. Our target is still based on blended valuations. A shareprice re-rating is likely only in 2H09, probably triggered by an improved Aerospace.