Author: tfwee
SingTel – Kim Eng
Breathing A Little Easier
Lower revenue/profits expected but better margins
SingTel will be reporting 3QFY09 results on 10 Feb. We expect underlying net profit to decline 15% yoy to $792m on the back of a 4% yoy (5% qoq) decline in revenue to $3681m. However, EBITDA margin is expected to rise 1 percentage point qoq to 28.7% while share of associates’ profits is expected to be flat qoq but down 28% yoy.
Margins should rebound as rivalry eases
Group EBITDA margin should have improved qoq following the sharp decline in 2Q09, which was caused by launch costs and hefty subsidies for the Apple iPhone. In Singapore, competition had also noticeably retreated after 4-5 quarters of intense market share grab that caused EBITDA margin to fall from 31% in 1Q08 to 27.7% in 2Q09.
Associates expected to be lower in general
Associates had a mixed performance during the quarter. Bharti did very well (3Q09 sales +7%, PBT +25% qoq) as the Indian market remained immune to the economic crisis. Globe reported a very strong 4Q08 saleswise (5% qoq) as it benefited from strong demand for data and broadband, but reported a 15% qoq drop in profit due to higher expenses.
Currencies stabilising but impact still negative in 3Q09
Currencies in general have been less volatile than in the past few quarters. Still, the average value of the Australian dollar, Indonesian rupiah and Indian rupee depreciated 18%, 12% and 5% during the quarter, impacting Optus, Bharti and Telkomsel. They account for roughly 60% of PBT. AIS and Globe contributions however should flow through without any forex muddying of the waters.
Maintain BUY recommendation with $2.88 target
We maintain our BUY call on SingTel with a blended DDM/SOTP target of $2.88. Potential catalysts include potential currency appreciation in future as the worst of the crisis newsflow appears to have passed. In addition, a benign competitive landscape in Singapore could draw attention to SingTel’s defensive business and decent dividend yield.
SingTel – CIMB
3Q08 results preview: diluted by regional currencies
SingTel is expected to announce 3QFY09 results on 9 Feb 09. We expect its core net profit to further decline to S$760m-790m from S$801m in 2QFY09, on the back of an expected 8-12% qoq and 9-13% yoy decline in revenue, a 1-2%-pt increase in EBITDA margins qoq, and flat qoq but 20-28% yoy decline in associate contributions.
Operational improvements at subsidiaries. We believe EBITDA margins rebounded in Singapore and Australia after plunging in 2QFY09 on the back of high subsidies for the iPhone. Subsidies are expected to decline qoq in 3QFY09. In Singapore, mobile competition had eased in 4Q08 after four quarters of intense competition.
Improved results for key associates. Bharti announced a commendable set of results, with revenue surging 7% qoq and EBITDA margins gaining 3.3% pts. After a sharp contraction in the previous quarter, we expect Telkomsel’s revenue and EBITDA margins to rebound in 4Q08 on the back of higher tariffs, lower network congestion and festivities. On the other hand, Globe Telecom’s 4Q08 PBT declined qoq.
Regional currency weakness. The Australian dollar, Indonesian rupiah and Indian rupee depreciated 25%, 20% and 8% qoq respectively against the S$ during the quarter, effectively wiping out all operational gains at these units. SingTel’s units in these countries contributed an estimated 59% of FY09 PBT.
Weaker regional currencies wiped out S$86m (S$36m due to A$, S$31 due to Rp and S$19m due to Rs) or about 11% from SingTel’s core net profit. Excluding the impact of weaker currencies, SingTel’s core net profit would have rebounded about 5% qoq.
Valuation and recommendation
Maintain OUTPERFORM and sum-of-the-parts target price of S$3.10. Catalysts for a re-rating could include:
• A$, Rs and Rp appreciation vs. the S$.
• Further signs of easing competition in Singapore.
• Strong qoq results at its key units, namely Telkomsel and Bharti.
• A bottoming out of its earnings in 3QFY09, given the turnaround of regional currencies and lower subscriber acquisition and retention costs in Singapore.
StarHub – CIMB
A star-crossed 4Q?
4Q08 results preview
StarHub is slated to release its 4Q08 results on 10 Feb 09. We expect a core net profit of S$75m-80m, representing flat growth to a 6% contraction qoq as some margin tremors are likely to be felt due to heavier expenditure in the festive period. Yoy, core net profit should be up 6-13%. FY08 core profit is projected at S$299m-304m.
Topline is expected to rise 2-4% qoq, lifted by the festive period, and representing a reversal from 3Q08’s 1.2% qoq contraction. Over the past three years, 4Q revenues have been rising by an average 4% qoq, thanks to the festive season effect. This year, however, harsh economic conditions might have had some impact on StarHub’s topline in 4Q. As such, we believe FY08 revenue may only rise 6%, slightly below StarHub’s guidance of 7% growth.
More pertinently, we expect EBITDA margins to lose close to 1-3% pts in 4Q from a surprisingly strong 3Q. In the past three years, EBITDA margins have been declining on average by 2-4% pts qoq in 4Q. Thus, we are projecting fairly in-line service EBITDA margins of 32% vs. guidance of 31% for FY08. While mobile number portability-induced margin tremors could have faded away and we do not expect a return to those levels, we believe that some margin strain could still occur due to the traditional festive season where A&P expenses tend to rise and the bulk of costs are booked in 4Q. That said, we do not think the impact will be as severe as in most years, judging from the relatively quiet 4Q.
We would be looking for signs of downtrading for StarHub’s suite of products, namely in broadband and cable TV, as consumers tighten their belts.
Dividends. We do not anticipate anything out of the ordinary, with another 4.5cts likely to be declared in 4Q, bringing full-year payout to the minimum 18ct guidance. A special dividend is unlikely with gearing remaining high at 1.2x annualised net debt/EBITDA as at end-3Q08. Historically, StarHub has undertaken capital reduction or special dividend payment only when the ratio trends below 0.8x. What lends further weight to our belief is the tender process for OpCo, which is still in the pipeline. The results of the tender will be made known sometime in 1QCY09, and we do not foresee any payout, if at all, until the outcome is known. The need to conserve cash is paramount under current economic circumstances.
Valuation and recommendation
Maintaining earnings forecasts, DCF-based target price of S$2.50 (WACC: 8.5%, terminal growth: 1%) and Neutral rating. We leave our estimates and rating untouched pending the release of the results, although we are likely to lower our target price post-results. With its diversified base, we believe StarHub’s revenue is most susceptible to an economic downturn. The key event looming this year would be bidding for premier content, most notably that of the British Premier League (BPL) for 2010-2012 and the 2010 World Cup in 3Q09, where a brutal bidding battle is expected. The potential setting up of Premier League TV, while slim at this juncture, could undercut StarHub’s monopoly of the crown jewel of content. Nevertheless, despite the many risks, we maintain our Neutral rating as we believe downside will be limited by its attractive dividend yields of 9%.
SingTel – BT
SingTel unit Globe’s earnings down 15% last year
WEAK market demand and foreign exchange losses dragged down last year’s earnings of Singapore Telecom’s listed Philippine unit Globe Telecom.
In a report to the Philippine Stock Exchange yesterday, Globe said consolidated net income slumped 15 per cent to 11.3 billion pesos (S$362.7 million) due to flat revenue of 62.9 billion pesos. Core net income, which excludes forex gains and losses, was down 14 per cent to 11.8 billion pesos.
Globe, SingTel’s joint venture with listed Manila conglomerate Ayala Corp, blamed the weak economic environment, intense competition, forex and mark-to-market losses and other adverse factors, including one-time bond redemption costs, for its poor earnings.
Overall, revenue from wireless services fell one per cent to 55.6 billion pesos, while that from fixed lines edged up 7 per cent to 7.3 billion pesos.
Though interest expenses were lower compared with 2007, this was offset by higher net forex losses arising largely from the revaluation of the company’s US dollar-denominated debt.
Analysts said Globe’s revenue could have sunk deeper if not for its strong performance during the holiday season in the fourth quarter of last year. Q4 revenue surged 5 per cent to 16.3 billion pesos – Globe’s highest quarterly revenue to date – as it launched new mobile and broadband services at competitive rates.
‘Our strong topline performance in Q4 enabled us to regain some of the ground that we lost in the early part of the year,’ said Globe president and CEO Gerardo Ablaza.
He believes the good Q4 results have given Globe, the country’s second-largest telco, the momentum to face the challenges in the telecom market this year.
‘We are encouraged by the resilient growth of both our mobile and broadband subscriber base, and remain committed to delivering products and services that serve the needs of our subscribers at affordable prices,’ he said.
Globe, whose stock closed 1.2 per cent higher at 850 pesos yesterday, posted a 22 per cent rise in wireless subscribers to 24.7 million last year. Broadband subscribers almost doubled to 234,000.
Mr Ablaza said demand for Globe’s fixed and mobile broadband services has been ‘very positive,’ exceeding expectations. It expects broadband growth to continue this year, with the increasing affordability of the service and data devices.
‘For 2009, our objective is to build on the earnings of 2008, sustain our Q4 gains and step up growth for all our businesses,’ he said. ‘While we will adapt to changes in near-term demand with the slowing economy, we will continue to invest and set our sights on the long term.’
SingPost – DBS
Resilient earnings despite slowdown
Singpost announced core net profit of S$36.6m (flat y-o-y, – 2.4% q-o-q) that was c.10% above our forecast, due to higher rental income from a larger lease area following the refurbishment of its post offices. Meanwhile, the impact of the global slowdown was visible in higher provisions and slower topline growth. An interim 1.25 cents DPS was declared, as expected.
Budgetary benefits expected to offset potentially lower rental income. The job-credits and corporate tax reduction would benefit its bottomline by about 3%. But Singpost’s rental income could drop, as one-third of its leases are due for renewal every year.
Impact of slowing economy already captured in our estimates. Singpost was able to maintain flat revenue during the Asian financial crisis in 1997/98, while revenue fell only 2% during the SARS crisis in FY04. We expect a 3% decline in Singpost revenue for FY10F.
Competition not a major concern. Singpost has launched new initiatives in its business mail (22% of total revenue) and international mail (24% of total revenue) segments. These initiatives should mitigate the leakage in Singpost’s revenues, given that its competitors – typically small companies – would be hit harder by the slowdown.
Raised earnings, maintain Buy. We raised our FY09F earnings by 2.5%, but there is no change to our FY10F estimates. Maintain BUY with a revised target price of S$0.88, based on 12x FY10F PER (historical PER range is 15x- 18x) as we roll forward our valuation window. The stock offers a minimum annual DPS of 5 cents (6.5% yield) that is payable quarterly.