Author: tfwee
M1 – DBS
Cost savings help earnings
M1’s 4Q08 results were better than we expected, mainly due to lower staff cost. It declared a final 7.2 cents, as expected, and management intends to maintain the 80% payout ratio for FY09F. Management also guided for similar earnings for FY09F, as it remains cautious of the impact of a possible recession on the population of foreign workers in Singapore.
Better bottomline but weaker topline. 4Q08 net profit of S$36.6m (+6% q-o-q, -3% y-o-y) exceeded our S$32.6m forecast, due to S$6m savings in staff cost resulting from lower bonuses. But revenue of S$195m (- 1% q-o-q, -6% y-o-y) was short of our S$202m forecast due to lower handset sales and slightly lower ARPU, which could be attributed to the economic slowdown.
Competition seems to move in the right direction. Average retention and acquisition costs tumbled from 3Q08 levels. Churn rate also fell q-o-q to 1.7% from 1.8%, indicating competition is getting more rational. We expect competition to ease in 2009 as operators get into cost control mode, but FY09F earnings might soften as easing competition may not be sufficient to offset the impact of recession.
Fair value at S$1.57. This is pegged to 10x FY09F PER, based on its historical PE range of 8x-13x. Given its 12% free cash flow yield, dividends should be sustainable at 8.5% yield. FY10F earnings is expected to grow y-o-y due to c.S$20m cost savings from its backhaul network. With 0.7x net debt to EBITDA ratio, the lowest among Singapore telcos, M1 will have ample room for capital management when credit conditions improve. Maintain BUY.
M1 – BT
M1’s Q4 net profit dips 3.4% to $36.6m
Telco paying a final dividend of 7.2 cents, bringing its full-year payout to 13.4 cents
MOBILEONE yesterday reported a 3.4 per cent decline in net profit to $36.6 million for the fourth quarter of 2008 as competitive pressure started easing after months of intense rivalry.
Q4 sales slid 5.9 per cent to $194.7 million, while earnings per share came in 2.4 per cent lower at 4.1 cents for the period. M1’s Q4 profit was higher than the $35 million median estimate from five analysts polled by Bloomberg.
For the full 2008, the country’s smallest operator saw its net profit dive 12.6 per cent to $150.1 million from the preceding year. Sales for the year dipped 0.3 per cent to $800.6 million.
M1 proposed a final dividend of 7.2 cents, bringing its full-year payout to 13.4 cents or around 80 per cent of its 2008 profit. Despite the adverse economic conditions, the company expects to maintain a similar dividend payout ratio in 2009.
The firm’s full-year profit decline was due to higher customer retention costs with the introduction of mobile number portability (MNP) in June last year, said Karen Kooi, M1’s acting CEO and chief financial officer.
Average retention cost per post-paid customer for 2008 was $148, against 2007’s $132.
In addition, higher international traffic expenses also contributed to the drop, Ms Kooi told reporters and analysts at its results briefing yesterday. She was chairing the conference in place of outgoing M1 chief Neil Montefiore, who is set to leave the company next month after 12 years of service.
In response to MNP, the operator had introduced more competitive subscription plans which resulted in lower margins, while stepping up its marketing efforts to attract and retain customers but these initiatives tapered off in the tail end of 2008.Customer acquisition cost in Q4 fell to $131 from $162 in the preceding quarter and retention cost also dropped from $155 in Q3 to $135 in the last quarter of 2008.
‘Throughout the festive season, there were more rational promotions from the three telcos. The campaigns stayed clear of providing free monthly subscriptions, which wreaked havoc on margins earlier, to focus on deeper handset subsidies or rebates for monthly subscriptions without equipment,’ CIMB said in a research note.
M1 added 10,000 new subscribers in Q4, most of whom were prepaid customers, to take its user base to 1.63 million. However, its churn rate, or the percentage of subscribers leaving M1, rose to 1.7 per cent from 1.2 per cent a year earlier.
‘We are not going out aggressively to take market share,’ Ms Kooi stressed. However, she reiterated the company’s intention to diversify beyond mobile services into Internet provision when the upcoming Next-Gen National Broadband Network is completed in 2012.
In the meantime, M1 has started offering fixed broadband by leasing infrastructure from StarHub but it did not reveal the take-up rate for these services.
‘We are not actively pushing the fixed-line broadband just yet and we have not started bundling,’ Ms Kooi said, adding that M1 is using this arrangement as a dipstick for its broadband foray in future. M1 shares rose 1.3 per cent to close at $1.52 yesterday.
M1 – CIMB
Recovery expected
4Q08 results preview
We do not anticipate any major surprises in M1’s 4Q08 results which will be released tonight. We expect its core net profit to rise 6.8% qoq but slip 3.2% yoy, on the back of revenue growth of 3.3% qoq but decline of 1.8% yoy. We expect EBITDA margins to improve to about 39% in 4Q (from 38% in 3Q) as the effects of mobile number portability (MNP) fade from the system and as subscriber acquisition and retention costs (SARC) normalise. FY08 core net profit is projected to decline by close to 10%, at the extreme bound of M1’s guidance of a single-digit decline.
Expect some dividends. M1’s commitment to a minimum 80% payout should theoretically entail a further cash return in 4Q08. Our numbers suggest that M1 could distribute a 7.4cts gross DPS in 4Q to top off the 6.2cts declared in 2Q. This would bring full-year gross DPS to 13.6cts, based on an 85% payout and translating into a yield of 9% for FY08.
Competition moderating. Throughout the festive season, there were more rational promotions from the three telcos. The campaigns stayed clear of providing free monthly subscriptions, which wreaked havoc on margins earlier, to focus on deeper handset subsidies or rebates for monthly subscriptions without equipment. We do not anticipate a repeat of the severe margin compression both before and after MNP and believe that SARC should moderate.
Favourite for OpCo? The winner of the OpCo bid will be announced sometime in 1QCY09. As highlighted before, we regard M1 as the favourite as it has the most room to be aggressive in wholesale pricing which constitutes the bulk of the criteria. Either way, a win or a loss would be positive for M1 as it would be transformed into a multi-product operator with the ability to compete on a more equal footing either as an official OpCo or retail service provider.
Valuation and recommendation
Maintain OUTPERFORM, forecasts and DCF-based target price of S$2.32 (WACC 8.3%, terminal growth 1.0%). M1 is our top Singapore telco pick as it offers relatively attractive yields at comparatively lower risks than its peers, trades at near-trough valuations, will face receding competitive risks on the mobile front and avoid a bruising and distracting content war. NGNBN would help to address its single-product disadvantage. Re-rating catalysts could include: 1) attractive dividends; 2) winning OpCo; and 3) cost-savings from backhaul upgrades at a conservative S$20m p.a. from FY10 or 11% of net profit then.
SingTel – BT
SingTel: No rights issue on the horizon
CEO says telco wants to maintain ‘a healthy debt-to- equity ratio’
ALTHOUGH rules for rights issues have been eased, Singapore Telecom’s local chief says the company will not be turning to shareholders any time soon to help expand its war chest.
‘Calling capital from shareholders is a last resort. While the credit markets are available, we will continue to get money from credit markets,’ said SingTel Singapore CEO Allen Lew.
SingTel has an A+ rating from Standard and Poor’s and an Aa2 rating – the third-highest on a scale of 10 – from Moody’s Investors Service.
With these strong ratings, loans may be SingTel’s preferred method for recapitalisation. But other local companies are increasingly tapping on shareholders for funding amid the tight credit market.
Last month, DBS Holdings unveiled a rights issue to raise $4 billion. And companies such as Saizen Reit, United Engineers and KSH Holdings have since taken the same route.
Earlier this week, the Singapore Exchange even rolled out new measures to cut the time needed for companies to complete rights issues.
But SingTel’s Mr Lew said: ‘We always want to retain a certain level of debt.’ SingTel wants to maintain ‘a healthy debt-to-equity ratio’, he told BT on the sidelines of the launch of SingTel’s new retail outlet at Jurong Point.
With the opening, the operator will say goodbye to the ‘Hello’ branding that has previously been associated with its retail presence.
Like the new outlet, the company’s 10 other Hello stores will take on the new ‘SingTel Shop’ name as they are refurbished over the next few years. The shops will also get a similar interior make-over to reflect SingTel’s new multimedia positioning, Mr Lew said.
For example, there are large touch-screen displays inside and outside the Jurong Point shop so customers can search for product information and even buy ringtones or music tracks after operating hours.
Traditional customer service counters have been replaced with a cafe-style set-up, where customers are waited on at individual tables by service staff.
‘This (revamp) will help us enhance the brand and help us cut through the clutter during this period,’ Mr Lew said.
SingTel would not say how much the retail overhaul is costing. ‘Our own generated cash flow can fund this,’ said Mr Lew. SingTel had $1.089 billion cash and cash equivalents as at Sept 30 last year.
SingTel – CIMB
Ringing loudly again
• Raised to Outperform from Neutral. We are upgrading SingTel to OUTPERFORM as the factors that led to a sharp de-rating of the stock – risk aversion to emerging market assets and their currencies and stiff competition in Singapore and Indonesia – are receding. Bharti continues to gain market share and is a key earnings driver for SingTel. SingTel’s high trading liquidity and exposure to regional Tier-1 cellcos make it a highly defensive stock to ride out the recessionary environment. However, M1 remains our top pick in Singapore for its very attractive dividends.
• Falling risks. SingTel should benefit from receding aversion towards emerging market assets and their currencies which peaked in Nov 08. Some 65% of its sumof- the-parts valuation and 57% of its FY10 PBT are attributable to its investments in emerging markets, while Optus in Australia contributes 15% to both. We believe that competitive heat in Singapore will peter out in the current recessionary environment as telcos strive to protect cash flows.
• Telkomsel turning around; Bharti gaining market share. Competition in Indonesia is easing as Excelcomino (XL) has largely exhausted its ability to undercut prices by surprise. Bharti is poised to entrench its dominance thanks to its expansion to rural areas.
• Maintaining forecasts; higher target price. We are maintaining our forecasts as regional currencies are broadly within our assumptions. We expect FY09 earnings to bottom out with a 16% contraction before growing by an estimated 8% in FY10. However, we raise our target price to S$3.10 from S$2.72, after removing our 10% discount for overseas assets earlier attached on account of currency volatilities.