Category: M1
M1 – CIMB
Android accounting impact
M1’s 2Q12 core net profit missed our forecast and consensus by 16% and 11% respectively due to the accounting of non-iPhone device subsidies. Despite lower earnings, M1 pledged to maintain absolute DPS. It declared a 1H12 DPS of 6.6 cts, unchanged yoy.
We maintain Neutral on M1 but raise our DCF-based target price by 14% to S$2.86 on: 1) lower subsidies given the rising popularity of the lower-cost Android devices vs iPhones and 2) lower WACC of 7.6% vs 7.9% to reflect its fairly attractive dividends. We also adjust our FY12-14 EPS forecasts by -7% to +3%. StarHub remains our top pick.
Profitability impacted by accounting
Although its cashflows are unaffected, M1’s margins were impacted negatively by its accounting treatment for Android devices where the subsidies are expensed vs being amortised over the contract period for the iPhones. We suspect that this impact will carry over to 3Q12 as the very popular Samsung Galaxy S3 had only a one-month impact in 2Q12 since it was launched in end-May. Android devices made up about 70% of the total devices sold in 2Q, a reverse from previous quarters where the iPhones dominated. However, we think margins should improve thereafter when: 1) the new iPhone is launched, typically in 4Q, and 2) the impact of the Samsung Galaxy S3 washes through.
Outlook
Not surprisingly, M1 expects a “short-term” impact of handset subsidies on its profitability. It reiterated FY12 capex of S$120m. M1 views OpenNet’s 29% higher installation quota positively, but feels that it is insufficient to reduce the service activation period.
Maintaining dividends
Despite net profit being weighed down by expensing subsidies, M1 pledged to maintain its absolute FY11 DPS in FY12, i.e. by raising its payout ratio. The company said that it planned to maintain its FY11 absolute DPS of 14.5cts for FY12. It declared an interim dividend of 6.6cts (80% payout vs 70% in 1H11).
M1 – OCBC
LIKELY STABLE 2Q12 SHOWING
•2Q12 earnings likely to be S$41.6m
•Likely beneficiary of faster NBN connection rate
•Laggard among telcos
Likely stable 2Q12 showing
M1 Ltd is due to report its 2Q12 results on 16 Jul, where we expect the telco to put in a relatively stable showing. We forecast for revenue to come in around S$250m, up 1.9% YoY, but net profit to fall 2.8% YoY to S$41.6m. On a sequential basis, revenue is likely to fall 4.8%, but net profit should climb 3.2%.
May benefit from stepped-up NBN connection rate
On the NBN front, IDA (Infocomm Development Authority) now requires OpenNet to, starting from Aug, increase its weekly customer connection by nearly 30% to 3,100 from a revised 2,400. This is to reduce the waiting time, which was reported to be as long as six weeks. In addition, IDA has asked OpenNet to put in place a process to cater for sudden spikes in demand, especially during the quarterly computer trade shows. We believe that the increased connection rate would benefit M1 most. This is because M1 1) has a small base, 2) does not have much of a legacy system issue since its current cable modem bandwidth is leased from StarHub, and 3) could further
penetrate into the corporate segment, especially in the more price sensitive SME space.
Laggard among the telcos
Year-to-date, M1's share price has only risen 2.4%, as compared to SingTel's 11.0% climb and StarHub's 24.4% increase over the same period. One reason for M1's underperformance is probably linked to its lack of bundling of services. But we think this concern is probably overdone, given that M1 has been able to defend its mobile market share, despite it having the highest churn rate among the three telcos. And because M1 is not involved in the highly competitive Pay TV arena, it does not have to deal with rising content costs. As a result, M1 is experiencing less pressure on margins. We continue to like M1 for its defensive earnings and relatively attractive dividend yield of 5.7%. Maintain BUY with S$2.81 fair value.
TELCOs – DBSV
Regulator tightens belt to press the pedal on fiber
What's new?
Singapore telecoms regulator IDA is raising the weekly fiber installation capacity to 3,100 per week from Aug 2 onwards. This is up 30% from 2,400 earlier and exceeds our forecast of a 15% rise highlighted in our report on SingTel released on 2nd July. A dynamic mechanism to raise capacity in line with demand has also been put in place.
200 installations out of the quota will be for commercial buildings. This is the most attractive pie for retail service providers as each commercial connection commands much higher ARPUs than residential connections. IDA wants OpenNet (the fiber backbone provider) to offer an activation period of 10 days from its side, unless building owners cause a delay in wiring up their buildings.
Our view
Slightly negative for SingTel but positive for others. The commercial broadband market represents the biggest slice of the market, accounting for an estimated 60% of the total, with residential accounting for less than 40%. SingTel is the leader in the commercial space with an estimated 80% share of the commercial broadband market while StarHub has less than 20% due to difficulties in accessing commercial buildings. SingTel has differentiated itself on the basis of its strong managed service portfolio, cloud computing and strong IT support. However, SingTel's market share and margins may still feel the heat as retail service providers offer services to price-sensitive small and medium (SME) customers. SingTel may barely achieve stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. Ongoing re-structuring and its mobile advertising business are other cost pressures in the near term.
S-curve ahead as Singapore lags Malaysia in fiber adoption. Fiber adoption stands at 12% of rollout in Singapore versus 25% in Malaysia, due to the various bottlenecks the regulator IDA has identified and wants to quickly resolve. Compared to only 99k fiber subscribers in Singapore at the end of 2011, we project at least 150K subscribers to be added each year for the next three years in line with the "S curve".
No change to our TP and recommendations on stocks under our coverage.
TELCOs – DBSV
Regulator tightens belt to press the pedal on fiber
What's new?
Singapore telecoms regulator IDA is raising the weekly fiber installation capacity to 3,100 per week from Aug 2 onwards. This is up 30% from 2,400 earlier and exceeds our forecast of a 15% rise highlighted in our report on SingTel released on 2nd July. A dynamic mechanism to raise capacity in line with demand has also been put in place.
200 installations out of the quota will be for commercial buildings. This is the most attractive pie for retail service providers as each commercial connection commands much higher ARPUs than residential connections. IDA wants OpenNet (the fiber backbone provider) to offer an activation period of 10 days from its side, unless building owners cause a delay in wiring up their buildings.
Our view
Slightly negative for SingTel but positive for others. The commercial broadband market represents the biggest slice of the market, accounting for an estimated 60% of the total, with residential accounting for less than 40%. SingTel is the leader in the commercial space with an estimated 80% share of the commercial broadband market while StarHub has less than 20% due to difficulties in accessing commercial buildings. SingTel has differentiated itself on the basis of its strong managed service portfolio, cloud computing and strong IT support. However, SingTel's market share and margins may still feel the heat as retail service providers offer services to price-sensitive small and medium (SME) customers. SingTel may barely achieve stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. Ongoing re-structuring and its mobile advertising business are other cost pressures in the near term.
S-curve ahead as Singapore lags Malaysia in fiber adoption. Fiber adoption stands at 12% of rollout in Singapore versus 25% in Malaysia, due to the various bottlenecks the regulator IDA has identified and wants to quickly resolve. Compared to only 99k fiber subscribers in Singapore at the end of 2011, we project at least 150K subscribers to be added each year for the next three years in line with the "S curve".
No change to our TP and recommendations on stocks under our coverage.
TELCOs – Kim Eng
Let the BPL Money Games Begin
Buy StarHub to hedge rising cost of BPL TV rights. British soccer fans have just agreed to hand over GBP3b to the Premier League, the richest soccer league in the world, as the 2013-2016 UK TV rights were recently sold at a 71% premium over the last three seasons. In Singapore, soccer fans will have no choice but to tighten their belts yet again. However, we think StarHub will be the ultimate winner, even if SingTel decides to throw caution to the winds and bids aggressively. BUY StarHub to hedge against the rising cost of watching your favourite team; SingTel remains a SELL.
BPL scores huge TV rights win at home. The world’s richest soccer league, Premier League, just got a billion pounds richer. British pay TV broadcasters BSkyB and BT recently agreed to fork out GBP3.04b over the next three years for the UK domestic live TV broadcast rights for the 2013-2016 seasons, a 71% rise over the cost of the rights for the 2010-2013 seasons. BPL stars Yaya Toure and Mario Balotelli (despite his goal drought) can look forward to even more lavish pay hikes.
What will happen to Singapore? The worst case scenario is both telcos and Premier League walk away from the negotiation table, which we think is unlikely. Given the presence of cross-carriage laws this time round, it is more plausible that Premier League will allow a joint bid between SingTel and StarHub that will result in it receiving a sum more than the estimated SGD425m SingTel paid for the 2010-2013 seasons.
No good news for soccer fans. Whichever the scenario, there is unlikely to be any good news for soccer fans; just various degrees of bad. Assuming a joint bid is possible and a 30% rise in TV rights cost over the 2010-2013 seasons, as mooted in Hong Kong-based reports, our best case scenario suggests that subscribers will still need to pay between SGD27 and SGD35 more a month to watch BPL, which we think is still reasonable.
Odds are with StarHub. In the final analysis, we think StarHub will watch the dollars and cents and refrain from harming its generous dividend policy by bidding too aggressively, even if it does bid jointly with SingTel. If SingTel decides to be as aggressive as it was in 2009 and clinches the rights to the three seasons, the cross-carriage law will work to StarHub’s advantage. In such a tactical strategy game, we think the odds (and investors’ favour) are with StarHub.