Category: M1
TELCOs – OCBC
1Q09 Scorecard
Resilient 1Q09 results as expected. All the three telcos – MobileOne (M1), SingTel and StarHub – reported a pretty resilient set of results recently. M1’s 1Q09 earnings were slightly ahead of our forecast but that was mainly due to an one-off tax credit; EBITDA margin also improved due to slight easing in competition. SingTel’s 4Q09 earnings were much better than expected, aided by a strong domestic market performance. StarHub’s 1Q09 earnings were within expectations, but the boost came from lower taxes; its mobile business recorded a mild decline.
Review of operations. On the mobile front, we note that the recession has impacted consumer spending in the March quarter; this has led to a decline in mobile post-paid ARPUs. And in line with the weaker demand, most of the telcos have further scaled back their acquisition costs; the exception being SingTel, which clocked in at S$290/ customer, up QoQ but down YoY. And in terms of market dynamics, we see that M1 has lost post-paid market share, which does not come as a surprise, given its lack of bundling abilities. On the broadband front, the net additions for both SingTel and StarHub have slowed, partly due to the economic slowdown and also the saturation in the market, which has now hit 109.5% (up from 99.9% in 4Q08). And while StarHub managed to add more customers, we note that its ARPU has been declining, whereas SingTel’s ARPU has managed to remain quite stable.
Stable outlook for 2009. Going forward, all the three telcos expect their Singapore operations to remain stable or show slight growth, with EBITDA margins remaining relatively steady; this as they strive to reduce costs to keep pace with the expected softening in operating revenue. But due to their strong cashflow-generative businesses, the telcos have largely kept their dividend payout guidance; M1 to pay at least 80% of underlying net profit; SingTel to pay 45-60% of underlying earnings; StarHub to pay S$0.18/share, or S$0.045/share per quarter.
Maintain Overweight. Although there has been a steady switch into highbeta stocks on hopes of a rapid recovery in both the economy and corporate earnings, we are not entirely convinced. And until we see more concrete signs of a rapid recovery, we would still advocate holding on to these defensive counters for their attractive dividend yields and as a means of diversification. Maintain Overweight.
TELCOs – BT
Telcos’ quarterly results show resilience
But signs of slowdown in mobile market point to need for diversification to sustain growth.
SINGAPORE’S telecommunications trinity walked the talk in the curtain raiser to 2009 with an encouraging set of quarterly results. But despite proving their defensive mettle, signs of a slowdown in the saturated mobile market could point to diversification as the only route to maintain local growth in the long run.
To recap, MobileOne flagged off the telco earnings season on a high note by beating most analyst estimates with its 10.3 per cent jump in Q1 net income to $41.9 million. This improvement was largely the result of lower taxes and tighter cost control.
StarHub kept the momentum going with a 3 per cent increase in first-quarter profits to $82.5 million, helped by lower taxes and higher contributions from its pay-TV and fixed network businesses.
SingTel would appear to have upset the balance this week by turning in quarterly earnings of $903 million, a 17 per cent drop from last year.
However, this decline was largely pegged to negative currency movements and a poor showing from its key regional associates Telkomsel and AIS. If Singapore is used as the yardstick for comparison with its two rivals, SingTel’s local Ebitda (earnings before interest, taxes, depreciation and amortisation) actually rose 20 per cent to $578 million.
Market analysts reciprocated the trio’s performance with unanimous ‘buy’ calls as local telcos continue to live up to their reputation as defensive plays.
‘M1 outperformed the STI by 2 per cent YTD (year to date), but its solid 9 per cent yield is the key attraction,’ said DBS Vickers analyst Sachin Mittal.
StarHub, on the other hand, impressed market watchers with its ability to eke out better margins during crunch times. ‘We have raised our earnings estimates by 4.2 per cent to $310.9 million in FY09 on the back of improving margins,’ said Terence Wong, head of research at DMG & Partners.
Despite SingTel ending its fourth quarter with a lower bottom line, the recent appreciation of regional currencies, coupled with the improved outlook of its key associates, is expected to give the operator a boost this financial year.
‘We have revised our FY10 estimates up slightly (by around 3 per cent to reflect its resilient business) and introduced our FY11 estimates. We have also bumped up our SOTP (sum-of-the-parts) fair value from S$3.09 to S$3.18 to reflect the recovery in equities of its associates,’ OCBC Research analyst Carey Wong said in his client note. He expects SingTel to turn in a net profit of $3.42 billion this year on the back on a $14.32 billion turnover.
While the three operators have shown that they are still in the pink of financial health for now, the Q1 numbers did unravel some niggling signs of concern within their cellular core.
Singapore’s sky-high mobile penetration of 132 per cent leaves little room for new post-paid subscriber growth. In addition, operators are also feeling the pinch as consumers rein in their talk time during the downturn.
In particular, M1 lost 11,000 mobile subscribers during the quarter and the exodus pulled its market share down to 25.4 per cent in Q1. StarHub’s mobile revenue dipped 3.1 per cent in to $264.7 million as customers cut back on international calls and voice usage.
Even SingTel, which reported a 9.1 per cent increase in mobile sales to $370 million with the addition of more customers, admitted its subscribers are making less international calls and keeping within the talk time allocated to their respective subscription plans.
This has prompted SingTel to look into ‘adjacent markets’ such as pay-TV, Internet and mobile advertising, said its Singapore CEO Allen Lew. The launch of its new cross-platform advertising service, and its digital media subsidiary earlier this month are the flag bearers for SingTel’s diversification intent. In addition, it also has its overseas investments to help offset any weakness at home.
StarHub, on the other hand, may have to look more to its pay-TV business and come up with new subscription packages to appeal to the remaining half of the unconverted local households. This will buy time as it waits for its opportunity to extend its corporate connectivity reach when Singapore’s new fibre-optic network is minted in 2013.
Without a viable second business in the near term, market watchers say M1 will have to innovate on mobile pricing and subscription bundles to try and draw the crowds but its margins could be thinned as a result.
‘From the tone of the management, we gather that should its (M1’s) market share continue to fall, it will retaliate aggressively,’ said Mr Wong from DMG & Partners.
M1 – DBS
Don’t expect much from NBN
• A saturated broadband market and the lack of a pay TV platform means that M1 has little chance of benefiting from the National Broadband Network
• M1 is trading at similar valuations to StarHub now, compared to 20-30% discount to StarHub before. M1’s FY09F yield is 8.2% versus StarHub’s 9.4%.
• M1 has reached our target price, downgrade to HOLD.
M1’s entry into broadband may be too late. By mid 2010, household broadband penetration would have crossed 110% (near 100% already) in Singapore. M1 does not have content expertise, unlike its competitors who have gained valuable experience from their pay TV business. In our view, content expertise is a must, as (i) attractive content will lure subscribers, and (ii) content ARPU will compensate for declining bandwidth ARPU, to a large extent. The IPTV business may not be an option for M1; there has not been a profitable IPTV business model in Singapore. Other players have compelling pay TV platforms already (though not very profitable), and M1 may not be able to compete with their bundled offerings. As a broadband retailer, through NBN, M1 could gain subscribers by offering the lowest price, which may further dent its profitability.
Valuations not compelling anymore. M1 is trading at 10.2x FY09F PER vs StarHub’s 10.4x, compared to 20-30% discount to StarHub before. And M1’s FY09F projected yield of 8.2% is lower than StarHub’s 9.4%.
Downgrade to HOLD. At our target price of S$1.60, including 8.2% dividend yield, there is limited upside for M1. Hence, we downgrade M1 to HOLD. Management has ruled out capital management in FY09, which removes a key rerating catalyst.
M1 – CIMB
Highlights from roadshow
Roadshow in Singapore
We hosted a non-deal roadshow for M1 on 17 Apr following the release of its 1Q09 results on 16 Apr. M1 was represented by Ms Karen Kooi (CEO), Mr P Subramaniam (Chief Marketing Officer), Mr Lee Kok Chew (Director of Business Development) and Mr Ivan Lim (GM of Business Development and Investor Relations). We scheduled group and one-on-one meetings with eight investors. Key discussion points were its poor 1Q09 revenue, the outlook for 2009, NGNBN and capital-management initiatives.
Mobile experience is not representative of 2009
Poor 1Q does not signify a trend. M1 was at pains to highlight that 1Q09 revenue softness was not representative of the trend for 2009. To recap, revenue fell 9% yoy and 4% qoq on a combination of a slowing economy (lower roaming and IDD) and a loss of postpaid subscribers (to bundles and exclusive handset deals). It will be making a concerted effort to boost the topline through stimulating higher sign-ups of higher-bill plans (Take 3 is a good example), increasing take-up and boosting its prepaid business.
Defending market share. While M1’s focus has always been on profitability and not market share, it did concede that it would be prepared to defend its subscriber base more vigorously as it does not wish to see further erosion with the subscriber base approaching its internal threshold. Note that M1’s total market share has hit an estimated 25.4% or a loss of 1.1% pts yoy, the lowest in four years.
Boost to topline but margins would potentially be driven down. M1 signalled that it would be more aggressive on subscriber acquisitions and retention (SARC) in an effort to stem the erosion in its market share. It will be targeting more market segments (youth, young professionals, higher-end/corporate customers) while offering more services in 2Q-3Q. However, boosting revenue would come at the expense of margins as more aggressive handset subsidies are thrown in. It noted that SARC costs are at uncomfortably low levels currently and would trend upwards in subsequent quarters. It would be managing cost lines closely to stabilise the bottom line although we see very little room for costs to be cut further.
Take 3 take-up quite strong. Take-up for this programme has been quite strong with 20% of its sign-ups opting for the programme. The key attraction is giving customers the option of exchanging their handsets after nine months of sign-up or to those who have completed at least 20 months of their 24-month handset contracts. Take 3 aims to attract mid-to-higher-end customers who wish to upgrade their phones before their contract periods expire. It is also hoped that this programme would lift M1’s postpaid ARPU (-8% yoy, -4% qoq in 1Q09), which has been sliding. Customers who opt to keep their handsets would have to pay a fee.
Well-placed for NGNBN
Well-placed and prime beneficiary. M1 is well-placed to be a retail service provider (RSP) as it does not have an existing fixed broadband business to cannibalise and is excited at this prospect. Incremental costs for setting up as an RSP are minimal except for international bandwidth although that is not a major cost item. M1 can leverage its relationships with sister companies while it already purchases international bandwidth for its wireless broadband business. Unlike other RSPs, it also has its own billing and customer service systems in place. In fact, the main cost for M1 would be regulated wholesale pricing, which is very low and attractive.
Wholesale pricing to fall. M1 believes that broadband pricing will cascade downwards given the relatively low wholesale pricing. The bulge bracket will progressively move from lower to higher speeds and subscription fees should fall i.e. pricing per megabyte will fall.
Setting up OpCo. Once M1 reaches a critical mass of subscribers (20% of market share), M1 may set up its own OpCo to enjoy greater flexibility in managing bandwidth and resources. It likens the experience to its current backhaul build-out where data traffic has surged and building its own backhaul would help it save on leased circuit costs. It is confident of capturing a 20-25% market share in the fixed broadband space over the medium term although no timeframe has been provided. Note, however, that this is more of a secondary and longer-term objective.
Competing OpCo? Although not an official view, M1 believes that SingTel could set up its own OpCo as it has a critical mass of subscribers to tap on. Our conversations with industry executives suggest that SingTel would likely roll out its own OpCo where it could use some existing equipment.
Thoughts on NetCo and OpCo. For NetCo, M1 considers SingTel’s win as a win-win proposition for all. On its part, M1 will gain open access while SingTel will be able to monetise and protect what would have been a stranded asset had Infinity won. That said, returns on NetCo for SingTel are not very exciting and M1 pointed to the worldwide infrastructure projects as a gauge, which typically fetch returns of below 10%.
For OpCo, it views the margins there as extremely thin as they are sensitive to the subscriber base. OpCo is more of a strategic win for StarHub. Either way, M1 is satisfied with the outcome. Had it won, M1 would have secured returns at wholesale levels with an exclusivity period as it commands less than 25% of the market.
Other comments
No capital-management initiatives in the near term. Despite a low gearing of 0.6x net debt/EBITDA in 1Q09 (below its 1.0-1.5x target and rivals’ 1.2-1.3x), M1 will not be returning additional cash this year. It believes that it would be more prudent to keep cash on the balance sheet given the current economic climate and tight credit conditions. It will only consider further capital-management initiatives once the economy stabilises or shows no signs of further downward pressure.
Valuation and recommendation
Maintain OUTPERFORM, earnings forecasts and target price. M1 is a prime beneficiary of NGNBN, we believe, as NGNBN can help to produce a new revenue stream for the telco. For exposure to yields in the Singapore telco sector, we would advocate M1 over StarHub. StarHub faces the prospect of an intense bidding war with SingTel over football content rights and compression in its broadband business. If SingTel launches its own OpCo, this would further challenge StarHub’s OpCo. For those looking for growth, we prefer SingTel.
Our OUTPERFORM rating and DCF-based (WACC: 8.3%) target price of S$2.13 for M1 have been maintained on possible re-rating catalysts from: 1) a reversal of marketshare loss; 2) qoq improvements in earnings; 3) strong dividends; and 4) the favourable outcome from OpCo.
M1 – BT
Yet another lady at the helm of a telco
M1 promotes its own chief financial officer Karen Kooi to be its new CEO
MobileOne’s exhaustive search for a new leader eventually ended in its own backyard with the operator promoting veteran chief financial officer Karen Kooi as its new CEO.
Ms Kooi, who has been M1’s interim boss since the departure of former chief executive Neil Montefiore in February, will take on the role permanently and concurrently become a director of the company from today.
She will relinquish her CFO position and a replacement will be announced at a later date, M1 said in a statement yesterday.
Her appointment comes after a two-month manhunt, with M1 roping in recruitment agencies to help shortlist candidates locally and abroad.
‘Karen has very strong leadership credentials and financial experience, along with significant expertise in the telecommunications industry. She has been an outstanding CFO for the company, and was intimately involved in several strategic decisions for the company,’ said M1 chairman Teo Soon Hoe.
Ms Kooi, a Fellow Chartered Certified Accountant with an MBA in Investment and Finance from Britain’s Hull University, joined M1 as its CFO in 1995 after stints with other listed companies such as Singapore Press Holdings and City Developments.
Her promotion mirrors the move from rival Singapore Telecommunications when it appointed then CFO Chua Sock Koong to succeed Lee Hsien Yang as chief executive in 2006.
‘This is not surprising. It’s identical to what SingTel did more than a year ago,’ said DBS Vickers analyst Sachin Mittal.
The appointment of a company veteran could mean M1 is favouring ‘continuity’ over the need to hire externally for a ‘fresh perspective’, he said, adding that Ms Kooi has a ‘tough job’ in store as the new M1 chief.
Besides staring at Singapore’s worst recession in history, the smallest of Singapore’s three operators continues to fall prey to mobile number portability.
According to M1’s first-quarter results, it lost 11,000 mobile subscribers in the first three months of this year. Its cellular market share slid to 25.4 per cent from 26.5 per cent in 2008, with StarHub and SingTel chalking up bigger gains now that consumers can carry over their phone numbers.
Ms Kooi will also have to engineer M1’s foray into unchartered territories such as broadband and even pay-TV businesses over the coming years. The company is now leasing StarHub’s cable platform to offer fixed-line Internet access but it plans to strike out on its own once Singapore’s new fibre-optic network is fully-operational in 2013.
Ms Kooi has previously said she is using the StarHub arrangement as a dipstick for her firm’s future broadband foray and that M1 could even launch a television-related service in the near future.