Category: M1
M1 – OCBC
Defensive but expect lower earnings
Defensive but earnings likely lower. MobileOne (M1) is likely to see its business remain fairly defensive in an economic downturn. However, we believe earnings are likely to be lower, especially if the recent ARPU and margin trends continue. As a recap, M1 posted a slightly disappointing set of 3Q08 results, with operating revenue down 1.7% YoY and also 4.2% QoQ to S$196.7m, while net profit tumbled 20.9% YoY and 16.1% QoQ to S$34.5m. The telco blamed it on higher acquisition and retention costs, although in absolute numbers, acquisition cost eased from S$218 to S$162, while retention cost fell from S$167 to S$155. M1 has also guided for a single-digit decline in net profit in 2008, versus one of a stable operation earlier.
Most vulnerable to higher churn. From its 3Q08 results, we see that M1 has the highest monthly churn of 1.8% among its peers (1% for StarHub and 0.8% for SingTel), mainly due to its lack of bundling abilities; StarHub has been able to offer relatively attractive cost savings for customers who subscribe to all three of its services – mobile, broadband Internet and cable TV; SingTel also has its Mio plan that offers a bundling of similar services at slightly lower price points. And as the recession deepens, the search for value may see some of its customers switching over to StarHub and SingTel, especially since subscribers can retain their existing numbers with the launch of true MNP (Mobile Number Portability) in June.
Retention cost to remain high. As such, M1 may have to work harder than the other two telcos in retaining customers, but we do not believe that this would entail an all-out price war. Instead, M1 is likely to offer more freebies and premiums to retain customers, thus keeping its retention cost high. But continuous internal cost control measures should help balance out the squeeze on its EBITDA margin. We are also expecting M1 to adopt a more prudent capex approach, ensuring that it has ample free cashflows to support its attractive dividend payout ratio of at least 80% of recurring income. Meanwhile, we are also upbeat about its prospects of getting a slice of the fixed line broadband market when the Next-Generation National Broadband Network fully takes off in 2012. Maintain BUY with S$2.12 fair value.
TELCOs – OCBC
Still key defensive stocks
Macroeconomic issues in 2009. Going into 2009, the whole stock market will continue to face many challenges, most of them coming from the macroeconomic front. Besides having to contend with a global economic slowdown, investors will also encounter continued uncertainty brought on by the financial meltdown and credit crunch, currency instability, and increased volatility in the stock markets. In such a highly unpredictable climate, we believe that a flight to quality is not enough – investors should also focus on defensiveness of earnings as well as sustainable dividend payout abilities and most of the Singapore telcos meet these criteria. As such, we continue to maintain our OVERWEIGHT rating on the sector.
Oct sell down brings value. Telco stocks have managed to hold their own for most part of the year, outperforming the STI index admirably. Since the start of the year to end-September, the STI index fell about 31.9%, but in comparison, SingTel was only down 18.8%, StarHub down 8.2% and M1 just 4.2%. However, following a chain of unfortunate events in October, both SingTel and M1 were sold down along with the overall market – SingTel lost about 25.2% of its value in that month alone, while M1 lost about 28.6%, versus the STI’s 23.9% fall. While most of them have recovered somewhat in November, SingTel is still trading around 38.3% lower YTD (Year-to-Date), StarHub is about 27.8% down, and 34.2% off for M1.
Healthy operating cashflows support dividends. While earnings are expected to take a slightly knock next year due to the recession, the slowdown should not have much of an impact, if any, on the telcos’ healthy operating cashflows. If anything, we expect more prudent capex spending and other cost-reduction measures to further improve operating cashflows and in turn, sustain the already attractive dividend policies. StarHub has committed itself to paying out at least S$0.18 of dividend (S$0.045 per quarter) this year and we expect the same, if not better, dividends next year. M1 has guided that it will pay out at least 80% of its recurring income as dividend – we believe this policy is sustainable in 2009. As for SingTel, it is seen as less of a dividend play but with its regional expansion strategy likely to adopt a more cautious approach, we see a higher chance of a special dividend – this was something that SingTel has consistently done in the past to return excess cash to shareholders.
M1 – DMG
Value emerges
Stock slides. Since our last note on M1 on 20 Oct 08, the stock has dived 26% on the back of weak sentiments in the market, as well as negative newsflow from the telecommunications industry. The other two telcos, particularly SingTel, painted a bleak outlook for the next few quarters. Consequently, despite the fact that the industry is largely seen to be defensive, the telco index FSTTC fell by 8% in the past month. Before the recent slump, M1 has been one of the most resilient stocks. It only fell 4% for the first nine months of the year, far outperforming the STI’s 32% slump.
Recapping results. While M1’s revenue fell a mere 1.7% to S$196.7m in 3Q08, earnings took a bigger 21.1% knock to S$34.4m due to higher acquisition and retention costs, following the introduction of mobile number portability in Jun 08. EBITDA margin came in at 42.5%, down from last year’s 45.2%. Gearing, at 128.2%, is seemingly high for M1. But this is not very much of an issue, considering that it has strong operating cash flows that will enable it to comfortably pay off its debts and reward shareholders. It has a Net debt/EBITDA of 0.8x (SingTel 1.1x, StarHub 1.2x), while its EBITDA/Interest stands at 40.6, an improvement over the previous year’s 33.1.
Recession’s not the main curse. Looking back at the past recessions, management revealed that the bad debts are quite insignificant – less than 0.5% of revenue. What investors need to be more worried about is competition. The aggressive marketing by all three telcos have led to surging subscriber acquisition and retention costs, and consequently margins being driven down. Our recent discussions with the telcos suggest that this intense competition will be dying down, at least for now.
Churn rate eased. In 3Q08, M1 was hit with a high churn rate of 1.8%, a jump from 1.2% in the previous corresponding period due primarily to SingTel’s launch of the iPhone. This should be reduced to the 1.5% level as competition tames.
Target price down, but value emerges. We have left our earnings estimates at S$160.1m for FY08 (-6.8% YoY) and S$149.1m for FY09 (-6.9% YoY). At S$1.25, it is trading at 7.0x FY08 and 7.5x FY09 P/E, which compares favourably against the industry average of 9.4x. The yields, at 12.2% for FY08 and 11.4% for FY09, are also the best among the three telcos. We have downgraded our target price for M1 from S$1.89 to S$1.58, based on our revised DDM model. We are upgrading the stock to a BUY despite cutting the target price, as it is looking attractive after the recent fall with a potential upside of 26% from current levels.
M1 – CIMB
Upgrade of wireless broadband speed
Last night, M1 announced that its high speed packet access (HSPA) network has become the first in Singapore and Asia to go live with downlink speed of 14.4 Mbps and uplink speed of 5.76 Mbps following an upgrade to its network. However, M1’s customers would be able to enjoy the top speeds only when supporting devices come on to the market.
M1 will launch two new mobile broadband plans on 8 Nov at S$51.36/month and S$69.30/month. The former plan will provide a downlink speed of 4 Mbps and uplink speed of 1 Mbps while the latter will provide a downlink speed of 7.2 Mbps and uplink speed of 2 Mbps. Existing customers on 3.6 Mbps will be given a free upgrade to the new 7.2 Mbps broadband plan by month-end.
Warfare heated up
Hot on the heels of SingTel and StarHub. The announcement follows hot on the heels of SingTel and StarHub’s recent announcements that they would be upgrading speeds on their wireless broadband plans. StarHub had disclosed that it would be offering faster uplink speeds of 5.76 Mbps by end-December while downlink speeds would be upgraded to 21 Mbps from 14.4 Mbps. Similarly, SingTel would upgrade downlink and uplink speeds to 7.2 Mbps and 1.5 Mbps respectively from 3.6 Mbps for downlink and 384 Kbps for uplink.
Not a surprise. We are not surprised by this latest news as we had felt that M1 would need to respond to its rivals. M1’s latest move raises the competitive heat in wireless broadband where StarHub has been fairly aggressive in offering discounts on subscriptions, even throwing in free wireless modem and subscriptions if one signs up for the higher-speed fixed broadband plans.
No significant impact. We see this more as a defensive move to counter StarHub’s speed advantage in this segment. While the 4 Mbps tariff is attractive and M1 could lure new or poach subscribers, we believe that competitors are likely to react by offering similar or lower rates to match M1’s. Furthermore, it is unlikely that customers will be attracted by the higher speed of 7.2 Mbps as headline tariffs are fairly comparable with those of SingTel or StarHub. While M1 offers certain bundled plans, these cannot compete with its rivals’ more effective bundling or quad play propositions. Lastly, there is still a lack of consumer devices that support such high speeds.
Competing for speed to revive flagging data ARPUs. M1 is also competing for more premium users by offering higher speeds with higher monthly subscriptions in a bid to revive its flagging data ARPUs which dropped to S$28 (-11.1% qoq; -11.7% yoy) in 3Q. We believe this is another means to protect its margins given the higher margins commanded by data services.
Valuation and recommendation
Maintaining earnings forecasts, OUTPERFORM but raising target price. We are leaving our forecasts intact until we see greater traction with its new wireless plans. However, we have raised our DCF-based (WACC 8.3%) target price to S$2.32 for end-CY09 from S$2.24 for end-CY08 as we roll forward our valuation by a year. We keep our OUTPERFORM rating intact as M1 averts a costly bidding warfare, offers the highest yield in the sector and benefits from cost savings from the upgrade to its backhaul. The main share-price trigger here is any capital management initiatives.
TELCOs – DBS
Some disappointments ahead
Story: Telecom sector earnings are considered relatively resilient as consumers continue to spend on telecom services. However, lower corporate spending and the potential outflow of workers and tourists (typical pre-paid subscribers) in a slowing economy, lower roaming revenues from corporates and tourists, and not-so-benign competitive environment due to mobile number portability (MNP) are major concerns for the sector.
Point: We have reviewed the outlook for telco stocks under our coverage. Below are the key changes:
SingTel – earnings preview and revised earnings. On Nov 12, SingTel might report 2QFY09F underlying net profit of c. S$875m (-4% y-o-y, +1% q-o-q) that could disappoint the market. We lowered our FY09F and FY10F earnings by 5% each, and they are now 10%-12% below consensus.
StarHub – earnings preview and revised earnings. On Nov 5, StarHub might report 3QFY08F net profit of S$77m (-5% yo- y, +20% q-o-q), towards the lower end of street expectations. We lowered our FY08F and FY09F earnings by 2% and 3%, respectively, and they are now 6%-10% below consensus.
M1 – revised earnings. Our FY08F estimate is unchanged, but we lowered our FY09F profit by 4%. Our revised earnings are 4%-12% below consensus.
Relevance: Although StarHub has a better track record than M1, the 50-60% EV/EBITDA and PER valuation gaps may not be sustainable. Our below consensus FY09F earnings already reflect low expectations for M1. Hence, we do not advocate a valuation gap of more than 20-30%. We upgrade M1 to BUY with a revised target price of S$1.57 (Prev S$1.65) pegged to 10x FY09F PER, and downgrade StarHub to FULLY VALUED with a revised target price of S$2.34 (Prev S$2.50) pegged to 13x FY09F PER. At the current price, M1 offers sustainable 9.7% dividend yield compared to StarHub’s 6.8% yield. Concerns about a possible bidding war for the English Premier League (EPL) in late 2009 is likely to overshadow StarHub’s share price. Our trough valuation for M1 and StarHub are S$1.17 and S$1.67 respectively.
We maintain a HOLD rating for SingTel at a SOTP-based target price of S$2.84. But if we use the current market price (instead of target price) for some of the listed associates, SingTel would be worth S$2.42. We advise investors to accumulate SingTel towards our trough valuation of S$2.25.