Category: M1
TELCO – DBS
Big brother’s guidance positive but no near term catalysts
SingTel aggression not for long term: We do not subscribe to the view that SingTel would continue to be aggressive on market share gains for bigger scale that could be useful for National Broadband Network (NBN). Its experienced management is well aware of the fact that competitive response would halt its advance and hurt earnings of all players including its own.
Market share focus was a tactical move. We believe that SingTel focused on market share gains last year in order to (1) re-contract post-paid subscriber base three to six months ahead of full mobile number portability (MNP) introduction in June 08 (2) re-position itself to capture growth in the rapidly growing pre-paid mobile segment. It was a tactical move that paid off initially but strong competitive reaction rendered the move ineffective as SingTel’s EBITDA for Singapore declined 1% despite strong 10.7% revenue growth in 1Q 2008.
Margins should improve in 2H 2008 as evident from SingTel’s guidance for Singapore. There is hardly any room for SingTel’s Singapore margins to drop further given its stable margin guidance for Singapore in FY09. In the near term, we expect the three Telcos to report lower EBITDA margins YoY but higher QoQ in 2Q 2008 due to MNP from June 08. However, we expect to see margins reverting back to healthy levels in 2H 2008, when operators would be done with re-contracting their subscriber base. This is also reflected in the stable margin guidance issued by StarHub and M1.
SingTel involves risk of overpayment for overseas acquisitions. SingTel is under pressure for making overseas acquisitions in order to deliver on its guidance of double-digit earnings growth in the medium term, which we think is not possible without new acquisitions. However, acquisitions are no longer cheap with the rush among big global Telcos to acquire companies in emerging markets that may not be earnings accretive initially.
Downgrade the sector call to neutral with M1 as top pick. M1 is cheap at about 11x FY08 PER compared to 14.8x for StarHub and 14.7x for SingTel. Its dividend yield is highest among all the Telcos at 7.4% compared to 5.7% for StarHub and 3.4% for SingTel. StarHub trades at about 35% premium to M1’s PER valuations and the expected news flow on NBN could have an adverse impact on StarHub given that NBN would break StarHub’s and SingTel’s broadband duopoly with M1 as the chief beneficiary.
TELCOs – CIMB
Margin compression weighs in
• Margin concerns overshadow consumption growth optimism. EBITDA margin compression in 1QCY08 exceeded our expectations and Singapore telcos are now in unchartered waters with sector EBITDA margin at an all-time low of 34.6%. We believe that the systemic margin pressure exerted by SingTel is unlikely to ease soon and will overshadow telco service consumption growth in Singapore. Sector PBT growth is set to slow to 8% for 2008-09 as a result, down from 10% previously.
• 1QCY08 results review. SingTel’s market-share drive took its mobile subscriber share to 43%, the highest in 17 quarters. This came at the expense of sector EBITDA margin, which was driven down to 34.6% (-280bp yoy). StarHub was forced to respond to an aggressive SingTel, resulting in its sharpest EBITDA margin erosion (-200bp yoy) to date. M1 averted yoy EBITDA margin erosion with the help of a low base from heavy 10th anniversary promotions the year before.
• Will SingTel’s aggression ease soon? We would not bet that competition will ease once mobile number portability (MNP) comes on stream. We believe SingTel is in the midst of a strategic repositioning ahead of the rollout of a national broadband network and the push for market share could be extended. Market share offers SingTel the scale of return for strategic growth initiatives/investments e.g. pay TV content, upgrade of fixed network, new wireless services. This sets SingTel up to generate potentially better returns for future investments relative to StarHub and M1.
• Yields offer respite for StarHub and M1. StarHub and M1 continue to offer prospects of more than 8% yields on robust free cash flow. Earnings risk should be limited by SingTel’s EBITDA margin guidance of 40% (flat yoy) for FY09, which suggests that sector margins could stabilise during the course of the year. However, we do not expect a significant margin recovery in 2008-9.
• Maintain Neutral on the sector. In the current environment of increased competition within Singapore, SingTel’s diversified earnings base offers better downside protection than its peers. Singapore is only 30% of its earnings versus 100% for M1 and Starhub. It also has potential near-term re-rating catalysts from the MTN acquisition with Bharti. Between Starhub and M1, we prefer StarHub over M1 for its more diversified earnings. As a dividend yield hideout, our strategist prefers Media and S-REITs, over Singapore Telcos. Among regional telcos, our preference is for TM International.
M1 – Phillip
Q1 FY08 Results Within Expectations
Net profit dropped in Q1. For Q1 FY08, M1 reported operating revenue of S$203.9m (+3.8% yoy), profit before tax of S$46.8m (+2.6% yoy) and net profit of S$38.0m (-23.5% yoy).
The increase in revenue was due to service revenue growth as the customer base increased by 19,000 from the last quarter to 1,554,000. The decrease in net profit in Q1 FY08 was due to the adjustment for the reduction in corporate tax by 2% to 18% in Q1 FY07.
Outlook for FY08. M1 expects the operations for 2008 to remain stable. The introduction of full mobile number portability from 13 June 2008 is likely to cause increased competition, which may result in short term increase in acquisition and retention costs. However, there are opportunities for M1 to target specific market segments. Furthermore, StarHub Ltd has joined M1-City Telecom consortium to jointly submit a bid to design, build and operate the passive infrastructure layer for the Next Generation National Broadband Network (NBN).
Maintain Hold with fair value at S$2.16. Based on our valuation using the free cash flow to firm model, the target price is maintained at S$2.16. M1 remains a hold as the growth in revenues and profits are likely to be limited due to its focus on the domestic market.
M1 – OCBC
Pretty decent 1Q08 results
1Q08 results pretty decent. MobileOne (M1) posted a pretty decent set of 1Q08 results, with operating revenue up 3.8% YoY (down 1.4% QoQ) at S$203.9m, meeting nearly 25.4% of our FY08 revenue forecast. Although net profit fell 23.7% YoY (flat QoQ) to S$38.0m, meeting about 22.2% of our full-year earnings estimate, we note that the decline was mainly due to a higher tax of S$8.8m, versus a tax credit of S$4.1m in 1Q07, and a tax of S$6.4m in 4Q07. Looking at the operating level, profit was actually up 1.3% YoY and 4.9% QoQ at S$48.8m. EBITDA was also fairly stable at S$78.9m, up 3.5% YoY and 3.1% QoQ, although margin eased slightly from 43.4% in 1Q07 to 42.2% but was still above 4Q07’s 40.9%.
Mobile data usage growing steadily. On the operating front, M1 managed to add another 19,000 new subscribers (+1.2% QoQ) over the previous quarter, but we note that the bulk came from the competitive prepaid segment (+1.8% QoQ), while the more lucrative postpaid segment gained 0.8%. In addition, ARPU (Average Revenue per User) numbers were slightly disappointing, with prepaid down 7.7% QoQ at S$16.8 and postpaid down 1.3% QoQ at S$61.6. While acquisition cost fell 31.6% QoQ to S$143/user, and retention cost eased 7.5% QoQ to S$136/user, we expect them to rise again as competition is likely to heat up ahead of the implementation of full MNP (Mobile Number Portability) from 13 June 2008. On a more positive note, mobile data ARPU has not only remained fairly stable at S$31.7 (+0.3% QoQ), its contribution of service revenue has risen from 7.2% in 1Q07 and 9.6% in 4Q07 to 12.4% in 1Q08.
Focus on mobile broadband space. Going forward, we expect the data segment to increase its contribution, given the recent incentives by M1 to focus on the mobile broadband space. In addition, M1 has emerged as a serious contender in the NGNBN project, given that rival StarHub has recently joined the M1-City Telecom NetCo consortium and it will also evaluate the RFP details for the OpCo tender. Meanwhile, we retain our BUY rating and S$2.33 fair value as we continue to like M1 for its defensive nature, given its stable earnings stream and high dividend payout.