Category: M1
TELCOs – CIMB
A less bumpy ride on the way up
• 3QCY07 results in line, Singapore telco service consumption growth intact. Earnings for the three telcos came within our expectations. The key positive was robust 9.5% yoy revenue growth for the sector, driven by mobile and broadband, which both grew 12% yoy. The key negative was margin pressure due to unique factors at SingTel (strategic initiatives and increased contributions from low-margin IT sales) and StarHub (lag in passing on higher BPL costs). Overall, Singapore’s telco service consumption growth remains intact on the back of an immigration boom and a robust domestic economy.
• Positive outlook for 2008. The migration boom and the fastest rise in wages in seven years provide a promising backdrop for telco services for 2008. In addition, we expect wireless broadband and 3G services to provide upside to growth expectations on greater availability and affordability of user-friendly 3G handsets as well as the introduction of service innovations such as capped data plans. Margins in 2007 hit a low and we expect improvements in 2008. However, the scope of margin expansion should be capped by structurally higher retention costs with mobile number portability (especially at SingTel) and no let-up in intense but rational competition.
• StarHub and SingTel should be the biggest winners. Although all three telcos should benefit from subscriber growth, StarHub stands out for its potential ARPU growth (postpaid mobile and pay TV) while SingTel should be driven by mobile subscriber market-share gains. StarHub’s best-in-class bundled offerings make it the best stock to own for telco service consumption growth in 2008. We expect M1 to be increasingly marginalised for lack of bundling capability.
• Robust free cash flow yields supportive of above-consensus prospective yields. We reiterate our view that there is significant scope for consensus to re-rate dividend expectations for the Singapore telco sector. We expect the sector to deliver an average CY08 dividend yield of 8.4% (consensus: 6.0%), fully backed by free cash flow from robust topline growth, limited capex and strong balance sheets.
• Maintain Overweight; StarHub our top pick, followed by SingTel. Singapore telcos offer attractive risk-reward in terms of historical EV/EBITDA valuations. The sector also offers reliable earnings from an immigration influx, the proliferation of 3G/wireless services etc. Finally, downside risks should be limited given hefty prospective yields on robust free cash flow. Key risks are irrational competition and NBN but these are on the low side. StarHub is our top pick for its bundled offerings and greatest scope for upside surprises on the ARPU front. SingTel is our next preferred pick for prospective subscriber market-share gains in Singapore and exposure to high-growth regional markets.
M1 – CIMB
Margin pressure on the horizon
• In line. 3Q07 earnings of S$43.6m (+1.6% yoy) were 3% below our estimate but 6% above consensus. While there was little surprise in the results, key highlights were: 1) increased competition in prepaid and data plans; 2) cost pressure from higher call and data traffic; 3) capex guidance of S$70m, down from S$100m.
• Data plan and prepaid ARPU declined. Topline of S$200.2m (+5.8% yoy) was primarily driven by subscriber growth. ARPU actually declined for data plans (-21.3% yoy to S$31.70) and the prepaid segment (-12.6% yoy to S$15.90). We believe data plans are facing increased competition from StarHub which launched its HSDPA offering island-wide in 2Q07 while prepaid has to deal with sustained aggression from SingTel. Postpaid ARPU rose (+3.7% yoy to S$61.80) as more customers signed up for mid-tier plans.
• Rising margin pressure to persist into 4Q07. 3Q service EBITDA margin declined 340bp yoy to 46.6% on higher traffic expenses (+60.3% yoy) and leased circuit costs (+19.1% yoy). We do not expect these cost pressures to let up in 4Q07 as M1 faces increased competition from SingTel (prepaid) and StarHub (mobile broadband). We also expect A&P expenses to rise as we enter the year-end festive season and the run-up to mobile number portability.
• Capex guided lower to S$70m. This implies S$44m will be spent in 4Q07 when the construction of the cellular backhaul network commences. The backhaul project is estimated to cost S$40m-60m and should provide some relief to leased circuitcost pressure, especially from FY10.
• Maintain Neutral with an unchanged target price of S$2.40. Our target price remains based on DCF valuation (WACC 7.9%, terminal growth 1%). Our FY07 earnings estimate has been reduced by 8% to reflect higher tax assumptions (18%, based on guidance) and a 50bp reduction in our FY07 EBITDA margin estimate. While M1 remains vulnerable to competition from SingTel and StarHub, we believe downside risk should be limited by forward yields of over 9%.
M1 – BT
M1’s Q3 net profit rises 1.6% to $43.6m
MOBILEONE (M1) has reported a marginal gain of 1.6 per cent to $43.6 million in net profit for the third quarter ended Sept 30, helped by lower taxation.
Earnings per share was up 12.6 per cent to 4.9 cents.
Total revenue for the quarter rose 5.8 per cent to $200.2 million as M1 managed to sell more handphones in a very tough market where mobile subscription exceeds the population.
Operating expenses rose 8 per cent to $144 million while taxation was 7.8 per cent
Earnings before interest, tax, depreciation and amortisation margin was down to 46.7 per cent from 50.7 per cent.
Statistics from the Infocomm Development Authority of Singapore (IDA) put the country’s mobile penetration rate at 111.2 per cent in June this year, meaning the total number of handphone subscriptions far exceeds the entire local population.
M1, Singapore’s smallest listed telco, said for the first nine months, net profit increased 7.3 per cent to $133.9 million. Revenue for the nine months grew 4.3 per cent to $596.4 million.
M1 added 58,000 new customers in the third quarter to bring its total customer base to 1.467 million.
Data usage continued to grow, with non-voice services contributing 21.7 per cent to service revenue in the quarter, compared with 19.2 per cent in the same period last year.
M1 chief executive Neil Montefiore said, with mobile penetration exceeding 110 per cent, the competitive environment will remain challenging.
‘M1 will continue to innovate and enhance our service delivery to meet our customers’ total wireless communications needs while maintaining a disciplined approach to cost management. M1 will also continue to look for new opportunities for growth,’ he said.
Based on the current outlook, M1 estimates single-digit growth in net profit for full-year 2007.
It also maintained guidance for capital expenditure for full-year 2007 at $70 million.
M1 said total cash distribution for the year to be at least 80 per cent of net profit.
For the half-year, M1 had paid out a total of 7.1 cents comprising an interim dividend of 2.5 cents and 4.6 cents per share by way of a capital reduction without any share cancellation. Together, that amounted to 70 per cent of first-half net profit.
TELCOs – BT
Buy M1, SingTel, StarHub for their safe-haven status: Citi
All 3 outperformed the stock market in last 3 corrections
BUY the three listed telcos for their safe-haven status, given that markets are at all time highs, said Citi in a report this week.
It noted that the telcos outperformed the stock market in the last three corrections earlier this year, in 2006 and 2004, a point Citi had highlighted last month.
‘This track record should encourage ownership of all three Singapore telecom stocks, given that the markets are at all time highs,’ it said.
As domestic consumption stories, the telcos are largely insulated from the risk of a global economic slowdown, Citi had said in a September report on Asian telcos.
‘It’s all about relative outperformance though. No one single telco has delivered a positive return over the last three corrections (StarHub comes close),’ it said.
In the 2004 market correction, M1 outperformed the Straits Times Index (STI) 5.6 per cent while SingTel was 0.2 per cent higher.
StarHub was only listed in October 2004.
During last year’s correction, M1 outperformed 7.6 per cent, SingTel 0.4 per cent and StarHub 13.3 per cent.
During this year’s correction, the outperformance of M1, SingTel and StarHub was 10.9 per cent, 0.3 per cent and 5.9 per cent respectively.
In the latest report, Citi said the Singapore telcos are benefiting from the immigration-driven consumption growth and robust economic activity.
Yesterday, the government said preliminary third-quarter growth was 9.4 per cent. Economists are expecting full-year growth to exceed the official 7-8 per cent forecast.
Last month, government data showed that Singapore’s total population rose 4.4 per cent in 2007 to 4.7 million, boosted by foreigners.
The non-resident population grew about 14.9 per cent in 2007 to cross one million. Non-residents accounted for about 130,000 or 66 per cent of the total population increase.
The resident population grew 1.8 per cent in 2007 and in absolute terms, it was 66,600 from a year ago.
Citi’s economist Chua Hak Bin said: ‘The proportion gives a sense of distribution of current job growth, with about two-thirds of jobs going to non-residents.’
Job growth has been strong with total employment at 2.61 million at end-June 2007, up from 2.5 million at end-2006 and 2.32 million at end-2005.
Job growth was about 113,800 in the first half of this year. Manpower Minister Ng Eng Hen said a record 200,000 jobs at least will be reached this year.
The telcos focus much of their marketing, particularly pre-paid mobile services, on the foreign worker segment.
Citi has revised upwards its price target for SingTel to $4.40 from $3.90.
It likes SingTel for three reasons – its stakes in regional telcos, especially India’s Bharti, solid domestic earnings momentum and capital management efforts.
As for StarHub, the telco has the best exposure to Singapore’s vigorous growth, Citi said, also giving a new target price of $3.60 from $3.30.
M1 has been upgraded to ‘buy’ from ‘hold’. Citi said while M1 is structurally the weakest of the three operators, its good yield offsets lower growth prospect. Citi cites a 11 per cent prospective yield and noted that an interested buyer in Keppel has increased its holdings to 19.9 per cent versus 18.2 per cent in June.
TELCOs – CIMB
Growth surprises, capital management could be next
• 2QCY07 results marked the start of re-rating for Singapore telcos. Earnings for SingTel’s Singapore operations and M1 surprised on the upside while StarHub’s performance was within our expectations. The sector’s 9.5% yoy revenue growth, driven by double-digit increases in mobile (11.5% yoy) and Internet/data services (+14% yoy), was the quarter’s highlight.
• Topline drivers remain a robust domestic economy and immigration influx. A robust domestic economy has lifted mobile postpaid ARPU (+5.6% yoy) and penetration rates for household broadband (Jun 07: 71%, Jun 06: 56%). Meanwhile, an influx of immigrant labour on the back of Singapore’s transformation into a global city continued to drive mobile-subscription growth (+11.5% yoy), despite high penetration rates of 111%.
• Potential yield surprises. Consensus is expecting an average CY08 yield of 5.6%. We are going for 8.0%. We believe that topline-led cash-flow growth will set the stage for upside yield surprises over the next two years, particularly for StarHub and M1.
• Risks receding. The risk of cost pressure is declining on the back of healthy topline growth. The three telcos are indicating greater comfort with next-generation broadband network (NBN) risks from a year ago, following dialogues with the regulatory body, IDA. We also believe the IDA’s final decisions will be balanced between introducing greater innovation through competition and limiting the risk of destructive competition for SingTel and StarHub.
• Upgrading sector to Overweight from Neutral; SingTel our top pick on 3-6-month view; StarHub our preferred pick on 6-12-month view. We raise our target prices for SingTel (Outperform), StarHub (Outperform) and M1 (Neutral) as we roll forward our valuation to CY08. Our ratings on the three stocks remain unchanged. SingTel’s target price goes up to S$4.54 (from S$4.27), StarHub’s to S$3.64 (from S$3.50) and M1’s to S$2.40, all based on DCF valuations. Singapore’s telco sector is benefiting from strong consumption growth on the back of an immigration boom and robust domestic economy. Strong cash flow-generation sets the backdrop for attractive sector yields of 8%. SingTel is our top pick for nearterm outperformance, as it is most likely to benefit from fund flows seeking a safe haven together with high growth in regional markets. StarHub is our preferred pick for the medium term. As the leading quadruple-offering operator, StarHub arguably offers the best exposure to Singapore’s immigration boom, with a 10% yield on strong free cash flow. M1 is a pure defensive stock with prospective yields of 9.5%.