StarHub – DBSV
Counter-intuitive cost savings
- 3Q12 earnings of S$96m (+27% yoy,+11% qoq) were 15% ahead of our estimates.
- Surprise came from lower traffic and handset subsidy costs.
- Lost mobile market share & pay TV subscribers
- Recommendation and TP under review pending more information from the company.
Highlights
Counter-intuitive cost savings. We are surprised by the S$10m sequential decline in traffic costs despite rising data traffic, which management attributed to successful negotiations with international carriers. Cost of equipment was almost stable despite launch of expensive Samsung Galaxy S3 in late May and iPhone 5 in late August, which needed higher subsidies. StarHub could have discouraged these expensive handsets, which possibly reflected in the lower postpaid revenue (-1.2% YoY) as well.
Unimpressive operating metrics in mobile & pay TV. Mobile market share shrank to 27.5% from 27.7% in 2Q12 and 28.5% in 3Q11 due to loss of 10.5K prepaid subscribers in 3Q12. This can perhaps be explained by low marketing expenses (-12% YoY). StarHub lost 1.6K pay TV subscribers due to aggressive offerings from SingTel’s mio TV.
Our View
FY12F/13F earnings are likely to be reviewed. Management has guided for lower margins due to festive promotions in 4Q12F. Potentially slower domestic GDP growth in FY13F may impact mobile roaming revenue while pay TV will continue to face intense competition from SingTel.
Recommendation
Recommendation and TP under review. Despite net debt to EBITDA of only 0.5x versus long term target of 1.5x-2.0x, there is no clear assurance about dividend-hike in 2013F due to: (i) spectrum auction in 2013; (ii) potentially higher capex for 4G & enterprise business in 2013. In our DDM model, we assume 8% cost of equity, 2% long-term growth rate and project 22 Scts DPS (versus 20 Scts in FY12F) in FY13F.
StarHub – Phillip
Attractive Dividends
Company Overview
Starhub (STH) is the 2nd largest Telecommunications company in Singapore. The company also has a very strong
PayTV franchise with subscriber base of more than 500k.
- 3Q12 beat expectations on lower cost of equipment, and depreciation expenses
- Dividends remain attractive, earnings stable
- Maintain Neutral with revised TP of S$3.20
What is the news?
Starhub posted 3Q12 net income of S$96.2 million, representing growth of 10.8% q-q, 26.9% y-y. This was higher than our expectations, due to lower cost of equipment and depreciation expenses. Starhub maintained
its guidance of low single digit revenue growth, EBITDA margin of 30%, Capital expenditure of 11% of operating revenue, and DPS of 20.0 cents for the year.
How do we view this?
The results were above our expectations. Mobile revenue was below expectations on lower revenue from interconnecting fees for overseas calls. This was a result of renewed negotiations, and was mitigated with lower
interconnecting fees incurred. However, we expect a poorer 4th quarter on higher expenses from promotional activities and higher mobile subsidies, while capital expenditure is expected to increase significantly on LTE and other network enhancements.
Investment Actions?
We adjust our forecast to reflect 3Q12 results, with marginal increases to EBITDA forecast. We continue to be of the view that investors should hold on to shares of Starhub for its attractive dividend yields. Share price remains higher than our revised target price of $3.20 based on our DCF model. We assume WACC of 8.3% and 0% terminal growth rate. We think that the ability to monetize data would be a growth driver and rating upgrade catalyst. However, more visibility on the increase in data usage, and consumer’s receptiveness to paying more for data would be required. We therefore maintain our “Neutral” rating, due to its attractive dividend yields, and stable earnings.
SMRT – DBSV
Still riding against headwinds
- 2Q13 net profit within expectations with marginal 2% drop; 1H13 accounts for 50% of our FY13F
- EBIT margins dropped 1.7ppts on higher operating costs
- Cut in interim DPS of 1.5 Scts was expected, down from 1.75 Scts in 1H12, due to higher capex
- Above mean valuations unwarranted, dividend yield at 3.9% is unattractive, maintain Fully Valued. TP at S$1.50
Highlights
2Q13 within expectations. 2Q net profit dipped 2% y-o-y to S$33.3m despite an 8% increase in revenue to S$281.2m. 1H13 accounts for 50% of our FY13F forecasts. All business segments registered revenue growth, except Engineering due to lower consultancy revenue. Rail continued to be the main revenue driver with average daily ridership up by 7.3% to 1.9m. This was helped by Circle MRT Line (CCL) average ridership of 350k/day.
Margins under pressure from higher costs. EBIT margins dipped by 1.7ppts to 14.4% as a result of higher staff costs (+10% y-o-y), depreciation (+20%), repairs and maintenance (+28%) and other operating expenses (+10%). This was partially mitigated by lower electricity and diesel costs (-6%) due to lower tariffs and diesel price.
Our View
Lower interim DPS of 1.5 Scts not a surprise. The Board declared a lower interim DPS of 1.5 Scts (1H12: 1.75 Scts), which was not a surprise to us given the higher capex needs and operating expenses. Management had guided for capex of S$500m in FY13F, and S$118.5m has been incurred as of 1H. As such, we should see a significant ramp up in capex in 2H.
Lacklustre growth. While ridership is expected to grow, operating costs is projected to increase at a faster pace due to higher staff costs, repair & maintenance and depreciation. Thus, bottomline growth is expected to remain unexciting.
Recommendation
Maintain FV, TP unchanged at S$1.50. The stock is trading at c.0.5 std dev above its historical trading mean (c.16x), which is unwarranted in our view given its lackluster growth due to higher operating costs. Maintain FULLY VALUED recommendation with an unchanged TP of S$1.50. Furthermore, lower interim dividends should further signal the Board’s conservatism in its payout in view of capex and operational challenges, thus undermining its attractiveness as a yield counter.
SMRT – DBSV
Still riding against headwinds
- 2Q13 net profit within expectations with marginal 2% drop; 1H13 accounts for 50% of our FY13F
- EBIT margins dropped 1.7ppts on higher operating costs
- Cut in interim DPS of 1.5 Scts was expected, down from 1.75 Scts in 1H12, due to higher capex
- Above mean valuations unwarranted, dividend yield at 3.9% is unattractive, maintain Fully Valued. TP at S$1.50
Highlights
2Q13 within expectations. 2Q net profit dipped 2% y-o-y to S$33.3m despite an 8% increase in revenue to S$281.2m. 1H13 accounts for 50% of our FY13F forecasts. All business segments registered revenue growth, except Engineering due to lower consultancy revenue. Rail continued to be the main revenue driver with average daily ridership up by 7.3% to 1.9m. This was helped by Circle MRT Line (CCL) average ridership of 350k/day.
Margins under pressure from higher costs. EBIT margins dipped by 1.7ppts to 14.4% as a result of higher staff costs (+10% y-o-y), depreciation (+20%), repairs and maintenance (+28%) and other operating expenses (+10%). This was partially mitigated by lower electricity and diesel costs (-6%) due to lower tariffs and diesel price.
Our View
Lower interim DPS of 1.5 Scts not a surprise. The Board declared a lower interim DPS of 1.5 Scts (1H12: 1.75 Scts), which was not a surprise to us given the higher capex needs and operating expenses. Management had guided for capex of S$500m in FY13F, and S$118.5m has been incurred as of 1H. As such, we should see a significant ramp up in capex in 2H.
Lacklustre growth. While ridership is expected to grow, operating costs is projected to increase at a faster pace due to higher staff costs, repair & maintenance and depreciation. Thus, bottomline growth is expected to remain unexciting.
Recommendation
Maintain FV, TP unchanged at S$1.50. The stock is trading at c.0.5 std dev above its historical trading mean (c.16x), which is unwarranted in our view given its lackluster growth due to higher operating costs. Maintain FULLY VALUED recommendation with an unchanged TP of S$1.50. Furthermore, lower interim dividends should further signal the Board’s conservatism in its payout in view of capex and operational challenges, thus undermining its attractiveness as a yield counter.
SMRT – Kim Eng
Interim Dividend Cut on Cautious Outlook
1HFY3/13 results, dividend cut in line with our forecasts. SMRT reported 1HFY3/13 NPAT of SGD69.8m, which came in at 50% of ours and consensus’ full-year estimates. In our July 2012 land transport sector note “No light at the end of SMRT’s tunnel yet”, we had cut our FY3/13 dividend forecast by 10% due to impinged cashflow. This projection was seemingly validated as SMRT cut its interim dividend by 14% from SG1.75cts/sh to SG1.50cts/sh on the premise of prudence – management guided that FY3/13 will remain challenging on cost pressures and lack of fare adjustments until 2013. We maintain our SELL call, and roll forward our valuations based on FY3/14 PER.
Buses still weighing down transport portfolio. SMRT’s bus business continued its poor results, as operating profits were down SGD4mil (-157% YoY) on increased staff costs from salary revisions and higher depreciation and R&M costs associated with a larger fleet. This was mitigated by operating profit growth YoY in the rail (+6.5%), taxi (+SGD1.2m) and commercial space rental (+7.4%) segments.
Government help still not guaranteed. Management shared that the company had applied to, and was awaiting a response from the LTA for asset replacement grants for funding part of the SGD900m asset renewal plan announced earlier. In addition, grant amounts / formulas have yet to be nailed down for the sharing of bus shelter advertising revenues as part of the Bus Services Enhancement Programme (BSEP).
Outlook challenging, yields unattractive – reiterate SELL. The future for SMRT looks daunting as operating costs escalate, the group takes on debt (now net debt vs net cash in FY3/12), and fare revisions likely only kick in from mid-2013. We roll forward our valuations to 15x FY3/14 PER, maintaining our SELL call and adjusting our Target Price accordingly to SGD1.37. SMRT’s stable-to-increasing dividends are a thing of the past, as our forecasts of a full-year dividend cut to SG 6.8 cts/sh (~74% payout ratio) are also maintained.