RafflesMed – CIMB
Silverlining beyond short-term
Two issues surfaced in this result announcement. Salary increases appear to be a trend while hiccups in approvals in the new Orchard Specialist Centre were a surprise. We believe the stage is still set for operating efficiency that can come forth with these factors addressed.
3Q12 result was 10% below our expectation with 3Q12 and 9M12 EPS forming 21% and 60% of our previous FY12 forecasts, respectively. FY12-14 EPS estimates are cut by 2-10% for new staff cost adjustments. Still based on 22x P/E (mid-cycle valuations), our target price rolled over to FY14 is higher. Outperform as operating efficiency resume.
Staff cost hikes in play
The slowdown in profit growth was due to the rampant increase in costs, rather than stagnating in revenue. Revenue showed healthy growth of 14% yoy to S$78.7m in 3Q12. Staff costs (+16.8% yoy) was the culprit in this result. The group is merely keeping pace with industry-wide salary increments and staff recruitment to meet its business expansion. In spite of that, EBIT did not suffer but grew 4.4% yoy to S$15m, with the EBIT margin stable at 19.2%.
But operation efficiency would resume
Staff currently deployed at the Singapore Prisons will be redeployed in the new year to other parts of the group as well as to new clinics and services that will be opened in 2013, thereby suggesting that there will be a slowdown in new hiring, reversing the trend of continuous salary increases. Operating efficiency should follow.
Bideford still on for 2013
The application for the change of use of the commercial podium at 30 Bideford Road for medical clinics has not been successful. Management assured us that the group will work with the relevant authorities to amend its plans so as to accommodate such concerns and the resubmission will come forth shortly. Our belief is that clinical operations would still commence sometime in the later part of 1H13, if not early-2H13.
RafflesMed – Kim Eng
Under-catering for growth
Below expectations. 3Q12 results were slightly below expectations as profit was hampered by cost pressure, especially on the wage front. There were also hiccups on the capacity expansion plans. While revenue growth is still strong currently, the delay is a worry, given that RMG is nearing its capacity limitations in its current single hospital.
Cost pressure resulted in slow profit growth. Despite healthy revenue growth of 14% for the quarter, bottomline was up only 7%, which is a similar trend for 9M12 figures. The main culprit was staff cost, which was up 17%. This is a crucial cost line, which historically made up almost 50% of revenue. There were two factors 1) New staff hired in anticipation of business in the new Thongsia Building 2) An impending 8-10% industry-wide adjustment for nursing and auxiliary staff in Singapore this year. There were also higher expenses generally across the board, such as purchased services and consumables.
Revenue growth remains strong. Both the hospital services and healthcare services (mainly clinics) showed similar growth. Management shared that the 15% growth for hospital services was driven equally by higher pricing and volume. We understand that in terms of pricing, public hospitals have recently caught up with RMG, hence management’s belief that there is pricing upside to mitigate cost increases going forward.
First application to convert Thongsia Building unsuccessful. The application for converting this building, which was purchased for SGD92m in 2011, has not been successful, presumably due to traffic concerns, although earlier discussions with Ministry of Health went smoothly. Management is still optimistic that operations will commence there by 2H13, and has prepared for a second application.
Conservative stance may now scupper growth. The delays at Thongsia Building (especially if 2nd application fails) and capacity expansion at Raffles Hospital imply management may have under-catered for volume growth. This may scupper profit growth going forward, which would result in a possible de-rating of the stock. We maintain HOLD, with a TP of SGD2.55, pegged to 22x FY13F PER.
SPH – DMG
Slightly weaker ending quarter
Slightly below our expectations; 4QFY12 recurring earnings fell 17% YoY. 4QFY12 recurring earnings of S$86m (-23% QoQ) came in slightly under our expectations due to lower than expected N&M advertisement revenue. FY12 recurring earnings were up a marginal 0.3% to S$410m. We lowered our FY13 PATMI by 7% due to lower advert revenue and higher operating expenses. SPH has declared a final dividend of 17S¢ a share bringing total dividends for FY12 to 24S¢ a share. Going forward we believe SPH’s cash flow is strong enough to sustain a dividend payout of 24S¢ per annum, implying a yield of 5.9%. Maintain NEUTRAL with slightly higher SOTP TP of S$3.95 (from S$3.85 previously) as we roll forward our valuations to FY13. We think SPH’s FY13 dividend yield of 5.9% remains attractive and will cushion any downside in share price, though we see a lack of near term catalysts to drive upside for its core publishing business.
Property segment offset decline in N&M. Property rental income grew 14% in FY12 to S$191m due to a 101% growth in rental income from Clementi Mall to S$37m (on the back of a full year’s operations), as well as a 3% increase in Paragon’s rental income to S$154m (due to higher rental rates). This helped offset weaker Newspaper and Magazine revenue which declined 1% due to weakness from both print adverts as well as circulation revenue. The Seletar Mall, SPH’s latest property project is expected to be completed by end 2014.
Slowdown in Newsprint charge-out rate could bring some cheer. Newsprint charge out rates averaged US$678/MT in FY12 and US$654/MT in 4QFY12. SPH will benefit from current lower rates which are hovering at ~US$600/MT. As such, we have lowered our FY13 charge out rate assumptions by 10%.
SOTP-derived TP of S$3.95. We value the core media segment based on 11x FY13 P/E, Paragon (S$2.5b) with assumption of a 5% revaluation gain, Clementi Mall (S$266m) with assumption of average passing rent of S$15/sqft, cap rate of 5.5%, M1 and Starhub at DMG TP and investments.
M1 – DMG
Still noises on the line
The acute margin pressure persisted in the Sept quarter as expected due to the full quarter impact of the Android handsets, where fair value accounting is not observed. While 9M cumulative numbers were still behind the curve, M1 expects revenue and earnings to improve in 4QFY12. We have retained our forecast, fair value and recommendation, noting that forecast risk remains. NEUTRAL.
Calling for a better 4Q. M1's 9MFY12 results made up 66% and 68% of our and consensus estimates respectively (62%-65% of the street/our revenue forecast). Teh shortfall was mainly attributed to a further 3%-pt erosion in the EBITDA margin q-o-q, no thanks to the full-quarter impact of the accounting treatment for Android handsets (differs from fair value accounting applied for the iPhone where some revenue is recognized upfront to offset the subsidy). We are keeping our forecast – in line with the renewed guidance at its result call of a better final quarter- with the benefit of stronger revenue traction (Android revenue progressively recognized and fair value accounting for the iPhone 5). While management is guiding for improved earnings, it also stated that subscriber acquisition cost (SAC) is expected to rise due to the introduction of the Phone 5. This would imply much stronger revenue growth momentum.
Weak roaming revenue. M1 said it was affected by the seasonally weaker roaming traffic for the quarter and the lower Malaysia–Singapore roaming tariffs implemented last year. It had previously expected traffic to be stimulated by the lower rates (lowered by 20% for voice) but this has yet to materialize. We gather from the management that the split between inbound and outbound traffic has been fairly even.
Some improvement for NGN provisioning. M1 added 7k fiber broadband customers to 44k in 2QFY12. While it saw an improvement in the service-provisioning timeline for residential customers, M1 said this was still longer than the three days stipulated by the IDA. For commercial premises, the provisioning timeline is still below the threshold conveyed and it is working closely with all stakeholders to reduce the waiting time.
Seeing good LTE take-up – 43k subs on 4G in a matter of weeks. M1 is not able to monetize the premium charged for 4G usage (incremental SGD10/mth over 3G plans) due to the promotional waiver on access. Management said it is seeing a good shift from big screen usage to smartphones.
Capex and BPL. M1 is guiding for capex to remain at the SGD120m level until FY14, after which it would be replaced by maintenance capex. On the Barclays Premiership League (BPL) rights awarded non-exclusively to Singtel earlier, management reiterated its previous stance in not vying for premium content.
M1 – Phillip
Below expectations
Company Overview
M1 is the 3rd largest Telecommunications company in Singapore. The introduction of NGNBN in Singapore lowered entry barriers to the Fixed Line business, which would allow M1 to venture into the corporate and retail
broadband market.
- 6.0% Q-Q decline in Net profits on higher operating expenses, including higher cost of handset.
- 2.9% q-q increase in service revenue positive.
- Nationwide LTE coverage, higher iPhone 5 subsidies likely to increase post-paid customer base.
- Upgrade to Neutral, with new TP of S$2.41.
What is the news?
M1 reported 6.0% q-q decline in Net profits due largely to higher operating expenses, including higher cost of handset. Service revenue was however positive, with increases in revenue contribution from all three major categories.
How do we view this?
Although net profits were low, and EBITDA margins declined for the 5th consecutive quarter since 2Q11, we are upbeat on the improvement in service revenue, while noting that handset subsidies will be recovered in future quarters. We think that the nationwide LTE coverage and the higher iPhone 5 subsidies given by M1 compared to its peers would further increase its post-paid customer base. We see potential for fibre to significantly contribute to M1’s net profit, although this may take time as current profit margins are likely lower than its more established peers.
Investment Actions?
We adjust our figures to reflect 3Q12 earnings. With the current uncertainty in the macro economic environment, and as the search for positive real returns continue, M1’s dividend yield of 5.5% remains attractive at current prices. Fundamentally, M1’s service revenue growth continues to be healthy, while we do not expect any potential headwinds, other than a possible spectrum auction bidding war, for which M1 has the ability to compete in, possibly through an increase in borrowings from banks. We therefore upgrade our rating to “Neutral”, with a new TP of S$2.41.