STEng – CIMB
Nera deal is off; moving on…
We are not disappointed that Nera’s shareholders have voted against STE’s proposed acquisition of the firm. Firstly, we estimate that the deal would have only contributed 2% to STE’s earnings. Secondly, we believe there other M&A targets in Asia.
No change to our EPS or target price (blended P/E, DCF, dividend yields). Our forecasts have not assumed contributions from the acquisition. No reason was disclosed but we suspect Nera’s remaining shareholders (49.95%) are hopeful of striking a higher offer price. Maintain Outperform on STE for catalysts from stronger pick up in MRO.
What Happened
The shareholders of Nera Telecommunications have voted against STE’s proposed acquisition of the firm (all the shares).The acquisition was first announced on 10 Feb12,whenSTEsaid that its subsidiary, ST Electronics, had received an irrevocable undertaking from Nera’s controlling shareholder, Eltek ASA (50.5%),in favour of the transaction. The offer price then was S$0.45/share (S$0.39 cash and S$0.06 dividend), amounting to S$141m.
Nera is a provider of products, solutions and services ranging from satellite communications and wireless infrastructure networks to Internet protocol, optical and broadcast network infrastructure.
What We Think
We believe Nera’s remaining shareholders are hoping for a higher selling price. Nera’s share price hit a high of S$0.50 on 10 Feb just before the announcement (after trading hours).
The proposed purchase price of 10x CY11 P/E appeared fair vs. STE’s valuation (16.5x) then. We think STE is unlikely to pursue the matter further and is likely to move on to other M&A targets.
We are not extremely disappointed. Nera is “good to have”, given a clean balance sheet and potential synergies, but is not imperative to the group as we estimate only a 2% earnings contribution.
What You Should Do
Stay invested as STE is still trading close to its trough of 15xP/E in the last five years.
TELCOs – DBSV
Regulator tightens belt to press the pedal on fiber
What's new?
Singapore telecoms regulator IDA is raising the weekly fiber installation capacity to 3,100 per week from Aug 2 onwards. This is up 30% from 2,400 earlier and exceeds our forecast of a 15% rise highlighted in our report on SingTel released on 2nd July. A dynamic mechanism to raise capacity in line with demand has also been put in place.
200 installations out of the quota will be for commercial buildings. This is the most attractive pie for retail service providers as each commercial connection commands much higher ARPUs than residential connections. IDA wants OpenNet (the fiber backbone provider) to offer an activation period of 10 days from its side, unless building owners cause a delay in wiring up their buildings.
Our view
Slightly negative for SingTel but positive for others. The commercial broadband market represents the biggest slice of the market, accounting for an estimated 60% of the total, with residential accounting for less than 40%. SingTel is the leader in the commercial space with an estimated 80% share of the commercial broadband market while StarHub has less than 20% due to difficulties in accessing commercial buildings. SingTel has differentiated itself on the basis of its strong managed service portfolio, cloud computing and strong IT support. However, SingTel's market share and margins may still feel the heat as retail service providers offer services to price-sensitive small and medium (SME) customers. SingTel may barely achieve stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. Ongoing re-structuring and its mobile advertising business are other cost pressures in the near term.
S-curve ahead as Singapore lags Malaysia in fiber adoption. Fiber adoption stands at 12% of rollout in Singapore versus 25% in Malaysia, due to the various bottlenecks the regulator IDA has identified and wants to quickly resolve. Compared to only 99k fiber subscribers in Singapore at the end of 2011, we project at least 150K subscribers to be added each year for the next three years in line with the "S curve".
No change to our TP and recommendations on stocks under our coverage.
TELCOs – DBSV
Regulator tightens belt to press the pedal on fiber
What's new?
Singapore telecoms regulator IDA is raising the weekly fiber installation capacity to 3,100 per week from Aug 2 onwards. This is up 30% from 2,400 earlier and exceeds our forecast of a 15% rise highlighted in our report on SingTel released on 2nd July. A dynamic mechanism to raise capacity in line with demand has also been put in place.
200 installations out of the quota will be for commercial buildings. This is the most attractive pie for retail service providers as each commercial connection commands much higher ARPUs than residential connections. IDA wants OpenNet (the fiber backbone provider) to offer an activation period of 10 days from its side, unless building owners cause a delay in wiring up their buildings.
Our view
Slightly negative for SingTel but positive for others. The commercial broadband market represents the biggest slice of the market, accounting for an estimated 60% of the total, with residential accounting for less than 40%. SingTel is the leader in the commercial space with an estimated 80% share of the commercial broadband market while StarHub has less than 20% due to difficulties in accessing commercial buildings. SingTel has differentiated itself on the basis of its strong managed service portfolio, cloud computing and strong IT support. However, SingTel's market share and margins may still feel the heat as retail service providers offer services to price-sensitive small and medium (SME) customers. SingTel may barely achieve stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. Ongoing re-structuring and its mobile advertising business are other cost pressures in the near term.
S-curve ahead as Singapore lags Malaysia in fiber adoption. Fiber adoption stands at 12% of rollout in Singapore versus 25% in Malaysia, due to the various bottlenecks the regulator IDA has identified and wants to quickly resolve. Compared to only 99k fiber subscribers in Singapore at the end of 2011, we project at least 150K subscribers to be added each year for the next three years in line with the "S curve".
No change to our TP and recommendations on stocks under our coverage.
SingPost – OCBC
IMPACT FROM REVISED QoS FRAMEWORK LIKELY LIMITED
•Changes in QoS framework
•Do not foresee an impact
•Seeks growth on back of stable mail business
Revised Quality of Service Framework
The Infocomm Development Authority of Singapore (IDA) has revised the Quality of Service (QoS) framework for postal services. A key change is the increase in financial penalty for breach of the standards – a penalty of up to S$50,000/month per indicator may be imposed for non-compliance. This compares with the current penalty of S$1,000- S$5,000/month per indicator. The second key change is the requirement for SingPost to appoint an independent assessor to conduct a sampling letter test.
How will this impact SingPost?
The revised framework will be applicable to Singapore Post’s (SingPost) basic letter delivery service (effective 1 Jul 2012), and does not apply to parcel deliveries. According to statistics collected by SingPost in recent years, the group has been delivering over and above IDA’s requirements. Should this trend continue, we do not foresee an impact from the increase in penalty. Meanwhile, SingPost’s compliance with IDA’s QoS framework is currently measured via a sampling letter test that is carried out by SingPost itself. Under the new framework, SingPost has to appoint an independent assessor to conduct the sampling letter test at SingPost’s cost as an additional method of measuring compliance.
Expanding other divisions while being true to the core
A structural decline in the mail business due to e-substitution and lifestyle changes has affected personal correspondence and business transactional mail. However, growth in direct marketing mail has been observed, supporting mail volumes. We appreciate SingPost’s dominant domestic market position, operating efficiency, and stable operating cash flows. We are also mindful of margin pressures as well as the relatively limited growth opportunities in the core mail business. However, the group is seeking geographical and business expansion in logistics and retail, with continued investments in its core mail business. Maintain BUY with S$1.14 fair value estimate.
SingPost – OCBC
IMPACT FROM REVISED QoS FRAMEWORK LIKELY LIMITED
•Changes in QoS framework
•Do not foresee an impact
•Seeks growth on back of stable mail business
Revised Quality of Service Framework
The Infocomm Development Authority of Singapore (IDA) has revised the Quality of Service (QoS) framework for postal services. A key change is the increase in financial penalty for breach of the standards – a penalty of up to S$50,000/month per indicator may be imposed for non-compliance. This compares with the current penalty of S$1,000- S$5,000/month per indicator. The second key change is the requirement for SingPost to appoint an independent assessor to conduct a sampling letter test.
How will this impact SingPost?
The revised framework will be applicable to Singapore Post’s (SingPost) basic letter delivery service (effective 1 Jul 2012), and does not apply to parcel deliveries. According to statistics collected by SingPost in recent years, the group has been delivering over and above IDA’s requirements. Should this trend continue, we do not foresee an impact from the increase in penalty. Meanwhile, SingPost’s compliance with IDA’s QoS framework is currently measured via a sampling letter test that is carried out by SingPost itself. Under the new framework, SingPost has to appoint an independent assessor to conduct the sampling letter test at SingPost’s cost as an additional method of measuring compliance.
Expanding other divisions while being true to the core
A structural decline in the mail business due to e-substitution and lifestyle changes has affected personal correspondence and business transactional mail. However, growth in direct marketing mail has been observed, supporting mail volumes. We appreciate SingPost’s dominant domestic market position, operating efficiency, and stable operating cash flows. We are also mindful of margin pressures as well as the relatively limited growth opportunities in the core mail business. However, the group is seeking geographical and business expansion in logistics and retail, with continued investments in its core mail business. Maintain BUY with S$1.14 fair value estimate.