TELCOs – DBSV
Sector offers >6% yield, 2Q11 Review
• M1’s higher gearing and weak free cash flow may limit earnings payout to 80%, below last year’s 100%.
• SingTel continues to gain mobile revenue share while StarHub is gaining non-mobile subscribers despite absence of English Premier League rights.
• StarHub is our top pick, trading at 7.4% yield (fixed 20 Scts DPS) versus 6% for M1 & SingTel.
A quick recap of 2Q2011 results. M1 & StarHub reported inline earnings while SingTel’s earnings were 5% below our expectations. SingTel disappointed on lower than expected earnings contribution from Bharti and Optus. Bharti was hit by 3G rollout costs and higher tax rate in India. Optus, on the other hand, witnessed higher mobile competition as smaller player VHA joined market share battle with incumbent Telstra.
StarHub (Buy, TP: S$3.05) is our top pick. StarHub’s free cash flow is likely to be ~120% of FY11F earnings, as the company pays minimal cash tax due to its deferred tax assets. StarHub has a fixed dividend policy of 5 Scts per quarter for FY11F. We believe this will be maintained in the coming years.
StarHub impressed in the non-mobile segment. Despite loss of EPL and ESPN rights, StarHub continued to gain pay TV subscribers with sequentially stable ARPU. Moderate subscriber growth in the broadband segment and stable ARPU also demonstrated solid execution.
M1 (Hold, TP: S$2.60) may not gear up significantly above its peers. At the end of 2Q11, M1 had net debt to annualized EBITDA of 1.1x versus 0.7x for StarHub and SingTel each as shown in the chart on the side. M1’s gearing spiked from borrowing S$81m to partly pay for FY10 dividends, as its free cash flow was very weak. Even FY11F free cash flow may be ~70% of FY11F earnings due to fair value accounting for handsets. In our view, investor should expect 80% earnings payout ratio.
SingTel (Hold, TP: S$3.20) continued to gain mobile revenue share in Singapore. This was driven by more attractive lineup of handsets and devices offered slightly ahead of peers, focus on pushing data SIM cards by bundling them with fixed broadband service and attractive discounts to subscribers on re-contracting. Peers do not emulate these tactics lest market should become more competitive.
SATS – BT
SATS unit enters into food catering JV with OCS Ventures
SATS Ltd announced on Thursday that its wholly owned subsidiary SATS Investments Pte Ltd (SIPL) will be incorporating a joint venture company in Singapore with investment holding company OCS Ventures Pte Ltd.
The new company, of which SIPL will hold a 51 per cent stake, will provide food and allied services to clients operating in remote areas around the world.
It will start off by focusing on clients from the oil, gas and marine, mining and industrial and infrastructure construction in the Asean, China, Australia, New Zealand and Papa New Guinea.
Acting CEO of SATS Tan Chuan Lye said that the joint venture will be an ‘important milestone in our strategy to extend the reach of our non-aviation food solutions business’.
‘This partnership will enable SATS to leverage our strong food solutions capabilities and uncompromised food safety standards to remote catering clients,’ he added.
The company will also ‘benefit tremendously from Singapore’s impeccable record of corporate governance and established reputation as a preferred global hub for multinational companies in sectors such as oil and gas, and marine’, said Raju Shete, founder and president of OCS Ventures.
ComfortDelgro – BT
ComfortDelGro’s Q2 net profit up 3% at $60m
The group declares an interim dividend of 2.7cents per share
COMFORTDELGRO Corporation posted a 3 per cent rise year on year in net profit to about $60 million for the second quarter ended June 30, while revenue increased 6.8 per cent to $843 million.
During the quarter, operating profit improved by 3.7 per cent to $103 million despite rising costs, especially for fuel and electricity. Earnings per share were 2.87 cents, up from 2.79 cents in Q2 2010.
The group has declared an interim dividend of 2.7 cents per share, payable Sept 1.
For the half-year ended June 30, net profit slipped 2.2 per cent to $110 million, dragged down by higher operating costs while group revenue climbed 5.8 per cent to $1.65 billion.
In Q2 2011, ComfortDelGro’s bus business saw revenue increase about 5 per cent to $419.5 million, as growth in Australia, Singapore and the UK helped to mitigate a decline in China.
The group’s taxi business saw revenue increase by 7.1 per cent to $255.6 million, with stronger contributions coming in from Singapore and Vietnam.
Revenue from the rail business rose 11.1 per cent to $33.3 million as average daily ridership for the North East Line and the Punggol and Sengkang LRTs grew by 15.7 per cent and 15.8 per cent to 418,000 and 57,000 respectively. Including rental and advertising income, total revenue from the rail business increased 10.2 per cent to $36.8 million.
Meanwhile, revenue contributions from its bus station business in Guangzhou, its vehicle inspection and testing services as well as its automotive engineering services were all higher in the second quarter.
The group’s overseas operations accounted for about 42 per cent of group revenue in Q2 2011, though the group aims to derive 70 per cent of its total revenue from overseas within the next four to six years.
‘The global economic uncertainty and the inflationary pressures in the countries we operate will continue to pose challenges for the group,’ said managing director and group CEO Kua Hong Pak. ‘However, with our strong balance sheet and low gearing, we will be well positioned to meet these challenges.’
Shares in ComfortDelGro closed at $1.26 yesterday, down one cent.
SingTel – BT
SingTel Q1 profit down 2.9% at $916m
Associate Bharti Airtel continues to weigh down its bottom line
Singapore Telecommunications’ first- quarter net profit dipped 2.9 per cent to $916 million, from $943 million last year as Indian associate Bharti Airtel continued to weigh down its bottom line.
Earnings per share for the three months ended June 30 slid to 5.75 cents, from 5.92 cents in 2010 while operating revenue rose 7.4 per cent to $4.6 billion during the period.
South-east Asia’s largest telco, which derives 77 per cent of its Ebitda – earnings before interest, tax, depreciation and amortisation – from overseas, was hit by a 10 per cent decline in pre-tax earnings contributions from its regional associates.
Its largest overseas foray, Bharti, was again the main culprit. Pre-tax contributions from the Indian operator dived 27 per cent to $154 million in the first-quarter due to a combination of higher domestic taxes as well as sustained losses in South Africa.
Bharti completed the acquisition of the African assets of Kuwaiti conglomerate Zain Group in the first quarter of last year.
Since then, SingTel’s quarterly profits have been repeatedly dampened by the financing costs associated with the mammoth US$10.7 billion buyout, However, there are fresh signs that the situation is on the mend.
‘Its (Bharti’s) transformation and restructuring plans (in South Africa) are going well,’ SingTel group chief executive officer Chua Sock Koong told reporters at a media conference yesterday.
According to SingTel’s international CEO Hui Weng Cheong, Bharti has been steadily growing its revenue and Ebitda in South Africa on the back of higher customer numbers and usage levels.
In India, the ‘downside’ in the first quarter was largely due to fair-value losses, higher taxes and the amortisation of Bharti’s 3G license fees, he explained.
Besides Bharti, contributions from Telkomsel also fell in the first quarter.
The share of pre-tax profits from SingTel’s Indonesian associate slid 4.8 per cent to $210 million due to weakening of the rupiah against the Singapore dollar.
Pakistani operator Warid and PBTL in Bangladesh continued to be in the red, with respective pre-tax losses of $12 million and $6 million.
Their decline was mitigated by improvements at SingTel’s associates in the Philippines and Thailand.
Pre-tax profit contributions from Globe and AIS climbed 10.3 per cent and 13 per cent to $49 million and $77 million respectively in Q1.
Optus, which accounts for 30 per cent of SingTel’s Ebitda, grew its first quarter net profit by 2.2 per cent to $213 million despite facing cutthroat competition.
In Australia, mobile operators have resorted to slashing tariffs to gain ground, Ms Chua said.
The appreciation of the Australian dollar also helped to cushion the impact of the price war on Optus’ first-quarter performance, she added.
Net profit from SingTel’s Singapore operations fell 11.7 per cent on year to $328 million as a result of higher pay-television content and service costs.
During the quarter, the group added a record 57,000 postpaid mobile subscribers to take its cellular customer base to 3.42 million.
It also grew its mio-TV tally by 21,000 users to 313,000 ahead the Barclays Premier League kickoff this weekend. Pay-TV contributed $23 million to the topline of its Singapore operations in Q1, the firm said.
On the home front, SingTel is expecting revenue boon from the disposal of its Internet assets over coming years.
Last month, the operator hived off some $1.89 billion in passive broadband infrastructure that is being used for the government- backed Next-Gen NBN (National Broadband Network). These assets, which include manholes, ducts and exchange buildings, are now held under a newly-minted Netlink Trust, which counts SingTel as the sole unit holder for now.
However, local authorities have ordered the firm to pare down its stake to less than 25 per cent by April 2014.
SingTel is looking at various options to meet this requirement. These include a possible initial public offering for Netlink Trust. It could also sell its stake to partners, Ms Chua said.
SingTel shares closed three cents lower at $2.92 yesterday.
SBSTransit – BT
SBST Q2 profit dives 34.2%
Higher fuel costs and other operating expenses put the brakes on SBS Transit’s net profit in the second quarter ended June 30: it slumped 34.2 per cent to $9.8 million.
But SBST’s Q2 revenue inched up 3.2 per cent to $185.7 million as average daily ridership for both bus and rail grew.
SBST is a unit of land transport giant ComfortDelGro. It operates a fleet of about 3,000 buses, or three-quarters of Singapore’s public buses, as well as a smaller rail network.
Q2’s total operating expenses rose 6.8 per cent to $173.5 million, with fuel and electricity costs jumping 23.7 per cent to $44.1 million, and other operating expenses growing 14.8 per cent to $15 million. Staff costs, the biggest component of operating expenses, were relatively stable, inching up one per cent to $73.7 million.
As a result, operating profit in Q2 plunged 29.9 per cent to $12.1 million.
Revenue from bus operations in Q2 was 1.7 per cent higher at $139.7 million due to a 6.5 per cent growth in average daily ridership, although this was offset by lower average fares with the implementation of distance fares. Q2 saw an operating loss of $1.5 million compared with an operating profit of $4 million a year ago.
Revenue from Q2 rail operations rose 11.1 per cent to $33.3 million, as average daily ridership for the North-East Line and the two LRT systems saw increases of 15.7 per cent and 15.8 per cent respectively from a year ago. But average fares were lower. Still, operating profit for Q2 was up 3.7 per cent to $5.3 million on higher rail fare revenue, offset by higher electricity costs.
For the first half, SBST’s net profit fell 30.8 per cent to $21.6 million, even as H1 revenue rose 4.3 per cent to $369.6 million.
Q2 earnings per share dropped to 3.17 cents from 4.83 cents in Q2 2010, while H1 earnings per share sank to 7.01 cents from 10.16 cents previously. Net asset value as at June 30 was 106 cents, up from 103 cents six months earlier. A one-tier interim dividend of 3.1 cents has been declared.
Looking ahead, the company says it expects bus and rail ridership to increase, and advertising and rental revenues to be maintained. But fuel and electricity costs will be higher if the current price trend continues, while staff costs are likely to rise due to salary increments, increases in the CPF employer contribution rate and foreign worker’s levy, as well as cessation of Jobs Credit.
Another ComfortDelGro unit, Vicom, also announced its Q2 results yesterday. The inspection and testing company said net profit rose 4.8 per cent to $5.9 million. Revenue was 5.6 per cent higher at $22.3 million, mainly on higher revenue from the core businesses of vehicle inspection, and test and inspection services.
For H1, Vicom’s net profit rose 10.5 per cent to $12 million, while H1 revenue was up 8 per cent at $44.7 million. Earnings per share in Q2 was 6.72 cents, up from 6.51 cents in the previous corresponding quarter. H1 earnings per share was 13.76 cents, up from 12.65 cents a year ago. An interim dividend of 6.9 cents has been declared.
SBST shares closed half a cent lower at $1.73 while Vicom ended one cent higher at $3.51 yesterday.