SingTel – CIMB
Telkom to buy SingTel’s stake in Telkomsel Government wants Telkomsel back
Maintain Underweight on sector. We maintain our UNDERPERFORM rating for SingTel and urge investors to sell into expected strength in its share price on news that Telkom Indonesia plans to buy SingTel’s 35% stake in Telkomsel. Should the acquisition take place, we believe SingTel will return the proceeds to shareholders. However, any acquisition will take time and SingTel’s share price could be de-rated after the initial euphoria. Telkom remains an UNDERPERFORM with an unchanged DCF-based target price of Rp7,400 (WACC 12.2%) as the acquisition would deplete its cash, ratchet up its gearing, and possibly affect its plans for a share buyback. Axiata remains our top regional telco pick.
The news
Indonesia’s State-Owned Enterprise (SOE) Ministry has asked Telkom Indonesia to buy SingTel’s 35% stake in Telkomsel. The Minister Mr Mustafa Abubakar said the acquisition will “strengthen the position of Telkom.” Eddy Kurnia, Telkom’s Head of Corporate Communication said, “We support the statement by the SOE Minister because it was expected by Telkom or the shareholders.” But he added that it would take a while to buy back the shares and did not provide a timeframe.
Comments
A surprise. The news surprised us although rumours had been circulating. It is indeed puzzling why the government is now eyeing Telkomsel. This comes after ST Telemedia, another Singapore government-linked corporation, sold its stake in Indosat after Indonesia ruled that Indosat and Telkomsel were fixing prices. We suspect Telkom’s intention to own 100% of Telkomsel is related to SingTel’s reluctance for Telkomsel to sell its towers to Telkom. Telkom had intended to park all the towers of its units under Daya Mitra and eventually list this entity. Taking full control of Telkomsel could pave the way for this transaction. Telkomsel controls the largest number of towers in Indonesia, about 20k or 40% of the industry total.
Negative for Telkom. This news is negative for Telkom because SingTel will not relinquish its stake cheaply, in our view. Having said that, the government may find means to compel SingTel or the Singapore government to do so. The purchase could deplete Telkomsel’s cash pile of Rp10tr (US$1.25bn), weaken its balance sheet of 0.2x net debt/EBITDA and possibly affect its plans for a share buyback.
Assuming Telkom buys Telkomsel at 16x CY11 P/E or Rp72tr (US$8.5bn) and funds 70% of this with debt, Telkom’s gearing and net debt/EBITDA will rise from 0.2x and 0.3x to 1.1x and 1.4x respectively. While Telkomsel is the growth driver for Telkom, we believe Telkom should return excess cash to shareholders instead of sinking more money into Telkomsel given the lacklustre performance of Telkomsel and a maturing mobile industry. We also believe SingTel has been injecting talent and its regional experience into Telkomsel, and has been instrumental in driving Telkomsel’s operations.
Positive for SingTel’s shareholders, as proceeds from the sale are likely to be returned to them. Assuming an acquisition price of US$8.5bn or S$10.1bn, the sale would raise S$10.1bn (US$8.4bn) or a hefty S$0.70/SingTel share. Telkomsel has not been the growth driver it used to be as the Indonesian telco market matures, having lost market share. However, this may be a protracted transaction as price will be a key contention, in our view.
Valuation and recommendation
Sell SingTel into strength. We reiterate our UNDERPERFORM on SingTel and urge investors to sell into expected strength in its share price on news that Telkom Indonesia plans to buy its 35% stake in Telkomsel. Should the acquisition take place, we believe SingTel will return the proceeds to shareholders. However, any acquisition may take time and SingTel’s share price could be de-rated after the initial euphoria. Lastly, even if Telkom acquires Telkomsel at a 30% premium (i.e. 16x CY11 earnings) to our valuation of Telkom (based on 12.5), our SOP valuation for SingTel would only rise by S$0.15/share or 5%. SingTel continues to face competitive headwinds in Australia, margin pressure in Singapore and earnings drags in India, in our view.
Telkom remains an UNDERPERFORM with an unchanged DCF-based target price of Rp7,400 as the acquisition would deplete its cash, ratchet up its gearing, and possibly affect its plans for a share buyback. We believe Telkom’s outlook remains poor with declining fixed-line revenue and a lacklustre mobile performance due to a maturing industry and Telkomsel’s loss of market share. Axiata remains our top regional telco pick.
M1 – OCBC
Deployment of LTE by 1Q12
Deployment of LTE by 1Q12. M1 Ltd recently announced that it will deploy South East Asia’s first commercial LTE (Long Term Evolution) network in Singapore by 1Q12. M1 has awarded a five-year contract valued at S$280m to Huawei – a leading provider for next-generation telecommunications network solutions for global mobile operators – to provide turnkey LTE solution; this includes installation of macro base stations, distributed base stations and Evolved Packet Core (EPC), for M1’s island-wide next-generation network.
Investing for the future. LTE is capable of delivering downlink speed of up to 300Mbps (versus the current HSPA network which supports 21Mbps) and is specially designed for the efficient carriage of data traffic. We view this development positively, as the demand for mobile data transmission will only continue to grow, fueled by the proliferation of smart devices (phones, tablets and other personal entertainment devices) and also the “stickiness” of new social media. Hence, the network will enable rich multi-media applications such as video conferencing, high-definition content transmission, highspeed video downloads and social network updates.
Timely due to shifting preferences. Recall that M1 had previously paid S$21.7m to secure a lot of the 1800 MHz spectrum, which we understand could also be used for LTE. We view these recent developments as timely due to shifting preferences. As mentioned earlier, we have observed a growing preference towards using instant messaging (via the generous data plans currently) to communicate versus voice – the traditional money churner for the mobile operators. For M1, we note that the post-paid monthly MOU (minutes of usage) has eased to 356 minutes in 1Q11 (down from 364 minutes in 4Q10), while post-paid monthly ARPU has dipped to S$56.1 in 1Q11 from S$58.5 in 4Q10 and S$59.7 in 1Q10. But once the next-gen network is in place, we believe that M1 should be able to offer differentiated services and capture these changing preferences; of course, this is assuming that there are available “4G” devices that can fully utilize the LTE network.
No additional capex needed. In any case, we understand that this LTE move has always been part of M1’s upgrading plans, and hence we do not expect M1 to incur any extra capex this year (or even the next) i.e. capex spending should remain around S$100m, implying no impact on its ability to pay out 70% of its recurring earnings as dividends. As before, we continue to like M1 for its defensive earnings and good dividend yield, hence we maintain BUY with a DCF-based fair value of S$2.79.
M1 – OCBC
Deployment of LTE by 1Q12
Deployment of LTE by 1Q12. M1 Ltd recently announced that it will deploy South East Asia’s first commercial LTE (Long Term Evolution) network in Singapore by 1Q12. M1 has awarded a five-year contract valued at S$280m to Huawei – a leading provider for next-generation telecommunications network solutions for global mobile operators – to provide turnkey LTE solution; this includes installation of macro base stations, distributed base stations and Evolved Packet Core (EPC), for M1’s island-wide next-generation network.
Investing for the future. LTE is capable of delivering downlink speed of up to 300Mbps (versus the current HSPA network which supports 21Mbps) and is specially designed for the efficient carriage of data traffic. We view this development positively, as the demand for mobile data transmission will only continue to grow, fueled by the proliferation of smart devices (phones, tablets and other personal entertainment devices) and also the “stickiness” of new social media. Hence, the network will enable rich multi-media applications such as video conferencing, high-definition content transmission, highspeed video downloads and social network updates.
Timely due to shifting preferences. Recall that M1 had previously paid S$21.7m to secure a lot of the 1800 MHz spectrum, which we understand could also be used for LTE. We view these recent developments as timely due to shifting preferences. As mentioned earlier, we have observed a growing preference towards using instant messaging (via the generous data plans currently) to communicate versus voice – the traditional money churner for the mobile operators. For M1, we note that the post-paid monthly MOU (minutes of usage) has eased to 356 minutes in 1Q11 (down from 364 minutes in 4Q10), while post-paid monthly ARPU has dipped to S$56.1 in 1Q11 from S$58.5 in 4Q10 and S$59.7 in 1Q10. But once the next-gen network is in place, we believe that M1 should be able to offer differentiated services and capture these changing preferences; of course, this is assuming that there are available “4G” devices that can fully utilize the LTE network.
No additional capex needed. In any case, we understand that this LTE move has always been part of M1’s upgrading plans, and hence we do not expect M1 to incur any extra capex this year (or even the next) i.e. capex spending should remain around S$100m, implying no impact on its ability to pay out 70% of its recurring earnings as dividends. As before, we continue to like M1 for its defensive earnings and good dividend yield, hence we maintain BUY with a DCF-based fair value of S$2.79.
SingPost – BT
SingPost buys remaining 30% stake in DataPost
SINGAPORE Post (SingPost) is acquiring the remaining 30 per cent stake in DataPost from Oce NV for $6 million, in a move aimed at ramping up SingPost’s hybrid mail business.
Since 1994, SingPost has held a 70 per cent stake in DataPost, having invested $700,000 in the company back then. With the acquisition of the remaining 30 per cent, DataPost will be a wholly owned subsidiary of SingPost.
DataPost, which was established in 1994, provides end-to-end mailing services such as confidential data printing as well as letter shopping and enveloping to clients hailing from industries such as banking, insurance and telecommunications. DataPost has also expanded in the region and set up data printing facilities in Malaysia, Hong Kong, Thailand and the Philippines.
‘DataPost provides businesses a cost-effective, end-to-end service covering data formatting, secured printing, processing and digital archiving,’ said Ng Hin Lee, SingPost’s chief executive officer for postal and corporate services. ‘With this acquisition, SingPost will have full control of DataPost and the flexibility to further develop our hybrid mail business in the region. We will be able to better support our regional customers with a wider suite of hybrid mail solutions.’
He added that the acquisition will give SingPost another platform from which it can expand its regional business.
The group has been beefing up its presence in the region, having made several acquisitions since 2009 which include cross-border mail-logistics company Quantium Solutions and Postea Inc, a US-incorporated technology company specialising in technology solutions for the postal and logistics industries.
Shares in SingPost closed at $1.16 yesterday, up one cent.
SATS – Phillip
Gearing towards an optimal capital structure
•Revenue increased by 12.4% to S$1.7bn, PATMI increased 5.6% to S$191mn.
•Marginal loss at TFK despite low volume and disruptions
•Move towards optimal capital structure to reduce cost of capital
•Adjusted earnings estimates by +1.6%/-1.7% for FY12/FY13E; introduce FY14E
•Maintain Buy recommendation with revised target price of S$3.41.
FY11 within our expectations. SATS’s PATMI for FY11 was in line with our expectations to record a 5.6%y-y increase to S$191.4mn. SATS also consolidated the results of TFK Corp for the first time in 4QFY11 (Revenue: S$72.6mn; Operating loss: S$1.6mn). TFK’s losses for the quarter are fairly small, in our opinion, considering the disruptions to air traffic experienced in the month of March. Despite the translational effects of a weaker GBP against SGD, the UK business managed to record a marginal growth in revenue contribution, which we estimated to be an 8%y-y growth in local currency terms. The core Airport Services business for SATS continues to grow in tandem with the higher traffic at Changi Airport. However, despite the double digit growth in sales, operating profits were flat y-y, due to the changing cost profile for the company.
FY10 FY11 y-y (%) Remarks
Inflation outlook looks manageable, for now
Previously, we had discussed extensively on the effects of food price inflation on SATS. For now, the operating cost profile for 4Q seems to indicate that the cost pressures on raw material cost is manageable. Raw material cost continues to make up c.40% of Food Solutions Revenue and had declined sequentially. However, this figure is slightly distorted by the contributions of TFK in 4QFY11 and we will continue to monitor for SATS’s ability to pass on the higher cost to their customers.
Inflight catering seems to be able to pass on the higher cost?
Recall that some of SATS’s inflight catering contracts with airlines have an embedded inflation peg to its price. Our ASP estimates suggest that SATS was able to raise their unit price to combat the rising food costs. The ASP for their inflight catering business in Singapore trended upwards to S$21/unit meal in 4QFY11. We see this as a sign of the inflation peg taking effect or a better product mix (higher value meals) in the quarter. Either way, it seems to indicate that SATS is able to lift their prices to offset the inflationary pressures.
TFK is not likely to contribute in the near term
TFK’s financial statements were consolidated into SATS’s results for the first time in 4QFY11. Management disclosed that TFK recorded revenue of S$72.6mn and operating loss of S$1.6mn. We translated this value to arrive at an estimate of ¥4.68bn, which is 21% of the revenue attained in FY10. TFK is currently operating at 50% capacity and we believe that the key to TFK being earnings accretive would be to increase its sales volume. However, following the Earthquake on 11th Mar, air travel to Japan had been adversely affected. For example, SIA had disclosed that traffic to Japan declined by c.30%, as compared to pre-crisis levels. We believe that the near term outlook for TFK is negative with poor passenger confidence in air travel to Japan. Hence, we expect TFK to report at least another two quarters of operating losses, before they can be earnings accretive to SATS.
SG Aviation growth continues in 4QFY11
SATS’s operating statistics showed that the Aviation business in Singapore continued its path of growth in 4QFY11. We opine that SATS’s aviation business in Singapore has the best competitive position amongst the various segments. With its dominant position and stable business, the segment is able to generate strong free cashflows to finance its acquisitions and return cash to shareholders.
Towards an optimal capital structure
SATS surprised us by proposing significantly higher dividend payout for FY11 (Special + Final: 12¢). It was surprising as we had expected management to be more conservative in their gearing, as the company recently raised >S$120mn of debt to finance the acquisition of TFK Corp. SATS is likely to tap the debt market to finance any further acquisitions and would gear up towards a slightly more leveraged capital structure. In our opinion, this would significantly reduce the company’s cost of capital and should not have an impact on the interest coverage with strong cashflows contributions from the stable business in Singapore. In view of the likely change in capital structure, we estimate SATS to have a long term WACC of 7.6%.
Valuation
We used a DCF model (WACC: 7.6%; terminal g: 1%) to arrive at our target price of S$3.41. Our target price implies a FY12E P/E of 19X, which is at the top end of its historical P/E range. With significant changes in capital structure and varied risk profile following the acquisitions in recent years, we believe that the historical valuation range could no longer be a good guide for SATS’s future valuation. After including forecasted dividends of 17.3¢ over the next 12months, we expect total return of 34.8%. Hence we keep our Buy call on SATS.