SPH – CIMB
Persistent cost pressures
• Below; maintain Neutral. 2Q11 core net profit of S$78.4m was below our forecast and consensus, forming 19% of our FY11 estimate. 1H11 core net profit forms 45% of our full-year estimate. The variances came from higher-than-expected other operating expenses, as Clementi Mall only partially commenced in the quarter. Higher staff and newsprint costs also eroded margins in SPH’s print business. An interim dividend of 7 Scts was declared. We reduce our FY11-13 EPS estimates by 3-5%, factoring in higher opex and lower rental contributions from Clementi Mall. Accordingly, our SOP target price falls to S$4.29 from S$4.51. Maintain Neutral in view of continued cost pressures and increasingly remote accretive property acquisitions. SPH should, however, be supported by dividend yields of about 6%.
• Cost pressures in print business. Excluding S$51.4m of revenue from Sky@eleven in 2Q10, operating revenue rose 7.7% yoy on stronger print ad and rentals. Margins were, however, hit by higher staff and newsprint costs. Staff costs rose 8% on salary increments and in the absence of the Jobs Credit scheme while newsprint costs surged 15% on higher charge-out rates (US$651/MT). Management expects newsprint prices to climb higher though the pace should moderate. Spot prices are just below US$700/MT. SPH will be covered up until Dec 11 and guides for an average charge-out of US$675/MT for FY11.
• Clementi Mall yet to contribute fully. Clementi Mall (60% owned) is fully leased. However, with only two levels opened since mid-January, rent-free periods for some tenants and a mismatch with full financial charges and overheads, we believe Clementi Mall lost money in 2Q11. Management expects the mall to be fully operational in 4Q11 and guides for average monthly rentals of S$14 psf, a shade below our previous S$16 psf assumption. We thus lower our rental expectations and valuation of Clementi Mall. Paragon remains 100% occupied with rental income rising 13% yoy on higher rental rates. Management remains on the lookout for acquisitions of retail sites though we believe accretive purchases could become increasingly remote going by developers’ aggressive bids in recent site tenders.
SPH – BT
SPH posts $75.4m Q2 net profit
33.5% profit fall due to condo completion; core business revenue stays healthy
SINGAPORE Press Holdings (SPH) has reported a net profit of $75.4 million for its second quarter ended Feb 28, 2011, a year-on-year fall of 33.5 per cent. This was due to the absence of profit contribution this time round from its Sky@eleven condominium development, which was completed in May 2010.
In Q2 FY2010, recurring earnings included a $36.9 million profit recognition from Sky@eleven.
Operating revenue dropped 9.7 per cent to $287.82 million because of a 53.7 per cent fall in property operating revenue to $39.5 million. Excluding the effect of Sky@eleven revenue of $51.4 million for the second quarter last year (Q2 FY2010), group operating revenue rose $20.5 million (7.7 per cent) with increases across all segments. Operating revenue for the newspaper and magazine segment, the group’s core business, stayed healthy, rising $11.6 million (5.2 per cent) to $234.3 million. Print advertisement revenue increased $10.9 million (6.6 per cent) to $176.3 million, driven by strong showing in display and recruitment advertisements. Circulation revenue held steady at $50.3 million.
Rental income from shopping mall Paragon increased $4.2 million (12.9 per cent) as a result of higher rental rates achieved and incremental rental from the facade enhancement. Clementi Mall also registered its maiden income upon partial commencement of operations in January.
The period saw materials, consumables and broadcasting costs higher by $4.1 million (11.9 per cent), partly due to increase in newsprint costs of $3.1 million (15.3 per cent). Staff costs were up $6.9 million (8.3 per cent) mainly from salary increments and increased headcount to support new businesses and initiatives. Costs for Q2 FY2010 were also lower because of the government jobs credit.
Other operating expenses rose 40 per cent to $54.4 million, partly due to higher premises costs and other overheads. Earnings per share for Q2 fell to five cents from seven cents. An interim dividend of seven cents per share was declared.
For the first half, net profit slid 31.1 per cent to $177.7 million. H1 2010 recurring earnings included Sky@eleven profit recognition of $87.2 million. Operating revenue dipped 9.8 per cent to $606.5 million. Excluding the Sky@eleven $121.5 million revenue effect, group revenue rose $55.4 million (10 per cent).
On the outlook for FY 2011, SPH CEO Alan Chan said: ‘Singapore’s economic outlook remains positive, barring any deterioration arising from global uncertainties. The group’s print advertisement revenue is expected to move in tandem with the performance of the Singapore domestic economy. Our two property assets, Clementi Mall and Paragon, are both fully leased and are expected to contribute a steady stream of rental income to the group.’
SPH closed two cents up at $3.98 yesterday.
TELCOs – CIMB
Reading the signals for 1Q11
• Maintain UNDERWEIGHT. We remain UNDERWEIGHT on the Singapore telco sector in view of cost pressures (albeit not as strong as 2010), weakness in fixed broadband and also the potential for multi-year margin erosion. We leave our earnings forecasts and target prices intact. M1 remains our top pick, for having the most upside from NGNBN and the most benefits from soaring inbound visitors, in our opinion. We continue to prefer Axiata and XL Axiata for exposure to regional telcos.
• 1Q11 themes. We broadly expect: 1) service revenue growth to be muted, in line with seasonal trends; 2) EBITDA margins to improve towards the tail end of the iPhone craze and also from lower advertising and marketing revenue; 3) data to continue replacing voice revenue; and 4) weakness in fixed broadband though stability in pay TV.
• Data to continue replacing voice. We believe data revenue should climb further to replace voice revenue as smartphone penetration deepens and take-up of data packs grows as subscribers access emails and social networks on the go. Non-SMS data now accounts for 18-19% of M1’s and SingTel’s revenue (StarHub does not provide breakdown) while 33-40% of revenue from the three telcos comes from data (including SMS). This has also resulted in the cannibalising of voice traffic.
• Margins to recover. Coming out of the festive period, we believe margins should improve as we see deflating subscriber acquisition costs in a traditionally slower period. In addition, the tail end of the iPhone craze and lower subsidies offered for devices should alleviate the pressure on margins.
• Expectations for M1. M1’s core profit is expected to be S$38m-39m in 1Q11, up 1-4% qoq. We expect revenue to weaken as handset sales fall though service revenue should rise 1-2% qoq. We expect margins to recover from lower advertising and marketing costs and as device subsidies drop from lower pricing points and lower subsidies provided. M1 is expected to release results on 15 Apr.
• Expectations for StarHub. We expect -3% to +4% qoq earnings growth for StarHub on margin improvements as lower subsidies prevail and also from lower advertising and marketing spend. We expect mobile revenue to rise on higher data take up as well as wireless broadband growth. However, fixed broadband revenue should be weak from lower ARPU net adds and as StarHub reached more of the lower-income group. Meanwhile, pay-TV revenue should be flat sequentially. StarHub is slated to release results on 4 May. We will be previewing SingTel’s results separately.
M1 – OCBC
Pays S$21.7m for additional wireless spectrum
S$21.7m for more wireless spectrum. M1 Ltd has paid S$21.7m to secure a lot of the 1800 MHz spectrum which can be used for 2G, 3G or other technologies. According to the Straits Times (ST)1 , the winning bid is 54x the reserve price of S$400k set by IDA (Infocomm Development Authority). M1 also edged out SingTel and StarHub during the week-long auction; but we understand it was done via an open-tender system, suggesting that there was demand for it, given that it is probably the last block in the 1800 MHz band. The IDA had earlier allocated three blocks of 3G (1900 – 2100 MHz) spectrum – one each to the three incumbent telcos – for S$20m each. Meanwhile, the next spectrum rights for 4G – the next generation of wireless services – will go on the auction block next year, where the government will ask for bids for at least four lots.
Additional bandwidth much welcome. While M1 did not elaborate on how it plans to use the spectrum, management says that “M1 is investing for the future”, which could include providing for next-generation services. ST also quoted management as saying that the extra spectrum will benefit travelers roaming on its network, including those from Asia using older 2G handsets. But from a practical perspective, network congestion is getting to be a very real issue, brought on by the continued proliferation of Internet-ready devices. According to IT research firm Analysys Mason, it expects the total number of mobile broadband connections in developed Asia-Pacific region to increase from 6.2m in 2009 to 27.2m in 2015 (28% CAGR); it also expects mobile broadband revenue to jump 3x from US$2.4b in 2009 to US$7.1b in 2015. Hence, having the extra spectrum will give M1 more flexibility and help to sustain the quality of service.
No major financial impact. In the ST article, M1 also said it did not expect the additional spectrum to bring down costs. In any case, we do not expect the latest S$21.7m spending to have any substantial financial impact. Given that the spectrum license will run out by 31 Mar 2017, we note that the amortization expense is around S$1.4m. While the S$21.7m spending is over and above its stated S$100m capex budget for this year, we do not foresee any issue with the company funding it either via debt (net gearing ~1.01x as of end Dec 2010) or from their positive operating cashflow (M1 generated S$187.4m in FY10). More importantly, we believe that it should not affect its ability to pay out at least 70% of its underlying net profit as dividends. Maintain BUY with S$2.79 fair value.
M1 – OCBC
Pays S$21.7m for additional wireless spectrum
S$21.7m for more wireless spectrum. M1 Ltd has paid S$21.7m to secure a lot of the 1800 MHz spectrum which can be used for 2G, 3G or other technologies. According to the Straits Times (ST)1 , the winning bid is 54x the reserve price of S$400k set by IDA (Infocomm Development Authority). M1 also edged out SingTel and StarHub during the week-long auction; but we understand it was done via an open-tender system, suggesting that there was demand for it, given that it is probably the last block in the 1800 MHz band. The IDA had earlier allocated three blocks of 3G (1900 – 2100 MHz) spectrum – one each to the three incumbent telcos – for S$20m each. Meanwhile, the next spectrum rights for 4G – the next generation of wireless services – will go on the auction block next year, where the government will ask for bids for at least four lots.
Additional bandwidth much welcome. While M1 did not elaborate on how it plans to use the spectrum, management says that “M1 is investing for the future”, which could include providing for next-generation services. ST also quoted management as saying that the extra spectrum will benefit travelers roaming on its network, including those from Asia using older 2G handsets. But from a practical perspective, network congestion is getting to be a very real issue, brought on by the continued proliferation of Internet-ready devices. According to IT research firm Analysys Mason, it expects the total number of mobile broadband connections in developed Asia-Pacific region to increase from 6.2m in 2009 to 27.2m in 2015 (28% CAGR); it also expects mobile broadband revenue to jump 3x from US$2.4b in 2009 to US$7.1b in 2015. Hence, having the extra spectrum will give M1 more flexibility and help to sustain the quality of service.
No major financial impact. In the ST article, M1 also said it did not expect the additional spectrum to bring down costs. In any case, we do not expect the latest S$21.7m spending to have any substantial financial impact. Given that the spectrum license will run out by 31 Mar 2017, we note that the amortization expense is around S$1.4m. While the S$21.7m spending is over and above its stated S$100m capex budget for this year, we do not foresee any issue with the company funding it either via debt (net gearing ~1.01x as of end Dec 2010) or from their positive operating cashflow (M1 generated S$187.4m in FY10). More importantly, we believe that it should not affect its ability to pay out at least 70% of its underlying net profit as dividends. Maintain BUY with S$2.79 fair value.