M1 – Kim Eng
Nice way to start the new year
Event
• M1 will report its full‐year FY10 results next Wednesday. While we expect the results to be good but not extraordinary, its share price has risen 12% since early last month on dividend expectations and perhaps, market speculation that it may be the next takeover target, as Axiata owns close to 30% stake. But we do not think the Malaysian mobile operator will want to buy the rest of M1 or to sell its stake. Nevertheless, as our target price has been increased to $2.88 (16% upside) upon rolling over to FY11 forecast, we maintain our BUY call.
Our View
• M1 will report FY10 results next Wednesday after the market closes. We expect revenue to grow 10.5% YoY to $239m and earnings to rise 4% YoY but fall 1.5% QoQ on higher year‐end A&P expenses and smartphone subsidies. Also, the final dividend per share of $0.078 is expected to exceed FY09’s $0.072 for a total full‐year DPS of $0.142.
• In the light of recent M&A events, M1 stands out for its significant Malaysian interest. Mobile operator Axiata owns a 29.5% stake, or 265.4m shares, of which 118.5m shares were acquired from former shareholders C&W and PCCW at $2.20 a share and the rest at $1.85‐2.05 between August 2005 and March 2006. Add $0.55 in dividends paid since FY06, Axiata’s average cost could be as low as $1.50.
• However, we think it is unlikely that Axiata would want to take over M1 or to sell its stake. It has been scaling back capex in recent years and has just reduced its net debt/EBITDA to below 1x. Our Axiata analyst also believes buying M1 would eat into its funding for other more important investments. On the flip side, it would be difficult for Axiata to find another investment that can yield more than 10% annually. However, a potential buyer may have to pay as high as $3.54, going by our DCF valuation.
Action & Recommendation
We maintain our BUY call and raise our target price to $2.88 (from $2.63) as we roll over to FY11 valuation target of 15x PER and 5% dividend yield.
ComfortDelgro – CIMB
KL non-deal roadshow
Maintain Outperform. We recently brought ComfortDelgro on a roadshow to Kuala Lumpur, where management updated investors on its local and overseas businesses and prospects. We continue to like ComfortDelgro for its steady domestic outlook and overseas growth potential. A strong balance sheet and steady cash flows should allow it to take advantage of any M&A opportunities. Trading at 13.5x CY11 P/E against SMRT’s 18.3x, we continue to recommend a switch from SMRT to ComfortDelgro. We keep our earnings estimates and DCF-based target price of S$1.90 (WACC: 8.0%). We see catalysts from an improving outlook and a potential Downtown Line tender win.
Highlights
Steady local operations. Supported by economic growth, strong tourist arrivals and rising costs of car ownership with recent spikes in COE premiums, ComfortDelgro’s local land-transport operations should continue to grow this year. Though strong ridership last year was partly attributable to the opening of Singapore’s two integrated resorts early in the year, we believe that the spillover for public transport has yet to wear off. Its taxi business has also been benefiting from higher demand. With plans to delay the scrapping of older taxis to expand its operational fleet as well as ongoing fleet renewal, we believe that increased hiring and higher average hiring rates could provide revenue drivers for its taxi business. In the longer term, the Land Transport Authority wants to increase public transport’s share during peak hours to 70% by 2020 from the current 63%, by enhancing the public transport system. This should be beneficial for both land operators under our coverage.
Downtown Line (DTL) win, if any, could provide catalyst. With its limited role in Singapore’s rail sector through North East line (NEL) and higher margins on the rail business, ComfortDelgro is eager to expand its local rail footprint. The tender has closed and we believe that an award could take place by mid-2011. With a total length of 41km and 33 stations, DTL is the longest of the next three lines to be awarded, the remaining two being Thomson Line (27km, 18 stations) and Eastern Region Line (21km, 12 stations).
DTL is expected to open in three phases and achieve daily ridership of 500,000 commuters when fully operational. Unlike the Circle Line which is an orbital line linking the other lines to the city, DTL is a trunk line cutting across the island. While time may still be required for breakeven, the presence of established housing estates along the line should facilitate a ridership ramp-up. With similar technology as the NEL and Circle Line (CCL), we believe that neither ComfortDelgro nor SMRT would have a technical edge over the other. Nonetheless, with rail typically yielding better margins than bus or taxi operations, a win may prove more beneficial for ComfortDelgro, which we believe could prompt the company to put in a competitive bid. SMRT’s current preoccupation with turning around its loss-making CCL could also be a consideration in the award of the contract, in our opinion. With higher margins, limited capex (LTA will fund both operational and non-operational assets) and the potential for boosting economies of scale, a DTL contract could help ComfortDelgro expand its rail footprint locally.
Overseas growth potential. Despite its local growth potential, ComfortDelgro recognises that Singapore is ultimately a small country. It sees the importance of investing beyond its shores for the longer term. It plans to lift overseas revenue contributions to 70% over the next 5-7 years from 40%, with an eye on opportunities in land transport, its core expertise. ComfortDelgro’s Australian bus business, backed by the North South Wales and Victorian governments’ drive to improve public transport in the northwestern suburbs of Sydney, should continue to grow. Contributions from Swan Taxis, the largest taxi operator in Perth Metropolitan, are also expected to kick in, with the acquisition completed in November last year. We estimate a net-profit contribution of 2% from the entity. ComfortDelgro is also among eight bidders for six contracts to run 850 government-supply buses in Adelaide. Results are expected in 2Q11. The outlook in the UK appears weaker, in our view, with its taxi business plagued by a weak London economy. Lower government subsidies for its bus operations could also eat into its profitability, though a gradual phasing in of the change should give ComfortDelgro time to pass on additional costs in contract renewals.
Higher fuel costs. With diesel costs hitting new highs, some investors expressed concerns on margin pressures. Nonetheless, with fuel and electricity costs accounting for about 7% of its revenue vs. SMRT’s 12%, we believe that the impact would be less dire for ComfortDelgro. The group has hedged about 20% of its fuel requirement for 2011. Fuel exposure is also mainly limited to its local operations with overseas operations largely enjoying price-index adjustments to offset fuel inflation.
Valuation and recommendation
Maintain Outperform. No change to our earnings estimates. We continue to like ComfortDelgro for its steady domestic outlook and overseas growth potential. A strong balance sheet and steady cash flows should also allow it to take advantage of any M&A opportunities. Trading at 13.5x CY11 P/E against SMRT’s 18.3x, we continue to recommend a switch from SMRT to ComfortDelgro. We keep our DCF-based target price of S$1.90 (WACC: 8.0%), expecting catalysts from an improving outlook and a potential DTL tender win.
StarHub – BT
StarHub scores Serie A rights
THE merry-go-round of soccer programming keeps on turning, with StarHub now scoring the broadcast rights to Singapore Telecommunications’ (SingTel) exiled football content, the Italian Serie A.
In a statement released yesterday, StarHub said it will start screening the 2010-to-2012 seasons of Italy’s premier football league on its cable TV platform.
A total of 118 matches for the current Serie A campaign will be offered in high definition to subscribers over the Football Channel, as well as its SuperSports and Sports HD offerings, with up to six games being shown ‘live’ per week.
The fate of Serie A, which features renowned players such as Brazilian full-back Maicon and newly crowned African player of the year Samuel Eto’o, had been in limbo since the new season kicked off on Aug 29 last year.
SingTel had acquired the rights to the Italian league from worldwide rights holder MP & Silva in 2008 in a bid to boost the sports programming on its then-fledgling mio TV platform.
However, the operator chose not to renew the contract when it expired in June 2010, two months before it started the inaugural screening of the more popular Barclays Premier League (BPL).
SingTel had paid top dollar to prise the BPL away from StarHub in 2009 for three seasons until 2013, a move which has helped to more than double its mio TV subscriber base over the last 18 months.
The demise of Serie A on local screens even prompted a few hundred fans to rally behind an online Facebook petition for its return, with StarHub eventually answering their plea.
With Serie A, Singapore’s second-largest operator now has access to the lion’s share of popular European soccer leagues, with BPL being the lone exception. The company is already showing the Spanish La Liga and the German Bundesliga.
StarHub’s contract with MP & Silva is non-exclusive, so Serie A will not trigger the government’s new cross-carriage mandate.
Unveiled in March last year by the Media Development Authority of Singapore, cross-carriage forces pay-TV operators to allow rivals to carry their exclusive content.
It seeks to do away with the prevailing practice of paying premium to hog prized programmes, and the undesirable consequence of passing on the price hike to consumers.
Land Transport – DMG
New MRT line extension on East-West Line
Tuas West Extension (TWE) to add 7.5km to East-West Line (EWL). Transport Minister Raymond Lim announced that the EWL will be extended from Joo Koon station to Tuas West area. The TWE is expected to be fully operational by 2016 with ~100k daily commuters. Coupled with costs related to new train purchase (13 new trains will be acquired), constructions of a new train depot and a new road viaduct, the entire TWE is estimated to cost ~S$3.5b. While the addition of TWE is already known beforehand, its track length and operational date differ from previous indication of 14km and 2015 respectively. Despite the shorter length of TWE and delay in operational date, we maintain our belief that the Singapore rail ridership is on course for a multi-year growth trend as population size increases. Maintain OVERWEIGHT on land transport sector.
Circle Line Stage 4-5 to be operational in 4Q11. In addition to TWE addition announcement, the Transport Minister also confirmed our belief that CCL Stage 4-5 will only be operational in 2H11 (exact announced period is 4Q11) while the CCL Marina Bay extension will be ready in 2012. In order to achieve breakeven for CCL Stage 1-5 and the CCL Marina Bay extension, we estimate the daily ridership has to be in excess of 481k. While both TWE and CCL track additions will undoubtedly lead to increase in ridership for SMRT, we think that SMRT's earnings could be pressured in the short to medium term due to advance hiring associated with the CCL 4-5 beginning 2HFY11. Hence, we are maintaining NEUTRAL on SMRT with TP of S$2.08.
Prefer ComfortDelGro (CD) within the sector. We continue to favour CD over SMRT due to the former's 1) greater overseas growth potential, and 2) cheaper valuation. In addition to margin improvements from ridership increase, we think CD will be looking at acquisition of more land transport companies in foreign markets in order to achieve overseas growth. This is evidenced from CD's recent bidding for operational rights of metropolitan buses in Adelaide. The bidding involve six contracts to run 850 government-supplied buses in Adelaide for eight years. Should CD succeed in the bidding, it will have its first city bus service in Australia. The result of the bidding will be out in Mar 2011 and operations are slated to commence in Oct 2011. We think CD remains undervalued, possibly due to excessive concern regarding CD's forex exposure in relation to its extensive overseas operations in UK & Ireland (9M10: 13% CD's EBIT), Australia (9M10: 16% CD's EBIT), and China (9M10: 12% CD's EBIT). However, given the approximately even contributions from the emerging (China) and developed nations (UK, Ireland, Australia), we reckon the chances of adverse forex movement from sustained strengthening of S$ against the local currencies of CD's overseas operations as low. Maintain BUY on CD with TP of S$1.85. Currently, CD is trading at 14x FY11F PATMI vs SMRT's 18x FY11F PATMI.
SATS – OCBC
Broad-based growth expected in 3QFY11
Airport Services to show positive performance. We expect SATS Ltd to close its 3QFY11 on a positive note, driven by broad-based growth across its business segments. Based on latest statistics from the Singapore Tourism Board, the number of visitor arrivals to Singapore has continued to show robust performance, with a 16.1% YoY growth in Nov, thereby marking its 12th consecutive months of record arrivals. On a global scale, the air transport operating statistics as published by IATA has been equally healthy, with passenger and freight traffic registering 8.2% and 5.4% YoY growth in Nov, respectively. While the adverse weather conditions in Europe and US may have caused some setback to the year-end holiday season, we believe it has limited impact on SATS’ financial performance. As such, we expect its Airport Services segment to show positive YoY growth in 3QFY11.
Daniels Group to provide boost to Food Solutions. On its Food Solutions segment, we expect Daniels Group to give further boost to its UK operations as it enters into the seasonally stronger 2H (due to cold season). While pressure on food pricing, especially in Europe, is expected to continue, we note that SATS has in place several measures (e.g. secure longer contracts for some commodities) to tackle the inflationary pressures.
Acquisition of TFK Corporation a positive. We are also positive on SATS’ recent cash acquisition of Japan Airlines International’s 50.7% stake in TFK Corporation for JPY7.8b (~S$122m, funded through debt). We agree with management that TFK will provide SATS with synergies to its airline catering operations and access into Japanese airline catering market, especially at Narita and Haneda Airports, which are expected to see significant increase in arrival/ departure slots in the next few years. As a note, the purchase price implies a 9.4x EV/EBITDA based on its FY10 results, a discount to an average of 11.6x in similar transactions involving Japanese food/ food services companies over the last three years. For its FY10 ended Mar, it attained revenue and EBITDA of ~S$353m and S$27m respectively (forming 22.9% and 9.8% of SATS’ FY10 reported figures).
Retain BUY. We keep our FY11 forecasts intact pending the release of its 3QFY11 results but raise our FY12 revenue by 4.3% to factor in TFK’s contribution in the next fiscal year. We maintain our positive view on SATS’ growth prospects, as it is likely to benefit from continued growth in the tourism industry, and increased penetration in hospitality and healthcare sectors. Maintain BUY with S$3.31 fair value (unchanged).