SATS – OCBC
Robust operating data reaffirms 2Q performance
Robust aviation operating data. SATS Ltd’s recent 2QFY11 aviation operating data had lent support to our view that the group is poised to deliver another positive set of quarterly results on 2 Nov. As a note, the group registered improvement across all operating indices in the quarter (both YoY and QoQ), thanks to the recovery in the aviation industry. In particular, unit services grew 5.9% YoY as a result of increased flights from full-service and low-cost carriers. Unit meals also increased by 7.8% YoY on the back of a 10.8% YoY growth in passenger traffic, while cargo throughput rose 7.9% YoY. This is largely consistent with our Sep 17 report that SATS may potentially gain from the continued expansion in industry demand, hence turning in better financial performance for 2QFY11.
Improvements expected to continue, albeit at slower pace. According to the International Air Transport Association (IATA)’s October survey, aviation business conditions had continued to show improvements. While some airlines are starting to turn cautious in view of a modest economic growth in 2011, we note that a still-high 60% of the airlines being surveyed expect further improvement in profitability over the next 12 months (vs. 69.2% in July survey). On the passenger and cargo business front, expectations for further improvements in demand similarly appear to be moderating in light of the economic outlook and the end of restocking activity, but are
still high at 62.5-68.4% (down from 73.9-80.0% in the July survey). As such, we still expect to see further improvements in SATS’ operating performance going forward, albeit at a slower pace (in line with our FY11-12F forecasts).
Maintain BUY with S$3.30 fair value. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and excellent management. The recent launch of the first-ever city check-in and baggage acceptance service with Marina Bay Sands and contract win to provide ground handling services for SIA in Hong Kong are testaments to the group’s ability to innovate quality services and expand its market presence, in our view. We are keeping our DCF-based fair value of S$3.30 pending the release of its 2QFY11 results (cost of equity: 8.5%, terminal growth rate: 1%). At current level, we see an attractive 17.0% upside potential in the stock. As such, our BUY rating on SATS remains.
TELCOs – BT
Telcos refuse to fall in line on proposed mega fine
All of them oppose move to raise penalty ceiling to 10% of yearly sales
Singapore’s bickering telecommunications trio is standing in unison against a set of proposed legislative changes which could see them cough up 10 per cent of their yearly sales in fines if they flout their licensing agreements.
Currently, telcos that violate their licence conditions or codes of practice face a maximum penalty of $1 million. Instead of having a fixed ceiling, local authorities are considering tweaking the formula so that operators can be fined up to 10 per cent of their annual turnover.
Both Singapore Telecommunications and M1 feel that the current penalty of $1 million is enough to get operators to toe the line.
In its response to a recent consultation exercise by the Ministry of Information, Communications and the Arts (Mica), SingTel highlighted the fact that the maximum $1 million penalty has never been meted out in local history.
Mica oversees the country’s telecommunications regulator – the Infocomm Development Authority of Singapore (IDA).
A change would be justified if IDA could provide examples where a licensing breach was serious enough to warrant a fine that goes above the current ceiling, it said.
If enacted, the change would mean SingTel, which raked in $1.5 billion in local mobile revenue last year, could be slapped with a maximum penalty of $150 million instead of $1 million currently.
‘However, the converse situation has been true, whereby there have been no instances where the IDA has felt the need to impose a maximum fine. As such, the proposal to increase financial penalties is disproportionate,’ SingTel stressed.
Singapore’s smallest operator M1 echoed its rival’s sentiment, adding that a heavier fine would transfer ‘investible resources’ to the government and slow down the pace of technology and infrastructural deployment.
An alternative approach would be for IDA to require an operator to invest up to 10 per cent of its annual sales into the service that has fallen short, it said.
‘A financial penalty should only be imposed for instances of intentional non-compliance,’ M1 added.
StarHub is the lone operator to agree with the government’s stand that the current $1 million cap is inadequate. However, it urged Mica to consider lowering the 10 per cent quantum.
There is also a need for IDA to spell out how financial penalties are computed and how they will be imposed, StarHub said in its response.
One concern it had with the percentage-of-turnover approach is that it could result in a huge disparity in fines for the same breach as operator sales could vary significantly, StarHub pointed out.
Mica received a total of five responses when its consultation closed earlier this month.
OpenNet – the company in charge of wiring up Singapore with new fibre-optic links – and industry group the Asia-Pacific Carriers Coalition (APCC) were the only two outside of Singapore’s telco trinity to have replied.
Beyond increasing financial penalties, Mica also sought the industry’s views on other proposed changes to the country’s Telecommunications Act, a bill which has been intact since 2005.
Among the amendments are two recommendations to give the minister of information, communications and the arts the power to seize control of an operator’s business to protect national interests, as well as the right for him to force a telco to split up its various businesses.
Both were frowned upon by the APCC, which warned that investments in the local telecommunications sector could be chilled by the ‘introduction of a virtually unfettered power of confiscation’.
‘Other developed countries have not found a ministerial discretion to compulsorily transfer network management or assets to be necessary to protect national interest or continuity of supply,’ the APCC argued.
Mica previously said it is looking to table these amendments in parliament early next year.
TELCOs – BT
Telcos refuse to fall in line on proposed mega fine
All of them oppose move to raise penalty ceiling to 10% of yearly sales
Singapore’s bickering telecommunications trio is standing in unison against a set of proposed legislative changes which could see them cough up 10 per cent of their yearly sales in fines if they flout their licensing agreements.
Currently, telcos that violate their licence conditions or codes of practice face a maximum penalty of $1 million. Instead of having a fixed ceiling, local authorities are considering tweaking the formula so that operators can be fined up to 10 per cent of their annual turnover.
Both Singapore Telecommunications and M1 feel that the current penalty of $1 million is enough to get operators to toe the line.
In its response to a recent consultation exercise by the Ministry of Information, Communications and the Arts (Mica), SingTel highlighted the fact that the maximum $1 million penalty has never been meted out in local history.
Mica oversees the country’s telecommunications regulator – the Infocomm Development Authority of Singapore (IDA).
A change would be justified if IDA could provide examples where a licensing breach was serious enough to warrant a fine that goes above the current ceiling, it said.
If enacted, the change would mean SingTel, which raked in $1.5 billion in local mobile revenue last year, could be slapped with a maximum penalty of $150 million instead of $1 million currently.
‘However, the converse situation has been true, whereby there have been no instances where the IDA has felt the need to impose a maximum fine. As such, the proposal to increase financial penalties is disproportionate,’ SingTel stressed.
Singapore’s smallest operator M1 echoed its rival’s sentiment, adding that a heavier fine would transfer ‘investible resources’ to the government and slow down the pace of technology and infrastructural deployment.
An alternative approach would be for IDA to require an operator to invest up to 10 per cent of its annual sales into the service that has fallen short, it said.
‘A financial penalty should only be imposed for instances of intentional non-compliance,’ M1 added.
StarHub is the lone operator to agree with the government’s stand that the current $1 million cap is inadequate. However, it urged Mica to consider lowering the 10 per cent quantum.
There is also a need for IDA to spell out how financial penalties are computed and how they will be imposed, StarHub said in its response.
One concern it had with the percentage-of-turnover approach is that it could result in a huge disparity in fines for the same breach as operator sales could vary significantly, StarHub pointed out.
Mica received a total of five responses when its consultation closed earlier this month.
OpenNet – the company in charge of wiring up Singapore with new fibre-optic links – and industry group the Asia-Pacific Carriers Coalition (APCC) were the only two outside of Singapore’s telco trinity to have replied.
Beyond increasing financial penalties, Mica also sought the industry’s views on other proposed changes to the country’s Telecommunications Act, a bill which has been intact since 2005.
Among the amendments are two recommendations to give the minister of information, communications and the arts the power to seize control of an operator’s business to protect national interests, as well as the right for him to force a telco to split up its various businesses.
Both were frowned upon by the APCC, which warned that investments in the local telecommunications sector could be chilled by the ‘introduction of a virtually unfettered power of confiscation’.
‘Other developed countries have not found a ministerial discretion to compulsorily transfer network management or assets to be necessary to protect national interest or continuity of supply,’ the APCC argued.
Mica previously said it is looking to table these amendments in parliament early next year.
M1 – DBSV
On track to >10% EPS growth in 2010
At a Glance
• Net profit of S$39.5m (+15.5% y-o-y) in line, revenue up 10% q-o-q driven by higher iPhone sales
• Overall market share inches up to 26.3%
• No change to FY11F, broadband earnings should underpin mid single digit growth
• Maintain BUY with TP S$2.50, c. 7% regular yield at 80% payout ratio may be enhanced further
Comment on Results
3Q10 results in line. Revenue was up 10% q-o-q and 30% y-o-y to S$246m, as handset sales jumped 56% q-o-q, on the back of higher sales of the newly introduced iPhone4. This was largely offset by higher handset subsidy costs, and net profit of S$39.5m (+15.5% yo-y, -3.2% q-o-q) was in line with our estimates. Improved market share for the sixth consecutive quarter. Mobile market share stood at 26.3% (versus 26.2% in 2Q10 & 25.6% in 3Q09) as prepaid mobile subscriber share improved while post-paid market share remained stable. Churn rate remained low at 1.4%.
Recommendation
Broadband earnings in FY11F should offset slightly weaker mobile earnings due to FVA. We project broadband revenue to grow to S$41m (+45% yoy from low base) in FY11F, and increasing to S$54m in FY12F, mainly on the back of SME business. While EBITDA margins for broadband business are likely to be below 30%, net margins should be similar to mobile division’s 20% net margins, due to negligible depreciation expenses.
Close to 7% yield from 80% earnings payout ratio. If M1’s capex to sales ratio for FY11F is lower than our assumed 12%, free cash flow would higher, which could lead to special dividends or capital management. The recent 3G spectrum award from the IDA for S$20m held no surprises as there was no new player and all 3 telcos avoided a bidding war, thus keeping capex costs low. Maintain BUY with DCF-based TP of S$2.50 (WACC 8.5%).
M1 – BT
M1 chalks up 15.5% jump in Q3 net to $39.5m
Q3 operating revenue soared 30% to $245.7m, from $188.4m last year
HIGHER handset sales and subscription revenue helped lift M1’s third-quarter net profit 15.5 per cent to $39.5 million, from $34.2 million a year earlier.
Earnings per share for the three months ended Sept 30 rose 15.8 per cent to 4.4 cents, from 3.8 cents in 2009.
Q3 operating revenue soared 30.4 per cent to $245.7 million, from $188.4 million last year.
However, M1’s profitability was impacted by the recurring trend of having to absorb higher subsidies for smart phones such as the iPhone 4.
This led to a 34.5 per cent spike in the firm’s operating expenses to $196.6 million during the quarter.
Singapore’s smallest operator turned in a better scorecard across all three business lines in Q3.
Revenue from mobile services, which accounts for more than half its sales, grew 2.2 per cent to $143.9 million.
Besides recurring phone subscriptions, local telcos also received a boost from the launch of Apple’s iPad touchscreen tablet in Q3 with the introduction of new data plans for the device.
Income from international call services, which dipped last year as customers cut back on overseas calling during the recession, grew 0.6 per cent to $32 million in Q3.
Sales from its fixed services, M1’s nascent broadband business, grew to $6.1 million in Q3, from a mere $600,000 a year earlier.
M1 is hoping to ride on the recent launch of Singapore’s fibre-optic broadband highway to drive up this segment’s income in the near future.
Last month, the Republic’s new Internet backbone became partly operational and all three telcos have introduced new ultra high- speed Internet packages for estates that are wired up for breakneck broadband access speeds.
‘This (the launch of the fibre-optic network) represents a major milestone as we continue to grow our fixed-line business,’ M1 CEO Karen Kooi said in a statement yesterday.
Thanks to strict government regulations, M1 can buy bandwidth at the same wholesale pricing as its rivals.
This will allow the firm to compete on an equal footing with entrenched broadband incumbents Singapore Telecommunications and StarHub.
To take advantage of the new regime, M1 said it has even established its own operating company or OpCo to cater specifically to corporate customers.
OpCos lease fibre-optic infrastructure from a company called OpenNet, activates these links, and sells Internet packages to end users such as consumers or businesses.
Having its own OpCo will allow M1 to offer more customised solutions and faster customer response times, the company explained.
For the first nine months of the year, M1 registered a 5.7 per cent increase in net profit to $119.6 million on the back of a 27 per cent increase in operating revenue to $717.8 million.
‘Based on the current outlook, we are maintaining our guidance that net profit after tax for 2010 is likely to improve year-on- year,’ Ms Kooi said.
M1 shares closed one cent higher at $2.25 yesterday before its Q3 earnings were released.