SMRT – CIMB
Muted outlook
• Downgrade to Underperform from Neutral with lower target price of S$1.95 (from S$2.31). We cut our DCF-derived target price for SMRT to S$1.95 (WACC: 8.4%, terminal growth 2%) from S$2.31 after: 1) cutting our EPS estimates by 3-4% for FY12-13; 2) adjusting for higher capex assumptions; and 3) re-aligning discount rates with our house rates. We remain wary of losses on the Circle Line with the opening of more stations in 2011 and margin pressure from rising fuel and electricity costs. Valuations are also rich at 19x CY11 P/E. As such, we downgrade the stock to Underperform and recommend a switch to peer, ComfortDelgro (Outperform, target S$1.83), which trades at a more reasonable 13x CY11 P/E. We see de-rating catalysts from higher-than-expected operating expenses.
• Circle Line may not break even as fast as North East Line (NEL). NEL took over three years to break even and this was achieved with the help of a large population catchment in North-East Singapore (about 15% of the local resident population) and rationalisation of bus routes. In the absence of such advantages, we estimate that Circle Lind could take four years or more after the opening of all stages to break even.
• Future contracts could be less lucrative. With proposed amendments to the Rapid Transit Systems Act, we believe future contracts awarded could be less lucrative.
SMRT – CIMB
Muted outlook
• Downgrade to Underperform from Neutral with lower target price of S$1.95 (from S$2.31). We cut our DCF-derived target price for SMRT to S$1.95 (WACC: 8.4%, terminal growth 2%) from S$2.31 after: 1) cutting our EPS estimates by 3-4% for FY12-13; 2) adjusting for higher capex assumptions; and 3) re-aligning discount rates with our house rates. We remain wary of losses on the Circle Line with the opening of more stations in 2011 and margin pressure from rising fuel and electricity costs. Valuations are also rich at 19x CY11 P/E. As such, we downgrade the stock to Underperform and recommend a switch to peer, ComfortDelgro (Outperform, target S$1.83), which trades at a more reasonable 13x CY11 P/E. We see de-rating catalysts from higher-than-expected operating expenses.
• Circle Line may not break even as fast as North East Line (NEL). NEL took over three years to break even and this was achieved with the help of a large population catchment in North-East Singapore (about 15% of the local resident population) and rationalisation of bus routes. In the absence of such advantages, we estimate that Circle Lind could take four years or more after the opening of all stages to break even.
• Future contracts could be less lucrative. With proposed amendments to the Rapid Transit Systems Act, we believe future contracts awarded could be less lucrative.
Telco – Macquarie
Singapore telecoms sector
Misplaced fears on 3G auction
Event
There appear to be fresh concerns over a possible increase in competition in the mobile market post the 3G auction date announced by IDA (Infocomm Development Authority). We believe the fears are misplaced and that the market should concentrate on the more important event of NGNBN. We reiterate our view that StarHub is the best proxy to NGNBN and any weakness in the share price over the 3G auction event should be seen as an entry opportunity.
Impact
What is up for grabs?
⇒ 3 lots of 2 X 5MHz 3G spectrum up for auction: Reserve price of S$20m/lot has been set with the auction date as 15 November.
⇒ These lots have been lying idle since 2001: Ever since the three telcos were awarded 3G spectrum in 2001, these three lots have been lying idle.
What are the possibilities?
⇒ A fourth mobile operator could jump in: Two lots of 2 X 5MHz should be sufficient for a new mobile operator to start operating in Singapore with a target base of 1m subscribers. The reserve price is also attractive.
⇒ One of the existing telcos could bid for the future: In the light of exponentially increasing data traffic, one or more of the existing telcos could bid for one or more slots. This could spike up the reserve price.
⇒ If no one bids, IDA could distribute the spectrum: The three telcos have been asking for this for a while. However, IDA has been resisting this proposal as it wants a transparent auction and a higher price for lots.
⇒ Spectrum remains idle: The existing telcos have upgraded to HSPA+ network and are trialling LTE technology, which should aid network capacity as greater traffic occurs. There is also room to re-farm the 2G spectrum. Thus, the three telcos could abstain from bidding for spectrum.
Outlook
Remote possibility of a fourth player: We expect the likely outcome to bein favour of existing telcos, as we do not see a new player entering the Singapore mobile market in a hurry. Our reasons are:
⇒ Singapore is 140% penetrated in mobile: We believe penetration is at its peak with annual growth in mobile expected to be in the low single- digits. We doubt new operators would want to enter such a market.
⇒ Requires huge capex to roll out services: In addition to spending at least S$40m for two lots of spectrum, the new operator will have to shell out at least S$200–300m in upfront investments.
⇒ Virgin Mobile entered in 2002 but lasted only a year: In the less competitive market of 2002, a fourth player lasted but a year.
⇒ Only an international player with capacity to absorb initial losses could enter: Given the high capex and long gestation period to recover costs, we believe the probability of local players entering such as LGA or SuperInternet is low. An international player could take a chance on the improving 3G market and play on differential pricing.
Telco – Macquarie
Singapore telecoms sector
Misplaced fears on 3G auction
Event
There appear to be fresh concerns over a possible increase in competition in the mobile market post the 3G auction date announced by IDA (Infocomm Development Authority). We believe the fears are misplaced and that the market should concentrate on the more important event of NGNBN. We reiterate our view that StarHub is the best proxy to NGNBN and any weakness in the share price over the 3G auction event should be seen as an entry opportunity.
Impact
What is up for grabs?
⇒ 3 lots of 2 X 5MHz 3G spectrum up for auction: Reserve price of S$20m/lot has been set with the auction date as 15 November.
⇒ These lots have been lying idle since 2001: Ever since the three telcos were awarded 3G spectrum in 2001, these three lots have been lying idle.
What are the possibilities?
⇒ A fourth mobile operator could jump in: Two lots of 2 X 5MHz should be sufficient for a new mobile operator to start operating in Singapore with a target base of 1m subscribers. The reserve price is also attractive.
⇒ One of the existing telcos could bid for the future: In the light of exponentially increasing data traffic, one or more of the existing telcos could bid for one or more slots. This could spike up the reserve price.
⇒ If no one bids, IDA could distribute the spectrum: The three telcos have been asking for this for a while. However, IDA has been resisting this proposal as it wants a transparent auction and a higher price for lots.
⇒ Spectrum remains idle: The existing telcos have upgraded to HSPA+ network and are trialling LTE technology, which should aid network capacity as greater traffic occurs. There is also room to re-farm the 2G spectrum. Thus, the three telcos could abstain from bidding for spectrum.
Outlook
Remote possibility of a fourth player: We expect the likely outcome to bein favour of existing telcos, as we do not see a new player entering the Singapore mobile market in a hurry. Our reasons are:
⇒ Singapore is 140% penetrated in mobile: We believe penetration is at its peak with annual growth in mobile expected to be in the low single- digits. We doubt new operators would want to enter such a market.
⇒ Requires huge capex to roll out services: In addition to spending at least S$40m for two lots of spectrum, the new operator will have to shell out at least S$200–300m in upfront investments.
⇒ Virgin Mobile entered in 2002 but lasted only a year: In the less competitive market of 2002, a fourth player lasted but a year.
⇒ Only an international player with capacity to absorb initial losses could enter: Given the high capex and long gestation period to recover costs, we believe the probability of local players entering such as LGA or SuperInternet is low. An international player could take a chance on the improving 3G market and play on differential pricing.
SingTel – BT
SingTel Optus sued for ‘misleading’ ads
SingTel Optus Pty Ltd misled Australians with advertisements touting the company’s broadband speeds and data plans, the Australian Competition and Consumer Commission (ACCC) said.
The commission sued SingTel Optus, a unit of South-east Asia’s biggest phone operator Singapore Telecommunications, in the Federal Court of Australia yesterday, seeking to stop SingTel Optus from running the ads, force it to advertise corrections and pay fines.
The company’s advertisements fail to inform customers of limitations on promised download speeds, the lawsuit claims.
In its ‘Think Bigger’ campaign, SingTel Optus advertises a 120-gigabyte plan for A$49.99 (S$61.60) a month, while the ‘Supersonic’ broadband campaign promises download speeds four times faster than SingTel’s original plan.
‘Once the customer exceeds the peak data allowance, the Internet connection is limited to speed of 64 kbps,’ the commission said in a statement yesterday. ‘The ACCC alleges that Optus did not sufficiently or clearly disclose, and in some cases did not disclose at all, these qualifications.’
The lawsuit will proceed quicker than usual, having been placed on the court’s ‘fast track’ list, the commission said. A hearing is scheduled for Sept 16, the agency said.
SingTel Optus will work with the competition commission to resolve its concerns, the company said in a statement.
‘We go to great length to offer the best products and services to our customers and to explain the value of those offers clearly,’ SingTel Optus said. — Bloomberg