SingTel – GS
1Q11 Result Preview
Result Date:
• Thursday, 12 August 2010, approximately 9:30am (AEST).
GS&PA Estimates:
• N/a.
Trading Comment:
• SingTel’s key Associates will have reported their June quarter results by the time SingTel reports its 1Q11. Thus, the focus will be on the performance of SingTel’s Singapore and Australian businesses.
Look Out For:
• Singapore: At the FY10 result, SingTel gave subdued guidance for Singapore, with FY11 revenues expected to grow mid-single-digit and EBITDA expected to decline low-to-mid-single-digit. This is despite robust economic conditions (1Q10 GDP +25.1%, 4Q09 +11.0%, 3Q09 -4.6%, 2Q09 -12.4%, 1Q09 -15.5%). We expect to see: (1) robust WBB growth offset by slower mobile net adds; (2) a continued slowdown in fixed line; and (3) rising costs for SingTel’s new initiatives (e.g. mio TV). We may also get clarity on how SingTel expects its financials to look (margins, capex, etc.) in an NBN world.
• Australia: At the FY10 result, SingTel guided to mid-single-digit growth in sales and EBITDA in FY11. We expect to see broadly similar sales trends to previous results in 1Q11 – Mobile strong, Business and Wholesale flattish, Consumer and SME down. Our focus will be Optus Mobile (c. 70% of Optus EBITDA), specifically: (1) whether Optus Mobile has maintained its double-digit revenue growth momentum; (2) whether Telstra’s renewed vigour has had an impact on net adds; and (3) whether Optus Mobile has managed to drive earnings growth and margins.
• Associates: Following a robust recovery in FY10 (associates contribution +19.2% in FY10 cf. FY09 -21.6%) we expect growth in SingTel’s Associates earnings to slow in FY11. To date, both Telkomsel (NPAT -14.5%) and Globe (NPAT -27.5%) have reported weaker June quarter results. We also expect Bharti’s profit results (reports 11 Aug) to remain challenged given: (1) the impact of the price war; and (2) costs associated with the Zain acquisition.
Weakness in the underlying results is likely to be offset to some extent by the stronger Indonesian Rupiah.
SingTel – Daiwa
1Q FY11 results preview: associates offset Optus’s strength
What has changed?
• Singapore Telecom (SingTel) is scheduled to announce its 1Q FY11 results on 12 August 2010. We expect the company to reaffirm its FY11 guidance.
Impact
• The numbers. We forecast 1Q FY11 net profit to decline by 1% YoY as we expect the contribution from associates to be a drag on the company’s overall profitability, despite likely positives including a strong performance by subsidiary Optus (Not listed) and favourable currency fluctuations.
• Optus expected to shine. We believe the solid mobile revenue-growth trend of the past few quarters is set to continue, and forecast the EBITDA margin to rise by 1.5 percentage points year-on-year for 1Q FY11.
• Singapore EBITDA expected to be flat. Despite our expectation of strong revenue growth, driven by mobile and IT divisions, we expect the EBITDA margin to fall due to a changing business mix and a likely increase in pay-TV costs.
• Looking for associates to remain a drag. We expect a 15% YoY decline in the pre-tax earnings of associates. We think this will be driven by margin erosion at Telkomsel (Not listed) as a result of a rise in network expenses.
Valuation
• We maintain our 3 (Hold) rating and sum-of-the-parts-based six-month target price of S$3.09.
Catalysts and action
• A rejuvenated Optus is a bright spot, but we are concerned about the outlook for the company’s associates, which accounted for 48% of SingTel’s FY10 EPS. Based on our estimates, the core (Singapore and Optus) business is trading at a market-implied valuation of S$1.64/share. This is a 10% premium to our S$1.44 fair-value estimate, and is unattractive in our view.
SingTel – Daiwa
1Q FY11 results preview: associates offset Optus’s strength
What has changed?
• Singapore Telecom (SingTel) is scheduled to announce its 1Q FY11 results on 12 August 2010. We expect the company to reaffirm its FY11 guidance.
Impact
• The numbers. We forecast 1Q FY11 net profit to decline by 1% YoY as we expect the contribution from associates to be a drag on the company’s overall profitability, despite likely positives including a strong performance by subsidiary Optus (Not listed) and favourable currency fluctuations.
• Optus expected to shine. We believe the solid mobile revenue-growth trend of the past few quarters is set to continue, and forecast the EBITDA margin to rise by 1.5 percentage points year-on-year for 1Q FY11.
• Singapore EBITDA expected to be flat. Despite our expectation of strong revenue growth, driven by mobile and IT divisions, we expect the EBITDA margin to fall due to a changing business mix and a likely increase in pay-TV costs.
• Looking for associates to remain a drag. We expect a 15% YoY decline in the pre-tax earnings of associates. We think this will be driven by margin erosion at Telkomsel (Not listed) as a result of a rise in network expenses.
Valuation
• We maintain our 3 (Hold) rating and sum-of-the-parts-based six-month target price of S$3.09.
Catalysts and action
• A rejuvenated Optus is a bright spot, but we are concerned about the outlook for the company’s associates, which accounted for 48% of SingTel’s FY10 EPS. Based on our estimates, the core (Singapore and Optus) business is trading at a market-implied valuation of S$1.64/share. This is a 10% premium to our S$1.44 fair-value estimate, and is unattractive in our view.
StarHub – MacQuarie
Let’s look beyond the immediate
Event
• Looking beyond StarHub’s 2Q CY10 results, which disappointed on margins, we expect margins to improve in 2H CY10 and earnings growth to return strongly in CY11. We believe investors need to focus on the various changes that are in the offing in 2H CY10 (upside on corporate data from NGNBN, higher postpaid ARPU from smartphone data usage and lower-than-expected TV subs loss). StarHub remains a high dividend play (8.5% dividend yield), and we maintain our Outperform rating, while trimming our target price to S$2.62 from S$2.64.
Impact
• Immediate concerns being addressed: After 2Q results, investors may be wary about a margin decline and potential Pay TV subscriber loss to Mio.
Concern 1: Margins – EBITDA margin decline to 23.0% from 31.1% in 1H CY10 affected by one-offs like higher production costs from World Cup and a S$12m staff bonus. We expect margins to recover in 2H CY10 to about 27.5% and to remain around that level in CY11.
Concern 2: Pay TV subs loss – Despite the loss of BPL rights to SingTel, the subscriber base remains at 541,000. Although we assume a 7% decline, we think StarHub can retain subs by offering new channels.
Concern 3: Sustainability of dividends – Management remains committed to a S¢5 dividend per quarter, sustained via FCF. We expect StarHub to sustain around S¢19 dividend payouts in CY11 and CY12.
• Need to focus on the broader changes and the impact: We believe broader changes like impact from NGNBN and smartphones need attention.
Change 1: NGNBN – Potentially launching by October 2010, it provides strong upside for StarHub on the corporate data front, with much larger access to corporates and SMEs (24,000 buildings vs only 800 now).
Change 2: High smartphone usage – Increasing smartphone penetration driven by new Android-based phones and iPhone 4 could increase data usage in long term, positively affecting postpaid ARPUs.
Change 3: Pay TV – Despite the BPL rights loss to SingTel, StarHub remains the leader in Pay TV, with more channel offerings (locked in for three years), attractive packages and constantly improving telecast quality.
Earnings and target price revision
• Sequentially, we cut our EPS estimates for the next two years by 16% and 5%, respectively. We trim our TP to S$2.62 from S$2.64.
Price catalyst
• 12-month price target: S$2.62 based on a DDM methodology.
• Catalyst: Margin recovery in 2H CY10 and NGNBN launch.
Action and recommendation
• We expect positive news flow in terms of margins, upside from the NGNBN launch and continuity of high dividend payouts to keep the stock firm despite weak quarterly results. Maintain Outperform with S$2.62 price target.
StarHub – MacQuarie
Let’s look beyond the immediate
Event
• Looking beyond StarHub’s 2Q CY10 results, which disappointed on margins, we expect margins to improve in 2H CY10 and earnings growth to return strongly in CY11. We believe investors need to focus on the various changes that are in the offing in 2H CY10 (upside on corporate data from NGNBN, higher postpaid ARPU from smartphone data usage and lower-than-expected TV subs loss). StarHub remains a high dividend play (8.5% dividend yield), and we maintain our Outperform rating, while trimming our target price to S$2.62 from S$2.64.
Impact
• Immediate concerns being addressed: After 2Q results, investors may be wary about a margin decline and potential Pay TV subscriber loss to Mio.
Concern 1: Margins – EBITDA margin decline to 23.0% from 31.1% in 1H CY10 affected by one-offs like higher production costs from World Cup and a S$12m staff bonus. We expect margins to recover in 2H CY10 to about 27.5% and to remain around that level in CY11.
Concern 2: Pay TV subs loss – Despite the loss of BPL rights to SingTel, the subscriber base remains at 541,000. Although we assume a 7% decline, we think StarHub can retain subs by offering new channels.
Concern 3: Sustainability of dividends – Management remains committed to a S¢5 dividend per quarter, sustained via FCF. We expect StarHub to sustain around S¢19 dividend payouts in CY11 and CY12.
• Need to focus on the broader changes and the impact: We believe broader changes like impact from NGNBN and smartphones need attention.
Change 1: NGNBN – Potentially launching by October 2010, it provides strong upside for StarHub on the corporate data front, with much larger access to corporates and SMEs (24,000 buildings vs only 800 now).
Change 2: High smartphone usage – Increasing smartphone penetration driven by new Android-based phones and iPhone 4 could increase data usage in long term, positively affecting postpaid ARPUs.
Change 3: Pay TV – Despite the BPL rights loss to SingTel, StarHub remains the leader in Pay TV, with more channel offerings (locked in for three years), attractive packages and constantly improving telecast quality.
Earnings and target price revision
• Sequentially, we cut our EPS estimates for the next two years by 16% and 5%, respectively. We trim our TP to S$2.62 from S$2.64.
Price catalyst
• 12-month price target: S$2.62 based on a DDM methodology.
• Catalyst: Margin recovery in 2H CY10 and NGNBN launch.
Action and recommendation
• We expect positive news flow in terms of margins, upside from the NGNBN launch and continuity of high dividend payouts to keep the stock firm despite weak quarterly results. Maintain Outperform with S$2.62 price target.