M1 – DB
1Q10 not as good as earlier thought and 2Q10 preview
1Q10 performance not as good as previously thought; stay cautious
M1 is the best performing Singapore telco YTD with its 3M share price supported to some extent by the view that the 1Q10 results were “not as bad as earlier feared”. But M1’s 1Q10 was in fact flattered by a new accounting treatment, which we believe masked 7-yr EBITDA and NPAT lows. Although margins are expected to improve in 2Q10e and continue to recover over 2010e, the new accounting treatment clearly raises some uncertainty around M1’s relative performance. We remain fundamentally cautious but maintain Hold for the yield.
New accounting treatment flattered 1Q10 financials
M1’s 1Q10 results were flattered to an extent by a new iPhone accounting treatment (currently only adopted in the sector by M1), under which a subscriber’s lifetime revenues are front-end loaded. M1 has not disclosed specific details on the methodology, but our analysis suggests 1Q10 revenues may have been boosted by approx S$10-20m. Without the accounting adjustment, we estimate the 1Q10 EBITDA margin would have compressed to approx 25-27% (vs reported 31%) and driven EBITDA to a 7-yr low while NPAT would have fallen by up to 45% YoY (vs reported -6% YoY). M1 is expected to provide more clarity on the new accounting methodology with the 2Q10e results, but its adoption does raise uncertainties around M1’s performance vs the S’pore telcos and historical trends.
Recovering margin the key theme for 2Q10e
We expect QoQ margin recovery to be the key theme when M1 announces 2Q10e results on 15 Jul. Handset revenues will remain the key driver of M1’s 2Q10e performance (despite slowing iPhone sales) and we expect total reported revenues of S$230m (+20% YoY). But otherwise, mobile service revenue growth is likely to be modest. Positively, handset costs should moderate with lower volumes sold (although acquisition cost per sub expected to stay high) and drive QoQ margin recovery to 34.5%. Overall, we expect 2Q10e EBITDA to inch up to S$79m and NPAT to reach S$40m (+7% YoY), taking 1H10 NPAT to S$79m.
DCF-derived S$2 TP; key risks include competition and fixed-line execution
Our M1 TP is derived from DCF analysis using 7.2% WACC and 0% g to reflect the long-term ex-growth nature of Singapore’s telco market. Key risks include competition, fixed-line execution and capex.
SMRT – BT
More MRT retail areas coming
SMRT shares plans for Orchard, Circle Line at launch of Esplanade Xchange
SMRT is carving out a new shopping area at Orchard MRT station – and plans more such spaces at upcoming stations on the Circle Line.
The transport group shared the plans at the launch yesterday of Esplanade Xchange – a 2,000 sq m retail enclave at the Esplanade MRT station.
Teo Chew Hoon, vice-president of SMRT’s commercial and taxi divisions, said that Orchard Xchange could be ready at the end of the year and will have a lettable area of around 1,500 sq m. The tender process for space has started and the group expects good take-up.
There are also plans for ‘a few’ Xchanges at MRT stations in Stages 4 and 5 of the Circle Line, Ms Teo said, without elaborating on where they might be. These stages of the line will run through such places as Botanic Gardens and Holland Village.
SMRT now has seven Xchanges. Esplanade Xchange is the third largest, after Raffles Xchange (about 2,400 sq m) and Tanjong Pagar Xchange (about 2,000 sq m). The group has about 29,000 sq m of retail space across the SMRT network.
Esplanade Xchange is fully let and there will be 26 shops. Tenants include the Infocomm Development Authority of Singapore’s iExperience centre, Coffee & Toast, Dunkin Donuts and IT gadget retailer Juzz1. More than 90 per cent of the outlets have opened and all will be operating by the middle of this month.
Rents at Esplanade Xchange are at ‘market rates’, Ms Teo said, declining to elaborate further. At the nearby Suntec City Mall, the committed average passing rent was $10.89 per sq ft per month in March, according to Suntec Real Estate Investment Trust’s first-quarter financial results.
Ms Teo said that Esplanade Xchange’s location is a strong selling point. It is near Suntec City, Marina Square, CityLink Mall and Bras Basah, and will be directly linked to Raffles City Shopping Centre around the middle of the month. She expects pedestrian traffic to grow after the Circle Line is completed.
Juzz1 general manager Warren Teh said that the store has about 600 walk-in customers a day, and he expects the number to grow after the link to Raffles City opens.
SMRT shares closed unchanged yesterday at $2.32.
SingTel – MS
Optus Investor Day: Key Takeaways
Quick Comment – Conclusion: We remain EW following the Optus Investor day. While the Australian business appears to be performing well in a wireless market that continues to deliver stronger growth than global peers, we see risks to the core Singapore business from NBN as well as “fairish” valuations at F’11e PE of 12.3x.
What’s new: Optus presented a bullish outlook for the Australian business at its investor day yesterday, driven principally by Optus’ continued strong growth in an increasingly attractive Australian wireless market. Opportunities may also emerge in fixed line, as the open-access National Broadband Network gradually replaces Telstra’s copper network, but these are a lot less clear. The question of a local IPO for Optus continues to be asked by the Australian financial community, but continues to be answered by SingTel management in the same way: there are no current plans to reduce SingTel’s stake in Optus, and any transaction must be value accretive.
Three Key Takeaways: 1) Australian mobile revenue growth at 8.8% in CY09 continues to comprehensively outpace other developed markets, which are flat or falling; 2) 60% of the mobile market growth is due to wireless broadband, which Australians are clearly embracing, refocusing the market away from calling to data services; 3) Optus is currently out-growing its rivals, at the expense of higher acquisition costs and consequently lower margins. Our view remains that this above-market growth is unlikely to be sustained. Telstra has already launched its competitive response to market share losses with the introduction of new ‘any-net’ cap plans. Notably, these plans extend down to the A$49 price point, Optus territory, but not to A$29, traditionally a Vodafone-3 stronghold.
Fixed Line Opportunity May Emerge post-NBN, But Competition is Likely to Erode Margins
Optus has been hampered in the fixed line market, in its view, by an uneven competitive environment dominated by Telstra. The National Broadband Network (NBN), a government-owned fibre replacement for the current copper last mile network, promises to improve Optus’ access to fixed line infrastructure. Unfortunately for Optus, the NBN will also improve infrastructure access for everyone else also. Optus management commented that they expect aggressive competition at the outset, but that new entrants may underestimate the skills required for success in fixed line, and subsequently exit, or be consolidated in the longer term. For Telstra, we assume that fixed line EBITDA margins will fall to ~20% post-NBN, and we attribute very little value to Telstra’s fixed line business post-NBN. At this stage we see a broadly similar outlook for Optus in fixed line.
Customer Transition to NBN Key to Retaining Value in Existing Fixed Line Business
We see some risk to the market share of incumbent fixed line service providers in the transition to NBN fibre-based services. If the government and/or competition regulator prompts customers to re-evaluate their choice of service provider as the NBN is connected to the customer’s premises (or customers do so of their own volition), incumbent market shares could be threatened by new entrants. Optus currently enjoys a 16.4% fixed revenue market share, which is well behind Telstra’s share, but still threatened in our view.
StarHub – OCBC
Attractive Dividend Yield
Ex-CEO paring stake. StarHub Ltd saw a spate of insider selling of shares from former CEO Terry Clontz over the last two weeks. As of 29 Jun, Clontz sold another block of 30,000 shares, bringing his total share sale to 1,197,200 shares. We understand that the recent action was in response to the new US Senate Tax Extenders Bill; although currently still in debate, the Bill will effectively raise the tax on capital gains, dividends and ordinary income. As such, it makes sense for most Americans to accelerate their capital gains in 2010. According to management, Clontz indicated to them that while he may choose to accelerate more capital gains this year, he intends to keep a substantial amount of StarHub shares intact for as long as he is a director of the company. Based on the latest announcement, Clontz still owns 5,791,450 shares (or a 0.338% stake). But even with more share sales from Clontz, we do not expect any overhang on the share price because of the context of the sale.
iPhone 4G and iPad hitting Singapore in Jul. Meanwhile, Apple’s newest iPhone 4G is expected to hit Singapore in Jul – media reports suggest that there is a good chance that all three telcos will be offering the hotly sought-after smartphone at the same time. Indeed, StarHub has already started to accept pre-orders for the phone on its website for both consumers and corporate customers. While the pricings for the various models have not been fixed, we expect them to be comparable to the existing iPhone 3GS. With StarHub and M1 being slightly late to the game – they only started offering the iPhone 3GS in mid-Dec 2009 – the demand from their existing iPhone subscribers may not be as strong due to the 2-year lock-in period. As such, we suspect the promotions/subsidies for the iPhone 4G may not be that aggressive. Another eagerly awaited Apple product – the iPad with WiFi and 3G capabilities – could also be hitting our shores in Jul and this could also drive up the take-up of data plans.
Attractive dividend yield. In light of the more volatile markets, spooked by concerns of slowing economies in US and China as well as the ongoing EU sovereign debt crisis, we continue to maintain our preference for defensive plays. We also like StarHub’s attractive dividend yield of 8.7% (StarHub has committed to pay S$0.05 per quarter as dividend). Maintain BUY with S$2.32 fair value.
SATS – Phillip
Record Tourism arrivals
Singapore Tourism Board (STB) announced a record high for visitor arrivals of 946,150 for the month of May. This double digit surge in visitor arrivals of 30.3% over the same period a year ago bodes well for the aviation sector. Moreover, there is a growing trend of preference for air transportation, by visitors traveling into Singapore, over the past one yr. We also observed a high percentage of visitor arrivals by air, of above 75%, for 4 out of 5 months of this year.
The previous peak monthly visitor arrivals of 971,452 experienced in December 2009 was achieved prior to the opening of Marina Bay Sands (MBS) and Resorts World Sentosa (RWS). With the opening of RWS and MBS in Feb and April 10 respectively, Singapore has entered into a new phase of growth as a tourism hub.
Traditionally, July and December were the strongest months for visitor arrivals. We believe that the previous peak levels would likely be breached in the corresponding months of 2010, along with the phased opening of the two integrated resorts.
Valuation:
We revised our revenue projections for SATS to include all these factors. Along with the proposed final dividend payout of 8cents in Aug 10 and our interim dividend expectations of another 6cents in Nov 10, total returns expected based on our 12monthly target price would be 29.3%. We believe that this margin of safety is sufficient for us to issue a BUY call on SATS. Furthermore, high yielding stocks, such as SATS, are particularly attractive under the low interest rate environment of today.