SingTel – BT
Bharti’s pan-India 3G plan foiled by hot bids
Group paying 123 billion rupees for permits in 13 of the 22 regions
Bharti Airtel Ltd, India’s largest carrier and a unit of Singapore Telecommunications Ltd, scrapped plans to offer nationwide high-speed mobile phone services after bidding in a government auction drove prices ‘beyond reasonable levels.’
India’s 34-day auction of third-generation licences for airwaves in its 22 telecommunications zones ended on Wednesday with none of the nine approved bidders buying all the permits for national coverage. The auction raised 677.2 billion rupees (S$20.4 billion) for the government.
‘I am sure every pan-Indian operator would love to get their hands on pan-Indian spectrum, but the price needs to be right,’ Theo Maas, who owns Bharti shareholder Singapore Telecommunications Ltd as part of the US$4.5 billion in assets he oversees at Arnhem Investment Management in Sydney, said.
As bids surged beyond initial expectations, there was a ‘trade-off that every operator would make,’ he said.
The licence prices stoked concern that carriers won’t be able to recoup their investment from a market where calls cost a penny a minute, the cheapest in the world.
France Telecom SA and Deutsche Telekom AG posted record losses after European phone companies paid more than US$100 billion to buy 3G licences a decade ago.
‘The auction format and severe spectrum shortage along with ensuing policy uncertainty drove the prices beyond reasonable levels,’ Bharti, which is paying 123 billion rupees for permits in 13 of the 22 regions, said in a statement on Wednesday.
‘As a result, we could not achieve our objective of pan-India 3G footprint.’
In some areas of the country, building new base stations and towers might have been a cheaper alternative to buying new spectrum, according to Arnhem’s Mr Maas.
Bharti rose one per cent to 262.4 rupees at 11.33 am in Mumbai trading yesterday, while Reliance Communications added 1.7 per cent to 139 rupees, and Idea Cellular Ltd climbed 4.3 per cent.
Bharti has fallen 16 per cent since the auction began on April 9, while Reliance dropped 24 per cent, and Idea Cellular Ltd slumped 22 per cent.
That compares with an 8.5 per cent decline for the benchmark Sensex index in the same period.
Morgan Stanley raised its investment rating for India’s telecommunications companies yesterday to ‘in-line’ from ‘cautious,’ citing the removal of uncertainty over the pricing of third-generation spectrum with the conclusion of the auction, as well as stability in the region’s tariff wars.
The proceeds from the auction exceed the 350 billion rupees Finance Minister Pranab Mukherjee projected in his budget, and may help the government meet a target of shrinking the budget deficit by more than one percentage point of gross domestic product, the sharpest cut in 19 years.
On May 11, India’s telecommunications regulator said prices for 3G spectrum established through the auction should be used as a base to charge for second-generation airwaves.
The recommendation threatens to raise costs for mobile-phone companies.
The lack of clarity on regulations ‘gets worse by the day,’ Mark James, an analyst with Liberum Capital Ltd, said from London before the auction ended. — Bloomberg
SingTel – UBS
Concerns in Indonesia
• Telkomsel may be the loser in the competition for data, in our view
In the past two quarters, 70% of revenue growth in Indonesia wireless was from data. We believe this is not a temporary trend and Telkomsel may be the loser in the competition to grow data revenue. We believe the consumer perception that Telkomsel has the best quality wireless network in Indonesia is at risk. Please refer to today’s UBS report, Indonesia Telecommunication Sector: The rise of data by UBS Indonesia telecom analyst Sebastian Tobing for further details.
• Negative for SingTel, in our view
SingTel is the 35% shareholder of Telkomsel and 17% of our sum-of-the-parts based price target for SingTel comes from Telkomsel. We believe the market views Telkomsel as one of the growth drivers for SingTel.
• Bharti in India also facing difficulties
Bharti, SingTel’s other large overseas associate and potential growth driver, also faces difficulties in the near term. The difficulties are: competition, 3G licence fee and regulatory challenges. We believe the concerns at Bharti and Telkomsel will be an overhang for SingTel shares.
• Valuation: lower price target to S$3.15; retain Neutral rating
Reflecting our lower earnings estimates for Telkomsel, we lower our SingTel EPS forecasts for FY2011/12/13 from S$0.266/0.286/0.316 to S$0.255/0.274/0.301. Our price target, based on a sum-of-the-parts model, is lowered from S$3.22 to S$3.15.
ComfortDelgro – DMG
Trading near trough valuations; BUY
1Q10 results in-line with ours and consensus expectations. ComfortDelGro reported 1Q10 PATMI of S$54.3m, up 3.4% YoY (+0.4% QoQ) representing 24% of our full year forecast of S$227m (consensus S$226m). The Group’s Australia bus and Singapore taxi operations registered remarkable EBIT growth of 90% and 22%, respectively. Maintain BUY, with a DCF-derived target price of S$1.78. Stock trades at a compelling 13.9x FY10 P/E multiple.
Rail continues to cannibalise bus ridership. In 1Q10, NEL rail ridership rose 12% to 0.4m (2009 growth: 5.5%). This is in contrast with the 0.9% increase in bus ridership. We believe the overlapping of inter-town bus service routes with MRT lines will continue to draw more bus commuters towards rail, due to the relatively faster journey times. We expect the cannabilisation process to continue with rail ridership growing by a stronger 10% in 2010 underpinned by tourism growth. In contrast, we expect bus ridership to decline by 2% and we have factored this into our estimates. Every 1% change in bus ridership could affect earnings by 0.9%.
Key takeaways from analyst briefing. Management expects: 1) Singapore bus revenue to decline in 2010 (we believe this is in view of fare reduction and weaker ridership due to the opening of CCL); 2) bus revenue from Australia to improve with additional services; 3) Singapore taxi revenue to increase with more cashless transactions and new replacement taxis; and 4) rail ridership in Singapore to continue to post strong growth.
Trading at lower range of its 13-20x trading band. ComfortDelGro trades at a compelling 13.9x FY10 P/E multiple, compared to SMRT’s lofty 19.6x P/E multiple. Despite the relatively challenging operational environment in its Singapore’s bus operations, we believe other business units such as Singapore taxis and rail as well as Australia bus operations will continue to underpin the group’s overall earnings. Recommend a pair trade: SELL SMRT (TP: S$2.00) and BUY ComfortDelGro (TP: S$1.78).
ComfortDelgro – CS
1Q10 in line – Singapore taxis and Australian buses drive growth
● CD’s March-quarter revenue of S$766.9 mn (+7% YoY) and net profit of S$54.3 mn (+3% YoY) were in line with our forecasts, and 24% and 23% of our full-year revenue and earnings estimates, respectively.
● In Singapore, operations were buoyed by bus and rail ridership growth of 0.9% and 12.1%, respectively. Taxi revenue rose 8% YoY, driven by a larger operating fleet (up 1.5% YoY) and higher cashless transaction volumes, reflecting firm underlying demand.
● CD’s overseas growth profile, now at 43% of revenue and 38% of operating profit, remains on track, led primarily by an 84% YoY jump in its Australian bus operations (full-year contribution from CDC Victoria and tailwinds from a stronger AUD). UK bus revenue was flat, as increased standards lowered QIC income at Metroline.
● We see CD as the best leveraged to rising visitor arrivals, with its dominant taxi market share. We fine tune our EPS by 1% and raise our target price slightly to S$1.90 from S$1.88, and believe that valuations are compelling at 13x P/E. We maintain our OUTPERFORM rating.
ComfortDelgro – JPM
1Q FY10 results review
• 1Q FY10 net profit of S$54.3MM (+3.4% Y/Y) was in line with expectations with growth coming from (1) CDC Victoria; (2) CDC NSW; (3) Singapore taxi; (4) auto engrg; and (5) rail (NEL ridership +12% Y/Y).
• Bus: improvement in Australia, weaker Singapore outlook: Segmental revenue/EBIT for bus rose 8.9%/3.7% helped mainly by positive translation effect of the stronger A$, higher mileage operated by CDC NSW and fullquarter contribution from CDC Victoria. Singapore bus operation was weaker (EBIT: -21% Y/Y) due to the temporary fare reduction since Apr-09 (expiring Jul-10). Management expects Singapore bus ridership to be negatively impacted by the progressive opening of the Circle Line.
• Recovery in Singapore taxis: EBIT for Singapore taxi grew 22% on slightly larger operating fleet and higher volume of cashless transactions e.g. NETS, credit cards, Cabcharge. However, management does not expect to significantly increase its taxi fleet in the near term as it continues to monitor the sustainability of demand from the integrated resorts.
• Downtown Line bid could see delay: The company is actively preparing for the DTL bid but expects the tender to take place end 2010/early 2011.
• Fuel hedging: Management attributed the 3% Q/Q decline in fuel costs to its sound hedging strategy. Fuel costs for the rest of the year remain substantially unhedged as management sees lower prices ahead.