M1 – BT
M1 Limited posted a 6 per cent year-on-year decline in net profit for Q1 2010, from $41.9 million to $39.3 million.
Excluding the tax adjustment that had boosted Q1 2009's bottom line, M1's net profit for Q1 2010 saw an increase of about 8 per cent.
Revenue for the quarter increased 33.6 per cent from $186.4 million to $249 million.
Earnings per share for the quarter fell 6.4 per cent to 4.4 cents.
M1 – CS
1Q FY10 preview: higher sales; marginally lower EBITDA
• M1 will report its 1Q FY10 results after the market closes on Friday this week. We are looking for 1Q FY10 revenue to grow 16% YoY to S$216.2 mn, driven mainly by higher handset sales and fixed network revenues. We expect the arrival of compelling smartphone models, including the iPhone, to drive handset sales.
• However, higher handset sales could drive margins lower for the quarter. At the EBITDA level, we are looking for a 1% YoY decline in 1Q earnings to S$76 mn.
• During the FY09 results briefing, management mentioned that it would review its capital structure once refinancing of the S$250 mn loan was completed. The completion of the refinancing exercise late last month should pave way for a capital structure review – potentially a higher/special dividend payout. We look forward to management's guidance on any capital structure review at the post-results conference call this Friday.
• We maintain our OUTPERFORM rating on M1 with a target price S$2.60. This represents 24% upside from current levels.
M1 – DB
Maintain cautious stance and Hold rating with new S$2 TP
New S$2 TP on fixed-line upside but still cautious on fundamentals, Hold
We include potential fixed-line upside into our M1 estimates, which raises our TP 25% to S$2. But M1’s fundamental outlook remains challenging and we caution against excessive optimism that the National Broadband Network will significantly alter M1’s competitive positioning or growth profile. M1’s late entry into a mature fixed-line market entails substantial execution risks while near-term margins are under pressure. M1 remains our least preferred Singapore telco. But the potential for capital return should provide near-term price support, hence maintain Hold.
Late-entry into fixed-line market presents significant execution risks
M1 is likely to face an uphill task in gaining significant scale as a late entrant into a mature fixed market. With limited service differentiation, it is difficult to see how M1 can encourage significant subscriber churn from STel and STH, unless it is willing to sacrifice margins by competing aggressively on price (a strategy management has indicated to us they will not pursue). We are cautious of substantial NBN execution risks and are not particularly convinced it will significantly improve M1’s competitive positioning and growth profile. Furthermore, the growing emphasis on fixed-line could become an increasing management distraction and impact M1’s performance elsewhere.
Revenue estimates raised but margins now assumed to compress harder
With the impending NBN launch, we now include estimates for M1’s fixed-line business into our forecasts. This raises our FY10e-12e revenue projections 8-19%. But we assume greater margin compression than previously assumed (on costs of developing fixed-line services and expected increase in NBN-driven competition) and project FY10e EBITDA margin to fall 1.5% pt YoY, causing net profit to flat-line (in-line with management guidance). Our FY10e-12e forecasts are 2-11% below Consensus estimates, largely due to our lower margin expectations.
DCF-derived TP; key risks include competition and fixed-line execution
Our TP is raised to S$2 (+25%), primarily reflecting the potential upside from M1’s fixed-line business (which we now include in our estimates). Our TP implies 12.2x FY10 PE. We value M1 using DCF analysis based on 7.2% WACC and 0% terminal growth rate reflecting the long-term ex-growth nature of Singapore’s telco market. Key risks include competition, fixed-line execution and capex
StarHub – UOBKH
Engineering The Next Phase Of Growth
Leveraging on level playing field in corporate data. StarHub’s limited reach in corporate data services is set to enlarge thirty folds starting Jun 10. The telco is able to service 26,000 commercial buildings island-wide riding on network infrastructure provided by Next Gen Nationwide Broadband Network (NGNBN), versus only 800 within the CBD now. Prospects are further enhanced by the government’s decision to utilise NGNBN for the bulk of its requirement for telecoms services. Hence, this business will expand to 20.8% of service revenue in 2012.
Growth in mobile data traffic enhances ARPU. The launch of Apple iPhone has made smartphones indispensible. 75% of mobile phones sold at StarHub Shops were smartphones in 4Q09. The proportion will expand following the launch of seven new models based on Android, BlackBerry, Symbian and Windows Mobile in 1Q10. Mobile service plans bundled with data are priced at about S$10 above those without data. Thus, we expect post-paid ARPU to increase 6.2% over the next two years.
Pay-TV business faces less risk from cost escalation. Media Development Authority’s (MDA) latest ruling requiring cross carriage of exclusive content is now enshrined in Media Market Conduct Code. Pay-TV operators could henceforth acquire content on a non-exclusive basis or collaborate to jointly bid for content. Cross carriage of exclusive content will result in lower cost of content but reduces differentiation between content provided by StarHub Cable Vision (SCV) and mio TV over time.
Initiate coverage with BUY. StarHub’s valuation is attractive with 2010F EV/EBITDA at 7.6x, compared to 10.3x for SingTel. We estimate 2011 free cash flow at S$0.22/share, representing free cash flow yield of 9.3%. The stock provides a rich dividend yield of 8.4% for 2010-11. Our DCF valuation for StarHub is S$2.92 (required rate of return: 8.5%, terminal growth: 0%).
SPH – UBS
Core business doing well
• 30% increase in net profit YoY
Singapore Press (SPH) reported net profit of S$113m for Q2 FY10, 16% below our forecast. The difference was due to lower property and investment income. We are not overly concerned about the lower property income as we believe this is a timing issue. The core business did well and we think the momentum could continue given the strength of the economy. We reiterate our Buy rating with a price target of S$4.40.
• Room for upside in core business
Newspaper advertising was strong with display ads up 20% YoY and classified ads up 6.4%. On an annualised basis, the first half advertising revenue is still 11% below the high reached in FY08. We believe this gap will close, especially if the tourism industry picks up on the opening of the two integrated resorts.
• Sky@Eleven to be completed in a few months
The company has indicated that its Sky@Eleven project would be completed in the next few months. We had assumed it might finish towards the end of the year and as a result we have brought forward the Sky@Eleven revenue recognition. Our EPS forecasts for FY10, FY11 and FY12 are S$0.32, S$0.26 and S$0.27, respectively.
• Valuation: 13.5x one-year forward earnings, 20% below 10-year mean
We derive our price target from a DCF-based methodology, explicitly forecasting long-term valuation drivers using UBS’s VCAM tool. Our key assumptions include a WACC of 7.35% and long-term growth of 3%.