TELCOs – CIMB
1Q10 results preview
• Maintain UNDERWEIGHT. We maintain our UNDERWEIGHT stance as we do not expect any positive surprises in the upcoming 1Q10 results. We also remain concerned given the rise in content cost in the short-term, the pressure on broadband ARPUs and escalating subsidies from strong smartphone take-up. Our top pick in the sector remains M1 (TB, TP: S$2.26) as it would have the most capacity for capital management, the biggest upside from NGNBN and the most to gain from the recent content carry regulation. We retain our UNDERPERFORM recommendation on SingTel (TP: S$3.30) and StarHub (TP: S$2.14).
• No real shocks in 1Q. Competition stayed fairly benign across the major product groups, in our view. While 1Q service revenue typically declines, we believe that 1Q10 service revenue was flattish due to the improving economy, which powered higher usage and roaming, coupled with the increasing take-up of wireless broadband. However, we believe that overall revenue would have grown on the back of a full quarter’s worth of iPhone sales. EBITDA margins should fall, in our view, due to iPhone subsidies, especially for StarHub and M1.
• Expectations for operators. We estimate M1’s revenue rose by 2-3% qoq, helped by a full quarter’s worth of iPhone sales, the recovering economy and the increasing take-up of wireless broadband. While 1Q usually sees less marketing and acquisition costs, we think that the full quarter’s worth of iPhone subsidies would have negated that impact. As a consequence, we think that EBITDA margins dropped by 1-2% pts on a qoq basis, leading to a core net profit decline of 0-6%. M1 is scheduled to announce its 1Q10 results this Friday, 16 Apr. For StarHub, we think it will report revenue growth of 2-3% on a qoq basis, aided by the iPhone launch and the return of take-up for its more discretionary services. As a result, we think that a full quarter’s worth of iPhone subsidies would have caused EBITDA margins to range between flattish growth to a 0.5% pts drop, leading to a core net profit fall of 2-7% on a qoq basis. StarHub will announce its results on 6 May 2010.
• A fourth entrant? We view the likelihood of a fourth entrant as slim, following the proposed release of more 3G spectrum, because i) Singapore is a small and mature market, and ii) the new entrant would need deep pockets to build up a nationwide network, especially in-building coverage.
• OpCo progress running on time. Based on our recent meeting with NucleusConnect (NC), we gather that its rollout is progressing smoothly and on time. It is ready to launch its two central offices and the interoperability lab next month. It is seeing some fairly strong expressions of interest from retail service providers (RSPs) although it expects only a dozen or so to sign up. While no official confirmation has been given, NC expects a second OpCo to be constructed by SingTel, which is in line with our view. NC is anticipated to break even at the cashflow level only by 2015 or 2016.
SPH – DBS
A proxy to GDP growth
• MTI raises Singapore’s GDP forecast to 7%-9%; our economist also raised his forecast to 9%, from 7%
• SPH looks poised to ride on stronger GDP growth given its proxy to the economy
• Raise earnings by 2% on higher ad growth assumption, offset partially by higher costs
• Maintain Buy, TP raised to S$4.42
Remain positive. We hosted a post 2Q10 results luncheon with SPH management and remain confident that SPH will see sequential improvement in operating results arising from better economic outlook, in conjunction with a higher GDP forecast by MTI. During the luncheon, there were wide-ranging questions from its operations, properties, costs and strategies, which we have summarized inside this report.
Proxy to the economy. MTI revised up Singapore’s GDP to 7%-9%, from 4.5%-6.5% previously. With ad revenue growth trend correlated to GDP growth, we believe there presents further upside to SPH’s ad revenue in ensuing quarters. We are now assuming a 10% growth in ad revenue for FY10, though the flow through effects to net profit is partially offset by higher staff costs. As such, we revised our FY10 earnings up by c.2%.
Maintain Buy, TP: S$4.42. Our sum-of-parts TP is raised to S$4.42. We believe SPH is well-poised to ride on Singapore’s economy, which is now projected to grow stronger. Its strong balance sheet also allows it to capitalize on any investment opportunities that may arise. We believe the dividend yield of 6.8% would provide support for share price.
SPH – Kim Eng
Stellar 1HFY10 results
Key meeting takeaways
SPH’s 1HFY10 operating profit jumped by 29.4% yoy to $286.8m on strong performance by the Newspaper and Magazine segment, lower newsprint costs and higher revenue from Sky@Eleven. Net profit grew by 61.2% yoy to $258.0m, turning net loss from investments into a gain. Overall, the results were in line with our expectations. An interim dividend of 7 cents was declared. Maintain Buy with higher target price of $4.61.
Our View
Revenue from the Newspaper and Magazine segment grew by 2.6% to $465.9m in 1HFY10, in line with the positive trend in news ad revenue growth. In 2QFY10, display ad revenue grew by 20.2% yoy, led by demand from the property, telco and FMCG sectors. Classified ads grew by 6.4% yoy, dragged down by weakness in the auto sector.
Sky@Eleven will obtain TOP soon. A remaining $77m in revenue will be recognised in due course. As the project was on the deferred payment scheme, the bulk of the proceeds (about $423m) will be received upon TOP, replenishing SPH’s investible fund of $0.8b.
With one‐third of its $1b multicurrency bond program unutilized, SPH remains financially capable of exploring new opportunities. Apart from its four strategic growth thrusts, a separate strategy for the property division spelling out its aim to establish a presence in the retail mall sector for the long term and capitalizing on future opportunities in the residential segment supports our view of a potential spin‐off of its retail assets or a property arm.
Action & Recommendation
SPH now offers an attractive dividend yield of 6.4% (FY10F DPS 25.3 cents). Post‐Sky@Eleven, we believe a sustainable yield of 5% will be supported by its monopoly in the print media business and stable income from its retail investment properties. We raise our target price to $4.61, from $4.47, as we lower our cost‐of‐debt assumption and remove the Clementi Mall valuation estimate. Maintain Buy.
SPH – DMG
Fall in newsprint cost boosted earnings
Net earnings rose 30%. SPH reported better-than-expected 2QFY10 net profit of S$113.3m (+30.2% YoY; -21.7% QoQ), with higher profits from its Sky@Eleven residential project, investment gains and lower newsprint cost being the key drivers. 1HFY10 net income of S$258m represents 61% of our full year forecast. We raise our advertising growth forecast from 1% to 7% and lower our newsprint cost assumption by 18%. We consequently raise our FY10 PATMI forecast by 11% to S$469m and our SOTP target price to S$3.95 from S$3.86. Maintain NEUTRAL as valuations appear fair. An interim dividend of 7¢/share was declared.
Newsprint rates expected to increase at a moderate level. SPH’s strong 1HFY10 PATMI was largely attributed to the steep fall in charge-out rates for newsprint, which fell 37% YoY to US$521/MT from US$827/MT. Management, however, cautioned that newsprint rates are likely to increase at a moderate level, going forward. We have factored a 12% rise in newsprint rates for FY11. We estimate every 10% increase in newsprint rates over our base case will reduce FY11 PATMI by 3.6%.
More on Sky@Eleven and Clementi Mall. To date, SPH has already recognised about 85% of Sky@Eleven revenue. TOP is expected within the next few months and the remaining revenue (~S$80m) will be recognized progressively over the next 12 months. HDB will handover Clementi mall in August and mall operations are slated to begin operations in 1H2011. Management was confident of leasing the entire mall as over 300 prospective tenants have indicated leasing interests. Management cautioned that the S$18/sqft rental assumption for Clementi Mall is not tenable based on current leasing transactions, but could be achieved in its first lease renewal (i.e. by 2014). We have factored a rental assumption of S$15/sqft into our model.
Trading at the higher range of its 10-15x P/E trading band. SPH trades at 15x FY11 P/E, in line with its 2005-08 average. Maintain NEUTRAL rating with target price of S$3.95. We believe SPH’s attractive FY10 yield of 6.7% would provide support against significant downside risk. Await better entry level.
SPH – DBS
Ads picking up as expected
At a Glance
• 2Q results within expectations; operating profit +34% yoy to S$132.7m
• Print ad revenue on recovery track, positive yoy growth of 13.4% yoy led by newspaper display ads (+20%)
• Unchanged interim dividend of 7 Scents declared
• Key beneficiary of Singapore’s revised GDP. Maintain
Buy; TP: S$4.32; yield of 6.9%
Comment on Results
No surprises for 2Q. 2Q revenue of S$318.7 (+11% yoy) was contributed by newspaper & magazine operations (+8.8% yoy), higher rental revenue (+7.9%) and higher percentage of completion from development property revenues (+26%).
Operating profit grew by a larger 34% to S$132.7m largely arising from lower newsprint charge-out costs (US$521/mt vs US$827/mt in 2Q09) and other operating expenses, offset partially by higher staff costs (+20% yoy). As a result, 2Q net profit ended at S$113.3m (+30%) offset partially by higher taxes.
Display ads post 20% growth. Total print ad revenues posted a positive growth of 13.4% yoy as the economy picks up, with newspaper display ads being the main driver (+20% yoy) while classifieds posted a smaller 6% growth. We continue to expect ad revenue to pick up pace sequentially during the year.
7 cents dividend declared. We expected an 8-cent dividend in line with a partial restoration of staff pay cuts, but were disappointed. We believe management is being cautious and continue to expect 27cents dividend for full year.
Recommendation
Maintain Buy, TP unchanged at S$4.32. We maintain our Buy recommendation, as we believe current share price has yet to fully reflect ad recovery, which should be driven by more activities coming up in 2H as well as a stronger GDP forecast which was just revised up to 7%-9% (2010) by the Singapore Government on a strong 1Q growth. This is also coupled with an attractive yield of 6.9%, is an attractive investment thesis in our view.