SPH – CS
Newspaper ad demand picked up further in March
• According to the CS Page Monitor, newspaper ad demand picked up further in March.
• Estimated total classified volumes jumped 18% YoY in March – a big improvement from the estimated 7% decline in 2Q classified volumes. The strong showing is again attributable to a 71% YoY surge in job ad volumes (estimated at 71% in March). The strong job ad demand is in line with the healthy pick-up in the Singapore economy.
• Further, there is a sharp turnaround in non-job classified ad volumes – from an estimated -17% YoY for 2Q10E to +1% in March. In addition, our page count indicates that display ad volumes improved 14% YoY in March, versus +6% estimated for 2Q0E.
• SPH is scheduled to release its 2Q10 results on 13 April. We expect further consensus EPS upgrades after the results – our FY10 earnings forecast is 7% above street expectation.
• Our target price of S$4.67 represents 22% potential upside from here. We maintain our OUTPERFORM rating.
SingTel – CIMB
Bharti’s expensive growth
Third time lucky
Maintain UNDERPERFORM on SingTel. We believe Bharti’s recent acquisition of Zain Africa is pricey and earnings-dilutive for SingTel. At about 8x CY10 EV/EBITDA, this is a sharp premium to Indonesian telco valuations of 5-6x, the closest proxies in our coverage universe. We estimate that SingTel’s FY11-13 core net profit would be diluted by 0.5-4%. In addition, risks of operating in Africa are higher than in Indonesia. We maintain our sum-of-the-parts target price of S$3.30 for SingTel on the back of anticipated earnings dilution, and the premium valuations paid. Key de-rating catalysts are an upcoming 3G spectrum auction in India, higher content costs in Singapore with the telecasting of Barclays Premier League from Aug 10 and potentially higher competition in Australia, in our assessment.
The news
After failing to clinch controlling stakes in MTN twice, Bharti has finally succeeded in acquiring a large African asset through Zain Africa for US$9bn in cash for the latter’s equity. About US$8.3bn will be paid upon closing and US$0.7bn one year from closing. Bharti Airtel will assume US$1.7bn of consolidated debt. Zain Africa has controlling stakes in mobile operators in 15 African nations (Figure 1). This acquisition will expand Bharti’s presence from the three countries (Bangladesh, India and Sri Lanka) it currently operates in.
Nigeria is the largest contributor. Four countries – Nigeria, Zambia, Gabon and Tanzania − contribute 68% of Zain Africa’s EBITDA with Nigeria being a distant first with 38% contribution.
Comments
Expensive. We believe the purchase price is high, at 9.2x annualised CY09 and 8x CY10 EV/EBITDA, assuming Zain’s EBITDA grows by 15% in CY10. This is high relative to the risks and income levels of the countries Zain operates in. Valuations are above those of Indonesian telcos, which are the closest proxies in our universe, valued at 5-6x EV/EBITDA, and taking into account the premium paid for control of the group.
While Zain Africa’s mobile penetration is low, this has to be seen against the income levels in the countries Zain is present in. The average population-weighted penetration rate of the countries it operates in is 35%. While this is substantially lower than Indonesia’s 82% SIM penetration and 46% user penetration, the average population weighted PPP-adjusted GDP per capita where Zain Africa operates in is US$1,500. This is much less than Indonesia’s US$4,149 (according to IMF).
Risks. The risks of investing in Africa include political instability, poverty, potentially higher taxes/levies and more mobile licences being issued. However, the population weighted GDP growth expected for FY10 is a fairly robust 5.8%
SingTel – BT
SingTel-linked cable system completed
Unity Cable, a US$300 million link between Japan and the US, will help meet demand for bandwidth by businesses and consumers
SUBMARINE cable capacity in the region got a major boost yesterday with the completion of a US$300 million link between Japan and the United States.
The 9,620km Unity Cable, which took almost two years to complete, is funded by a consortium of six members – Singapore Telecom and its Indian associate Bharti Airtel, Global Transit, PacNet, Japanese telco KDDI and Internet giant Google.
After extensive testing, the cable is ready for service, the companies said in a joint statement yesterday.
The system is capable of transferring data at 4.8 Tbps (terabits per second) between the US and Asia. It will help meet explosive demand for bandwidth by businesses and consumers as regional Internet penetration soars.
It also provides an alternative path for diverting Internet traffic should other submarine cable systems be disrupted.
Telcos worldwide have stepped up sub-sea investments after the 2006 Taiwanese earthquakes severed major submarine cable links with the US and slowed Web traffic in the region to a crawl.
Besides Unity Cable, SingTel is involved in a US$400 million submarine cable project within Asia.
The 8,300 km system, called the Southeast Asia Japan Cable (SJC), will initially link Singapore, Indonesia, the Philippines, Hong Kong and Japan. It is expected to be operational by 2012.
The SJC is designed to carry data at breakneck speeds of 17 Tbps, claimed and it touted to be the highest capacity system ever built.
SingTel – Daiwa
The Bharti overhang is back
What has changed?
• Bharti Airtel (Bharti) (BHARTI IN, Rs310.85, 4), an associate company of Singapore Telecom (SingTel), has signed an agreement to acquire Zain Africa.
Impact
• Our telecoms analyst, Ravi, published Bharti Airtel: Deal signed to acquire Zain Africa today. Ravi estimates the acquisition of Zain Africa could lead to a 15% downward revision in Daiwa's FY11 EPS forecast for Bharti. The downward revision in FY11E EPS could be as much as 20% if Bharti were to win the pan-India 3G spectrum bid as well.
• If there were a downward revision of Bharti's FY11 EPS forecast, it would reduce our FY11 net profit forecast for SingTel by 5% to S$3,939m, or a 0.5% YoY decline.
• The deal is perceived negatively by the market, in our view, as we believe the acquisition EV/EBITDA multiple is high at 8.4x, while Zain Africa's recurring earnings was still negative last year.
Valuation
• Bharti's target price of Rs280 is unchanged pending more information on the deal, which we use for our estimated sum-of-the-parts (SOTP) valuation of SingTel (S$3.09/share). Bharti currently accounts for 21% of our estimated SOTP value for SingTel.
Catalysts and action
• We maintain our 3 (Hold) rating and six-month target price of S$3.09 for SingTel pending more information on the Zain Africa deal. Nevertheless, the risk is on the downside, in our view. We prefer MobileOne (M1) (M1 SP, S$2.09, 2) in the Singapore telecoms space, on the back of its high dividend yield and growth potential of broadband business.
STEng – CS
Outlook improving but valuations still demanding
• STE announced on that it has been awarded a ten-year engine maintenance contract by Jet Airways.
• The contract is worth US$750 mn (S$1.0 bn) and will commence immediately. The company does not expect this contract to have any material earnings impact this financial year.
• YTD, STE has secured new contracts worth S$1.8 bn, versus S$3.7bn of the order book (of S$10.3 bn as of December 2009) expected to be delivered in 2010.
• We adjust our revenue assumptions mainly to reflect a more favourable demand outlook. Overall, we raise our FY10E and FY11E net earnings by 2% and 9%, respectively. However, we cut our dividend forecasts to reflect a lower payout ratio. We also raise our DCF-based target price from S$2.37 to S$2.68 (implied P/E of 17x).
• Despite the stock's underperformance and improved outlook, STE remains expensive, in our view. At S$3.19, the stock is trading at a 2010E P/E of 20x. Our target price of S$2.68 represents 16% potential downside from here. We maintain our UNDERPERFORM rating.