Singtel – Maybank Kim Eng
SingPost opens up to Alibaba
- Alibaba, one of the world’s most successful e-commerce companies, is investing SGD312.5m in associate SingPost.
- A strategic collaboration could raise the valuation of SingTel’s 25.8% stake in SingPost. Every 35 SGD cts rise in SingPost’s share price adds 1 SGD ct to SingTel’s SOTP valuation.
- Reiterate BUY on SingTel with SOTP-based TP of SGD4.35.
Alibaba taking a 10% stake in SingPost
Singapore Post, a 25.8%-owned associate of SingTel (23.5% post placement), has announced an investment by Alibaba Group, which is seeking an IPO in the US. Post deal, Alibaba will own 10.35% or 220.1m SingPost shares. The SGD312.5m proceeds will be used for e-commerce investments or M&A in Southeast Asia and upgrade of IT systems related to e-commerce logistics (33%), M&A and property development (33%), and general working capital (34%).
A slight positive for SingTel’s valuation
Alibaba, one of the world’s most successful e-commerce companies, runs a highly-popular Taobao online marketplace. Its B2B platform is reported to power 80% of online commerce in China, and its Alipay e-payments system processed USD519b in online payments in 2013, nearly three times the USD180b cleared by PayPal. On the other hand, SingPost has built a successful e-commerce logistics platform mainly in Southeast Asia.
The two companies have signed an MOU to discuss a partnership that will allow Alibaba’s customers and merchants to have access to SingPost’s international logistics capabilities, infrastructure and delivery networks.
SingPost accounts for SGD0.05 (or 1%) of our SOTP value of SGD4.35 for SingTel. Alibaba’s entry could raise the valuation of SingPost over time. In the medium term, we believe the market will shrug off the fact that the placement price of SGD1.42 is lower than the pre-trading halt price of SGD1.55. Every 35 SGD cts gain in SingPost’s share price will add 1 SGD ct to our SOTP TP for SingTel.
TELCOs – Maybank Kim Eng
All in; SingTel raised to BUY
- Raise sector weighting to OVERWEIGHT as we upgrade SingTel to BUY. M1 remains our preferred BUY, followed by SingTel.
- M1 will enjoy stronger EPS CAGR of 8.5% over FY14E-16E, while SingTel is on the cusp of an earnings recovery of 5% EPS CAGR after three consecutive years of earnings decline.
- Growth pillars: Data monetisation and falling handset subsidies, with data roaming rebound a bonus.
Upgrade SingTel to BUY, sector to OVERWEIGHT
We upgrade SingTel to BUY with a SOTP-based TP of SGD4.35. We are now BUYers of all the three telcos, prompting us to raise the sector to OVERWEIGHT. In terms of preference, M1 remains our top choice, followed by SingTel which displaces StarHub to the third position. Despite challenges on the Pay TV and home broadband front, StarHub remains a BUY. We believe SingTel’s YTD under-performance and current low market expectations provide room for the stock to be re-rated ahead of StarHub.
Alignment of positive trends
In our view, the building blocks are fast falling in place and were evident in 1Q14 results. Data monetisation accelerated in 1Q14, driving mobile revenue to record levels with growth rate at its fastest in more than four quarters. Tiered data plan users have also hit new highs of more than 50%, and we expect 70% by year-end. Fast-falling handset subsidies are another positive trend that would benefit margins. Lastly, data roaming has finally stabilized after six quarters of YoY decline. The upshot: Stronger earnings growth prospects for the industry.
Catalysts: (1) Data monetisation could take place faster than expected with emphasis on video content to drive data usage. Both SingTel and StarHub are developing more local content for their apps. (2) Data roaming could make a comeback on plans to make it easier to activate or even kick in automatically when users are overseas. (3) Low levels of gearing, especially for M1 and StarHub, and the absence of large capex requirements in the medium term suggest room for higher dividends ahead.
Risks: As the telcos expand the capabilities of their networks to handle newer services such as VoLTE (Voice over LTE) and the greater demand for video content, there could be network outages. Regulatory fines aside, the key risk lies in higher user churn owing to unstable networks. One risk particular to SingTel is an acquisition of Shin Corp as was rumoured a few months ago, which we would view cautiously if it materialises.
TELCOs – Maybank Kim Eng
All in; SingTel raised to BUY
- Raise sector weighting to OVERWEIGHT as we upgrade SingTel to BUY. M1 remains our preferred BUY, followed by SingTel.
- M1 will enjoy stronger EPS CAGR of 8.5% over FY14E-16E, while SingTel is on the cusp of an earnings recovery of 5% EPS CAGR after three consecutive years of earnings decline.
- Growth pillars: Data monetisation and falling handset subsidies, with data roaming rebound a bonus.
Upgrade SingTel to BUY, sector to OVERWEIGHT
We upgrade SingTel to BUY with a SOTP-based TP of SGD4.35. We are now BUYers of all the three telcos, prompting us to raise the sector to OVERWEIGHT. In terms of preference, M1 remains our top choice, followed by SingTel which displaces StarHub to the third position. Despite challenges on the Pay TV and home broadband front, StarHub remains a BUY. We believe SingTel’s YTD under-performance and current low market expectations provide room for the stock to be re-rated ahead of StarHub.
Alignment of positive trends
In our view, the building blocks are fast falling in place and were evident in 1Q14 results. Data monetisation accelerated in 1Q14, driving mobile revenue to record levels with growth rate at its fastest in more than four quarters. Tiered data plan users have also hit new highs of more than 50%, and we expect 70% by year-end. Fast-falling handset subsidies are another positive trend that would benefit margins. Lastly, data roaming has finally stabilized after six quarters of YoY decline. The upshot: Stronger earnings growth prospects for the industry.
Catalysts: (1) Data monetisation could take place faster than expected with emphasis on video content to drive data usage. Both SingTel and StarHub are developing more local content for their apps. (2) Data roaming could make a comeback on plans to make it easier to activate or even kick in automatically when users are overseas. (3) Low levels of gearing, especially for M1 and StarHub, and the absence of large capex requirements in the medium term suggest room for higher dividends ahead.
Risks: As the telcos expand the capabilities of their networks to handle newer services such as VoLTE (Voice over LTE) and the greater demand for video content, there could be network outages. Regulatory fines aside, the key risk lies in higher user churn owing to unstable networks. One risk particular to SingTel is an acquisition of Shin Corp as was rumoured a few months ago, which we would view cautiously if it materialises.
Land Transport – CIMB
Cool winds of change
With changes to the public bus system just announced by the government, both CD and SMRT can expect to eliminate operating losses in this segment of their business and improve their cash flow through lower capex and asset disposals. Conventional thinking favours CD (Add, target S$2.59) as the biggest winner, owing to its larger bus fleet and experience with cost-plus models, but we think that SMRT’s (upgraded to Add, target S$1.67) performance will also improve, as this development could serve as a prelude to a new rail financing framework. We upgrade the sector to Overweight from Underweight, with catalysts from more government initiatives and SMRT as our top pick.
What Happened
The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems).
Implementation only in 2H16. Initially, LTA will tender out three packages of bus services (out of a total of 12), starting with the first package in 2H14, for implementation in 2H16. The three packages will cover 20% of the existing buses. LTA will negotiate with the incumbents to run the remaining nine packages (80% of existing buses) under the contracting scheme, for durations of about five years when their Bus Service Operating Licences (BSOLs) expire on 31 Aug 16. After their expiry, more bus services will gradually be tendered out. The contracts will be valid for 5+2 years.
What We Think
The devil is in the detail. Details of the first bus package will be out next week. After 2022, all packages will be tendered out, with the aim of having at least 3-5 bus operators in the market. While some numbers regarding margins, the transfer of assets to the government and contracting are not out yet, we have made certain assumptions for CD and SMRT, to estimate the impact on their earnings, balance sheets and fleet-disposal plans to reflect these landmark changes.
Earnings upgrade; reduced capex and some disposal cash flows. Both Public Transport Operators (PTOs) should benefit from the transition to a more sustainable model, as this should ward off operating difficulties for them. CD, through SNS Transit, operates about 75% of Singapore’s 4,500 public buses, while SMRT runs the remaining 25%. CD’s Singapore bus business (19% of revenue) made a small operating profit of S$3.2m (only 1.8% EBIT margin and 3% of group EBIT) in 1Q14, while SMRT Buses (also 19% of revenue) incurred an operating loss of S$28.4m in FY14. CD’s bus assets on its books are valued at c.S$820m and SMRT’s, at S$250m. While EBIT margins for both may not spike immediately, both certainly have advantages over any new competitor, given their extensive knowhow and track record in running public buses in Singapore.
What You Should Do
Sector upgraded to Overweight. We keep our Add rating for CD with a higher DCF-based target price (WACC 7.1%) after upgrading our earnings. It should be a clear beneficiary of the most significant development in the local bus industry in recent times. We upgrade SMRT to Add from Hold, given its greater earnings sensitivity to this move (see separate notes on CD and SMRT).
Land Transport – CIMB
Cool winds of change
With changes to the public bus system just announced by the government, both CD and SMRT can expect to eliminate operating losses in this segment of their business and improve their cash flow through lower capex and asset disposals. Conventional thinking favours CD (Add, target S$2.59) as the biggest winner, owing to its larger bus fleet and experience with cost-plus models, but we think that SMRT’s (upgraded to Add, target S$1.67) performance will also improve, as this development could serve as a prelude to a new rail financing framework. We upgrade the sector to Overweight from Underweight, with catalysts from more government initiatives and SMRT as our top pick.
What Happened
The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems).
Implementation only in 2H16. Initially, LTA will tender out three packages of bus services (out of a total of 12), starting with the first package in 2H14, for implementation in 2H16. The three packages will cover 20% of the existing buses. LTA will negotiate with the incumbents to run the remaining nine packages (80% of existing buses) under the contracting scheme, for durations of about five years when their Bus Service Operating Licences (BSOLs) expire on 31 Aug 16. After their expiry, more bus services will gradually be tendered out. The contracts will be valid for 5+2 years.
What We Think
The devil is in the detail. Details of the first bus package will be out next week. After 2022, all packages will be tendered out, with the aim of having at least 3-5 bus operators in the market. While some numbers regarding margins, the transfer of assets to the government and contracting are not out yet, we have made certain assumptions for CD and SMRT, to estimate the impact on their earnings, balance sheets and fleet-disposal plans to reflect these landmark changes.
Earnings upgrade; reduced capex and some disposal cash flows. Both Public Transport Operators (PTOs) should benefit from the transition to a more sustainable model, as this should ward off operating difficulties for them. CD, through SNS Transit, operates about 75% of Singapore’s 4,500 public buses, while SMRT runs the remaining 25%. CD’s Singapore bus business (19% of revenue) made a small operating profit of S$3.2m (only 1.8% EBIT margin and 3% of group EBIT) in 1Q14, while SMRT Buses (also 19% of revenue) incurred an operating loss of S$28.4m in FY14. CD’s bus assets on its books are valued at c.S$820m and SMRT’s, at S$250m. While EBIT margins for both may not spike immediately, both certainly have advantages over any new competitor, given their extensive knowhow and track record in running public buses in Singapore.
What You Should Do
Sector upgraded to Overweight. We keep our Add rating for CD with a higher DCF-based target price (WACC 7.1%) after upgrading our earnings. It should be a clear beneficiary of the most significant development in the local bus industry in recent times. We upgrade SMRT to Add from Hold, given its greater earnings sensitivity to this move (see separate notes on CD and SMRT).