Professional Documents
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STI :
3,117.37
SingTel StarHub M1
StarHub - Our new top pick offers (i) over 7% yield based on annual 20 Scts DPS and (ii) mid-single digit growth in FY12F from lower handset subsidy costs. SingTel HOLD for (i) 5.5% yield based on 70% payout ratio and (ii) mid-single digit growth prospects in FY13F (March YE). M1 Downgrade to HOLD after its recent outperformance. (i) 6-7% yield is the key attraction based on 80%-100% payout ratio. (ii) Expect flat earnings in FY12F due to fair value accounting.
Handset revenue minus handset costs (S$m). Fair value accounting at M1 led to lower subsidy costs
70 60 50 40 30 20 10 0 64 51 31 17 14 15 12 12 11 9 57 43 55 56
M1
StarHub
www.dbsvickers.com Refer to important disclosures at the end of this report ed: MY / sa: YM
Analyst
Sachin MITTAL +65 6398 7950 sachin@dbsvickers.com
Table of Contents
M1s 2Q11F earnings preview StarHubs 2Q11 earnings preview Three Key Industry Issues (i) Smartphones & Tablets (ii) National Broadband Network (iii) Cross-carriage of content Concerns for M1 in the mobile segment Why we like StarHub? Sector Valuation Peers Valuation Stock Profiles M1 5 7 7 8 9 3 3 4
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2Q10 1Q11
2Q11F
y-o-y
q-o-q
Comments
Opg Rev.
569
559
567
0%
Lower revenue on annual basis due to lower pay TV 2% revenue subsequent to loss of EPL rights. iPhone subsidy 1% may continue to be high To account for cash payment received from Govt for OpCo
Operating Rev
223
258
255
14%
Operating Expense (173) Other revenue Operating Profit Finance Costs PBT Tax Net Profit
Source: DBS Vickers
17% -80% 4% 0% 4% 5% 4%
1 51 (2) 50 (9) 41
Likley to be higher on annual basis due -1% to higher handset sales. Service Revenue should be stable Supported by lower -1% depreciation and leased circuit costs 0% 0% 7% 0% 1% 0%
Other income Opg Profit/ (loss) Interest Income Interest exp PBT Tax PAT
78 1 -7 72 -14 58
91 0 -5 86 -17 69
95 0 -5 90 -16 74
5% 0% 0% 5% -3% 7%
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Source: OpenNet
New broadband earnings may constitute ~10% of existing earnings base for M1 in the long term. M1 targets 20%-30% market share in the broadband market by 2015. With current broadband customer base of 1.2m, which is likely to grow further, it implies an approximate target of over 250-300K broadband subscribers by 2015. Based on an estimated broadband ARPU of S$50 per month, annual revenue should be S$150m. Due to the presence of multiple retailers, we assume 10% net profit margin in the broadband business (versus 20% in the mobile), translating to annual earnings potential of S$15m from broadband segment. This does not include any contribution from enterprise segment, as it may be harder to penetrate for a new entrant. Overall, new broadband earnings may constitute c.10% of existing base in our view, however, we believe that M1 would need 2-3 years to be profitable in broadband business. In addition to its lack of scale, there is also the need to offer aggressive price discounts for its lack of pay TV offerings and additional cost of international bandwidth.
M1 is the most aggressive player in terms of pricing as anticipated. M1 offers 100 Mbps connection at S$59/month versus S$87/month at StarHub. We need to keep in mind that S$21/mth is the regulated fee to be paid to OpCo and then there are other costs such as billing, installation and international bandwidth costs, which could amount to another
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S$25-30 in our view. During some of its promotions in 2Q11, M1 offered S$29/mth 100Mbps plans, well below the offerings from both StarHub and SingTel. Most of the players are promoting 50 Mbps connections at monthly subscription fee of S$49, S$65 and S$67 by M1, SingTel and StarHub respectively. StarHub expects SME & enterprise gains to more than offset consumer losses. Management believes that small and medium enterprises (SMEs) are the low hanging fruits with relatively shorter decision cycle than enterprise customers. In the enterprise segment, StarHub sees an opportunity as a backup service provider to SingTel as more organizations are looking for redundancy plans. We believe that it may take StarHub a couple of years to position itself as an alternative to SingTel as track record is very important for enterprise customers.
46.3
46.0
45.8
45.7
45.8
27.5 26.5
27.7 26.5
27.9 26.4
27.6 26.6
1Q10
2Q10 SingTel
3Q10 StarHub
4Q10 M1
72
71
73
62 1Q10
63 2Q10 SingTel
64 3Q10 StarHub M1
65 4Q10
64 1Q11
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substituted voice with data. As such, ARPU uplift has been insignificant at SingTel and StarHub. The use of fair value accounting at M1 may have an adverse impact on FY11F/12F earnings. Under fair value accounting, M1 recognizes handset revenue at the cost of future service revenue, leading to lower handset subsidy costs. Basically, the additional service revenue over the contract period, attributed to the handset, is recognized upfront as handset revenue a practice unique to M1. This practice boosted M1s past earnings at the cost of future earnings. Investors should keep in mind that FY11F benefit from (i) reduction of S$15-18m in operating costs due to lower depreciation and leased circuit costs and (ii) significant handsets revenue due to high demand for smartphones. With smartphone penetration exceeding 60% in Singapore, smartphone sale is likely to slowdown in FY12F, resulting in an adverse impact on M1s handset revenue while cost savings may not be significant either.
Fair value accounting at M1 led to lower subsidy costs (Handset revenue minus handset costs, S$m)
70 60 50 40 30 20 10 0 64 51 31 17 14 15 12 12 11 9 57 43 55 56
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
M1
StarHub
Fair value accounting at M1 has an adverse impact on postpaid mobile service revenue (S$m)
240 200 160 120 80 4Q09 1Q10 2Q10
M1
125 124 123 124 128 126 216 220 229 231 237 231
3Q10
St arHub
4Q10
1Q11
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monthly subscription rate by S$2/month from Aug onwards, which should result in additional revenue of S$6m and S$13m in FY11F and FY12F respectively, most of which should flow to the bottom line.
Sector Valuation
Downgrade M1 to HOLD. YTD total returns of 15% for M1 (our previous top pick) versus 11% for StarHub & 1% for STI. Based on 80-100% payout ratio, dividend yield of 6-7% is decent but not the best among the three telcos. The lack of earnings growth in FY12F due to fair value accounting is our biggest concern. No change to our DCF-based target price of S$2.60 (WACC: 8.4%, terminal growth 0%). Maintain BUY on StarHub. StarHub offers assured dividend yield of 7% based on annual DPS of 20 Scts DPS, which is sustainable over the next three years, in the managements view. In addition, StarHub may grow by 4-5% in 2012F on top pf 17% earnings growth in FY11F, on declining handset subsidy costs. No change to our DCFbased target price of S$3.05 (WACC: 8.4%, terminal growth 0%) Maintain HOLD for SingTel. Based on 70% payout ratio, dividend yield of 5.5% is decent but not attractive given mid-single digit earnings growth prospects in FY13F (March YE). We believe, SingTel needs to raise payout ratio over 80% in order to offer over 6% yield, in the face of low growth prospects. Next capital management may be three years away after special DPS of 10 Scts with FY11 results. No change to SOTP based TP of S$3.20.
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Peers Valuation
Company FYE Mkt Cap (US$m) China / Hong Kong China Mobile China Telecom China Unicom Malaysia Digi.Com Maxis Bhd Telekom Axiata Group Singapore M1 SingTel Starhub Mkt Cap LC Price (S$) 08-Jul 23,668 73.80 4.95 15.92 1,595 30.00 5.50 4.01 5.05 3,151 2.59 3.19 2.80 925 110.00 56.50 3.80 4,004 5,150 7,200 6,200 11,000 2,450 Target Price (S$) % Upside Rcmd Avg 6-mth Vol (m) CAGR 10-12 (%) PE (x) 11F 12F Dividend Yield (%) 11F 12F P/BV 10A 10A EV/EBITDA 11F 12F
0% 5% 13%
3 20 66 7
9.9 19.6 58.1 10.9 23.1 17.0 25.5 14.3 17.4 13.8 12.8 15.5 13.1 14.2 11.5 90.5 38.7 22.9 11.4 13.8 68.7 26.3
9.7 15.0 31.0 10.1 22.2 16.0 23.7 12.6 15.9 14.0 12.0 14.9 12.3 13.6 12.6 65.3 30.5 16.1 10.8 12.0 28.3 19.2
-5 6 4 15 8
0% 0% 9%
3 5 10 5
Thailand Advanced Info Service Dec Total Access Communica Dec True Corporation Dec Indonesia Indosat PT Telekom XL Axiata PT Sarana Menara Tower Bersama
4 1 nm 3
28 7 20 na 89
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M1
Bloomberg: M1 SP
Reuters: MONE.SI
Price Relative
S$ 2 .7 0 2 .5 0 2 .3 0 2 .1 0 1 .9 0 1 .7 0 1 .5 0 1 .3 0 1 .1 0 2007 2008 2009 2010 R e la t iv e In d e x 218 198 178 158 138 118 98 78 2011
M 1 (L H S )
R e la t iv e S T I IN D E X ( R H S )
Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs:
781 302 181 150 145 16.9 16.3 (3) 16.8 13.5 27.5 15.3 15.9 10.4 8.4 5.2 9.4 1.0 65.6
980 309 190 158 158 17.5 17.5 7 17.5 17.5 32.2 14.8 14.8 12.5 8.5 6.7 8.0 1.0 58.9
970 313 204 170 170 18.8 18.8 8 18.7 18.8 33.5 13.8 13.8 9.5 8.5 7.2 7.7 1.0 57.2 (0.1) 18.7 S: 3
980 313 203 167 167 18.5 18.5 (1) 18.5 18.5 33.3 14.0 14.0 9.0 8.5 7.2 7.8 1.1 55.6 (2.7) 20.0 H: 6
FY12F mobile earnings at risk. Under fair value accounting (FVA), additional service revenue over the contract period attributed to the smartphone is recognized upfront as handset revenue a practice unique to M1. This practice boosted M1s past earnings at the cost of future earnings. Investors should keep in mind that FY11F benefits from (i) reduction of S$15-18m in operating costs due to lower depreciation and leased circuit costs and (ii) significant handsets revenue due to high demand for smartphones. With smartphone penetration exceeding 60% in Singapore, smartphone sale is likely to slowdown in FY12F. This may have an adverse impact on M1s handset revenue and no major cost savings are expected either. Non-mobile contribution may be insignificant in FY12F. Overall, broadband may contribute S$15-16m of earnings by FY15F. However, it may take over 2 years to reap significant profit from the broadband business. M1 needs to offer higher price discounts for its broadband service due to the lack of pay TV offering. Margins would also be affected by additional cost of leasing international bandwidth and the lack of scale. Potential half yearly DPS of 6.5 Scts priced in. Although official dividend policy is minimum 80% payout ratio, we project M1 to maintain 100% payout in 2011F despite lower free cash flow than earnings due to FVA.
At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Axiata Group (%) Keppel T&T Ltd (%) Singapore Press Holdings (%) Free Float (%) Avg. Daily Vol.(000)
B: 11
ICB Industry : Telecommunications ICB Sector: Mobile Telecommunications Principal Business: MobileOne is one of the main telecommunication operators in Singapore.
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www.dbsvickers.com Refer to important disclosures at the end of this report ed: MY / sa: YM
Company Focus M1
Segmental Breakdown
FY Dec 2009A 2010A 2011F 2012F 2013F
Revenues (S$ m) Post Paid Cellular Pre Paid Cellular IDD Revenue Equipment Sales Total Income Statement (S$ m)
FY Dec
Surged because M1 started to apply fair value accounting from FY10 onwards
2009A
2010A
2011F
2012F
2013F
Revenue Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)
781 (119) 183 0 0 (8) 6 181 (31) 0 0 150 145 302 (2.3) (3.5) (4.7) 0.6 23.5 19.2 65.6 18.4 25.8 80.0 24.2
980 (114) 194 0 0 (4) 0 190 (32) 0 0 158 158 309 25.4 2.1 6.0 4.8 19.8 16.1 58.9 17.6 25.0 100.0 44.9
970 (105) 209 0 0 (4) 0 204 (35) 0 0 170 170 313 (1.0) 1.5 7.3 7.5 21.5 17.5 57.2 17.2 24.3 100.0 48.1
980 (105) 208 0 0 (5) 0 203 (36) 0 0 167 167 313 1.0 0.0 (0.3) (1.2) 21.2 17.1 55.6 16.4 23.1 100.0 43.0
999 (106) 207 0 0 (5) 0 202 (35) 0 0 167 167 313 2.0 0.1 (0.3) (0.3) 20.7 16.7 55.6 16.4 23.1 100.0 42.9
21A 00
21F 01
21F 02
O e tin Mrg % p ra g a in
N tIn m Mrg % e co e a in
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Company Focus M1
Balance Sheet (S$ m)
FY Dec 2009A 2010A 2011F 2012F 2013F
Asset Breakdown (2010) 612 0 83 7 8 120 3 834 0 224 250 115 245 0 834 (92) (243) 46.9 197.5 8.4 1.0 0.6 0.6 1.0 1.0 48.0 3.3 598 0 83 9 10 253 3 956 0 274 297 94 291 0 956 (8) (288) 69.5 142.2 6.0 1.1 1.0 1.0 1.0 1.0 33.7 4.0 609 0 83 31 10 281 3 1,018 0 274 347 94 302 0 1,018 20 (316) 100.5 158.8 6.7 1.0 1.2 1.1 1.0 1.0 33.5 4.0 617 0 83 9 10 297 3 1,019 0 278 347 94 300 0 1,019 33 (338) 107.7 156.2 6.6 1.0 1.2 1.1 1.1 1.1 32.5 4.0 620 0 83 3 10 303 3 1,023 0 282 347 94 300 0 1,023 34 (344) 109.5 153.6 6.5 1.0 1.1 1.1 1.1 1.1 31.7 NA Capital Expenditure
2009A 2010A 2011F 2012F 2013F
140
Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)
Debtors 29.1%
Inventory 1.2% Bank, Cash and Liquid Assets 1.0% Associates'/J Vs 0.0%
Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)
181 119 (35) 0 (44) 0 221 (120) (14) 0 0 0 (134) (120) 0 0 22 (97) 0 (10) 29.8 11.4
190 114 (31) 0 (86) 0 188 (100) (20) 0 0 0 (120) (120) 47 9 (1) (66) 0 2 30.3 9.7
204 105 (32) 0 (31) 0 246 (116) 0 0 0 0 (116) (158) 50 0 0 (108) 0 22 30.6 14.3
203 105 (35) 0 (13) 0 260 (113) 0 0 0 0 (113) (170) 0 0 0 (170) 0 (22) 30.3 16.3
202 106 (36) 0 (1) 0 272 (110) 0 0 0 0 (110) (167) 0 0 0 (167) 0 (6) 30.2 17.9
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Company Focus M1
Quarterly / Interim Income Statement (S$ m)
FY Dec 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011
Margins Trend
3% 0 2% 5 2% 0 1% 5 1% 0 5 % 0 % 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
Revenue Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Opg Profit Margins (%) Net Profit Margins (%)
O e tin Mrg % p ra g a in
N tIn m Mrg % e co e a in
Benefited from lower depreciation charges as some assets were fully depreciated
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