Download - 20110711 Telecommunications DBSV
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8/6/2019 20110711 Telecommunications DBSV
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www.dbsvickers.com
Refer to important disclosures at the end of this reported: MY / sa: YM
STI : 3,117.37AnalystSachin MITTAL +65 6398 [email protected]
Source: DBS Vickers
StarHub - Our new top pick offers (i) over 7% yieldbased on annual 20 Scts DPS and (ii) mid-single digitgrowth 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 prospectsin FY13F (March YE).
M1 Downgrade to HOLD after its recentoutperformance. (i) 6-7% yield is the key attractionbased on 80%-100% payout ratio. (ii) Expect flatearnings in FY12F due to fair value accounting.
TOP PICKS
Price Mkt Cap Target PriceS$ US$m S$ Rating
SingTel 3.17 41,171 3.20 HOLDStarHub 2.79 3,900 3.05 BUYM1 2.59 1,923 2.60 HOLD
Handset revenue minus handset costs (S$m). Fair value
accounting at M1 led to lower subsidy costs
Source: DBS Vickers, quarterly results of companies
DBS Group Research . Equity 12 Jul 2011
Singapore Industry Focus
Singapore Telecom Companies
2Q11F Preview and key sector issues 2Q11F earnings of StarHub & M1 are likely to
reinforce sectors appeal as bastion of stability.
Potential decline in smartphone sales in 2H11F tobenefit StarHub more; Downgrade M1 to HOLD afterits recent run-up.
Cross-carriage to start from Aug 1, but may not havesharp teeth to make a difference.2Q11F earnings should reaffirm sectors defensiveappeal. M1 is likely to report 2Q11 earnings of S$42.5m(0% QoQ, +4% YoY) on 14
thJuly, as its fair value
accounting may not leave much scope for improvement.
StarHub is likely to report 2Q11 earnings of S$74m (+7%
QoQ, +27% YoY) on 4th
August in a seasonally strong 2Q
as it recovers from the impact of dunning in 1Q11.
Potential decline in smartphone sales in 2H11F &FY12F may benefit StarHub. High penetration of smart
phones (60-65%) in Singapore may imply lowersmartphone sales in 2H11F, implying lower subsidy burden
at StarHub & SingTel. Lower smartphone sales, on the
other hand, may adversely impact M1s earnings due to its
unique practice of fair value accounting. While M1 is a key
beneficiary of National Broadband Network, it may take
another 2-3 years to show significant profit contribution
from the new business.
StarHub is our new top pick after M1s recentoutperformance. YTD total returns are 15% for M1 (ourprevious top pick) versus 11% for StarHub and 1% for
STI. At current price, M1 offers 6-7% dividend yield basedon 80-100% payout ratio vs assured 7% for StarHub. MI
offers flat earnings in FY12F versus mid-single digit growth
at StarHub.
Cross-carriage to start from Aug 1, but impact may bemuted. Cross-carriage applies only to the exclusivecontent signed after Mar 12, 2010. Firstly, StarHub has
locked-in most of the popular content on exclusive basis
before Mar 12 for 3-5 years. Secondly, content can still be
signed on non-exclusive basis where pay TV operators
negotiate the price as opposed to bidding earlier. As long
as other pay TV operators do not buy non-exclusive
content rights, they would not be able to cross-carry thosecontents.
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Analyst
Sachin MITTAL +65 6398 [email protected]
Table of Contents
M1s 2Q11F earnings preview 3
StarHubs 2Q11 earnings preview 3
Three Key Industry Issues 4
(i) Smartphones & Tablets(ii) National Broadband Network(iii) Cross-carriage of content
Concerns for M1 in the mobile segment 5
Why we like StarHub? 7
Sector Valuation 7
Peers Valuation 8
Stock ProfilesM1 9
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M1s 2Q11F earnings preview
M1 is likely to report 2Q11 earnings of S$42.5m, flat
sequentially. While 2Q is a seasonally strong quarter, fair
value accounting may offset the actual sequential increase in
service revenue as a significant portion is already recognized as
handset revenue at the start of the two-year contract.
M1s 2Q11F Earnings Estimates
Source: DBS Vickers
StarHubs 2Q11 earnings preview
StarHub is likely to report 2Q11 earnings of S$74m, up 8%
qoq on 4th
Aug, thanks to sequential improvement in mobile
revenue. 2Q results should be in line with consensus.
StarHub lost 5K postpaid subscribers in 1Q11 due toDunning. Dunning refers to churn initiated by StarHubfor non-paying customers subsequent to the
implementation of business support system in 4Q10.
Management expects postpaid mobile subscriber to
resume growing in 2Q11F, as the impact of dunning
should be over in 1Q11.
Recovery from seasonally weak 1Q. This is due to theimpact of lesser number of days (Feb month of 28 days
only) and the impact of Chinese New Year holidays in
1Q. In the past, mobile revenue improved sequentially
in 2Q from higher usage. The only exception was 2008,
which was impacted by intense price competitionahead of mobile number portability.
StarHubs 2Q11F Earnings Estimates
Source: DBS Vickers
FYE Dec S$m 2Q10 1Q11 2Q11F y-o-y q-o-q Comments
Operating Rev 223 258 255 14% -1%Likley to be higher
on annual basis due
to higher handset
sales. Service
Revenue should be
stable
Operating Expens (173) (205) (202) 17% -1%Supported by lower
depreciation and
leased circuit costs
Other revenue 1 0 0 -80% 0%Operating Profit 51 53 53 4% 0%Finance Costs (2) (1) (2) 0% 7%PBT 50 52 52 4% 0%Tax (9) (9) (9) 5% 1%Net Profit 41 43 43 4% 0%
FYE DecS$'m 2Q10 1Q11 2Q11F y-o-y q-o-q Comments
Opg Rev. 569 559 56 7 0% 2%Lower revenue on
annual basis due
to lower pay TV
revenue
subsequent to
loss of EPL rights.
Opg Exp -492 -471 -476 -3% 1% iPhone subsidymay continue tobe high
Other
income1 3 3 To account forcash payment
received from
Govt for OpCo
Opg
Profit/
(loss)
78 91 95 22% 5%Interest
Income1 0 0 -75% 0%
Interest
exp-7 -5 -5 -29% 0%
PBT 72 86 90 26% 5%Tax -14 -17 -1 6 20% -3%PAT 58 69 74 27% 7%
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Three Key Industry Issues
(i) Smartphones & Tablets High smartphone penetration implies slower sales
ahead. Smartphone penetration is estimated to reachover 60% of postpaid subscriber base and may rise
gradually from here due to high ARPU commitment
required for smartphone plans. Most handset users
made the transition in 2010 and are now locked in
two-year contracts. Moreover, smartphone adoption is
unlikely to breach 80% as there is still a large pool of
users, such as the elderly, who are resistant to the
switch. Telcos require four to eight months to recoup
subsidies for each smartphone, and this should happen
in 2011F & 2012F.
iPad & Tablet is a small incremental opportunity.Singapore telcos have started to offer tablets at upfront
subsidy of S$400-500 per iPad in lieu of subscription
fee of S$40/month. We believe that while breakeven
time is over 10 months for tablets, it is still an
incremental opportunity. However, the initial impact on
earnings would be negative on all the three telcos
(including M1 as tablets are not covered under fair
value accounting). We believe the market for tablets is
much smaller than phones as (i) there can only be one
or two tablets per household versus multiple phones
per household, (ii) many households may not buy
tablets as they have iPhones already (iii) each tablet
subscription would contribute much lower profit than
phone, due to lower monthly subscription fee.
(ii) National Broadband Network
Home Reached is significantly lower than HomePassed. Around 60% of the residential andcommercial properties achieved Home Passedstatus at the end of 2010. However, Home
Reached percentage is much lower and is behind its
60% target. M1 revealed that there are only around
16k fiber customers in Singapore in total with M1
having one-third share of this new segment. With
1.2m broadband customers, there are mere 1.3%
fiber customers despite 60% coverage. This can be
attributed to (i) high incremental cost of upgrading
to fibre from existing broadband players and (ii)
external trunking requirement may be undesirable
for many homeowners.
Home Passed hit 60% at the end of 2010
Source: OpenNet
New broadband earnings may constitute ~10% ofexisting earnings base for M1 in the long term. M1targets 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 yearsto 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 pricingas anticipated. M1 offers 100 Mbps connection atS$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 othercosts 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, wellbelow 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 morethan offset consumer losses. Management believesthat 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.
(iii) Cross-carriage of content for pay TV
From Aug 1, cross-carriage kicks in, but can be bypassed fornon-exclusive content. The Media DevelopmentAuthority's (MDA) mandate, announced in March last year,
will apply to any exclusive content that operators have
acquired on or after March 12, 2010. The regulation assertsthat pay-TV operators must be able to make available this
content within five days of request from the consumer, even
if they belong to competitors. However, the catch is that
cross-carriage applies only to the exclusive content. We
are afraid that most of the content in the future can be
signed on non-exclusive basis where pay TV operators
negotiate the price with content provider on a bilateral
basis. Recently, StarHub signed a deal to screen the ongoing
European Under-21 championship on a non-exclusive basis -
bypassing the much-publicised cross-carriage measure.
Currently, English Premier League (EPL) rights are awarded
on an exclusive basis, so next round of rights would becovered under the cross-carriage regulation unless they are
awarded on non-exclusive basis. In either case, the cost of
content should not rise too much while content ownership
may continue to be a competitive advantage for existing
pay-TV operators.
Concerns for M1 in the mobile segment
iPhone has helped M1 to raise market share and postpaid
mobile ARPU. However, high handset subsidies are not
reflected in its past earnings due to its use of fair value
accounting. This may have an adverse impact on FY11F &
FY12F earnings.
Postpaid mobile market share has improved for SingTel andM1. SingTel & M1 have aggressively promoted iPhoneswhile StarHub has focused more on the cheaper Android
phones due to high subsidy required on iPhones. This
resulted in SingTel and M1 gaining market shares in the
post-paid mobile segment as iPhone continues to be the
most popular phone in Singapore to-date.
SingTel & M1 have gained postpaid mobile market
share over the last one-year
Source: DBS Vickers, Quarterly results of companies
M1 has seen most improvement in post paid mobile
ARPU (non adjusted)
Source: DBS Vickers, quarterly results of companies
M1 has benefited from low ARPU base. Most of M1sexisting subscribers were not eligible to get iPhone subsidy
on their existing plans and had to upgrade to higher-end
plans, resulting in higher ARPU. As for SingTel and StarHub,
most of their subscribers (already high-end) were eligible toget iPhone subsidies on their existing plans and merely
46.3 46.0 45.8 45.7 45.846.5
27.3 27.5 27.7 27.9 27.6 26.826.5 26.626.426.526.4 26.7
20.0
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30.0
35.0
40.0
45.0
50.0
4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
SingTel StarHub M1
62 63 64 65 64
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SingTel StarHub M1
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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 adverseimpact 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)
Source: DBS Vickers, quarterly results of companies
Fair value accounting at M1 has an adverse impact onpostpaid mobile service revenue (S$m)
Source: DBS Vickers, quarterly results of companies
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Why we like StarHub?
Cash payment from regulator to support dividendsManagement does not rule out further capital
management over the next 18 months in addition to
20 Scts DPS. Besides, healthy free cash flow
generation of S$300m-S$350 from operations in
FY11F-12F, StarHub may receive total cash payment
of S$40-60m from the regulator over the next three
years on achieving certain milestones as OpCo for
National Broadband Network. StarHub had received
its first payment of S$60m from the regulator last
year.
Significant mobile traffic cost savings to drive FY11Fearnings. Since 4Q10, traffic costs have declined byS$5m each quarter as StarHub negotiated lower
costs per minute for certain international destinations
with its carrier partners. The tactic, we believe, here
is to barter IDD minutes with another carrier who has
substantial incoming calls (to Singapore in this case).
As a result, traffic cost is incurred only for certain IDD
minutes above those bartered by the two carriers.
This move could result in significant savings of S$15-
20m in traffic costs in FY11F, more than 5% of
expected earnings for FY11F.
Lower handset subsidy costs to drive FY12F earnings.While Android phone adoption has been slow in
Singapore till now, we expect Android phones to
emerge as popular alternatives to iPhones in 2012F
and beyond. This should lower subsidy burden on
StarHub in FY12F in our view.
Higher pay TV fee to benefit FY11F & FY12F. Pay TVrevenue has stabilized in 1Q11 and annual decline in
pay TV revenue is estimated to be less than S$40m,
still lower than the cost savings of S$60-70m from
not owning the EPL rights. In fact, Pay TV subscriberbase increased by 4K to 542K in 1Q11 reflecting
StarHubs ability to manage its pay TV business.
Besides, StarHub has managed to raise its pay TV
monthly subscription rate by S$2/month from Aug
onwards, which should result in additional revenueof 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 of15% 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 ofearnings 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 assureddividend 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 DCF-based 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 ofS$3.20.
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Peers ValuationMkt Mkt Price Target Avg CAGR
Company FYE Cap Cap (S$) Price % 6-mth 10-12 P/BV(US$m) LC 08-Jul (S$) Upside Rcmd Vol (m) (%) 11F 12F 11F 12F 10A 10A 11F 12FChina / Hong Kong 23,668China Mobile Dec 190,290 1,480,934 73.80 74.00 0% Hold 21.7 3 9.9 9.7 4.3% 4.4% 2.1x 4.0x 3.7x 3.3x
China Telecom Dec 8,827 68,693 4.95 5.20 5% Buy 70.3 20 19.6 15.0 1.7% 1.7% 1.4x 5.0x 4.7x 4.0x
China Unicom Dec 48,199 375,110 15.92 18.00 13% Buy 42.0 66 58.1 31.0 0.6% 0.6% 1.5x 6.3x 5.6x 4.7x
1,924,737 7 10.9 10.1Malaysia 1,595Digi.Com Dec 7,796 23,325 30.00 30.40 1% Hold 0.6 -5 23.1 22.2 5.4% 5.4% 17.3x 9.8x 9.0x 8.2x
Maxis Bhd Dec 13,788 41,250 5.50 5.10 -7% Hold 2.8 6 17.0 16.0 5.9% 6.2% 4.8x 10.4x 9.8x 9.5x
Telekom Dec 4,795 14,345 4.01 3.90 -3% Hold 7.1 4 25.5 23.7 4.9% 4.9% 1.9x 5.7x 6.2x 6.2x
Axiata Group Dec 14,275 42,709 5.05 5.60 11% Buy 15.2 15 14.3 12.6 2.5% 2.8% 2.3x 6.4x 5.6x 4.9x
121,629 8 17.4 15.9Singapore 3,151M1 Dec 1,923 2,348 2.59 2.60 0% Hold 1.0 3 13.8 14.0 7.2% 7.2% 8.0x 8.5x 8.5x 8.5x
SingTel Mar 41,642 50,837 3.19 3.20 0% Hold 19.7 5 12.8 12.0 5.9% 5.8% 2.1x 7.7x 7.4x 7.1x
Starhub Dec 3,933 4,801 2.80 3.05 9% Buy 1.9 10 15.5 14.9 7.1% 7.4% 88.5x 9.0x 8.1x 7.8x
57,986 5 13.1 12.3Thailand 925Advanced Info Service Dec 10,822 327,040 110.00 121.71 11% Buy 5.1 4 14.2 13.6 6.8% 7.1% 7.9x 6.6x 6.3x 5.9x
Tota l Access Communica Dec 4,427 133,781 56.50 62.49 11% Buy 6.4 1 11.5 12.6 8.7% 7.9% 1.9x 5.2x 4.8x 4.8x
True Corporation Dec 1,824 55,112 3.80 4.51 19% Valued 113.3 nm 90.5 65.3 0.0% 0.0% 3.6x 5.5x 5.4x 5.5x
515,934 3 38.7 30.5Indonesia 4,004Indosat Dec 3,285 27,984,760 5,150 7,000 36% Buy 2.5 28 22.9 16.1 2.2% 3.1% 1.6x 5.3x 4.9x 4.4x
PT Telekom Dec 17,039 145,152,000 7,200 7,700 7% Hold 18.4 7 11.4 10.8 4.8% 5.1% 3.5x 4.4x 4.4x 4.2x
XL Axiata Dec 6,200 52,815,109 6,200 7,100 15% Buy 4.5 20 13.8 12.0 3.6% 4.2% 4.5x 6.7x 5.8x 5.1x
PT Sarana Menara Dec 1,317 11,223,212 11,000 15,000 36% Buy 0.0 na 68.7 28.3 0.0% 0.0% 8.7x 14.0x 11.6x 9.5x
Tower Bersama Dec 1,310 11,163,915 2,450 2,700 10% Buy 3.4 89 26.3 19.2 0.0% 0.0% 5.2x 24.2x 16.8x 13.3x
* PT Telkom is adjusted for SingTel's 35% stake in Telkomsel
Singapore Telecom 11 & 12 earnings respectively
Source: DBS Vickers
PE (x) EV/EBITDAividend Yield (%)
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www.dbsvickers.com
Refer to important disclosures at the end of this reported: MY / sa: YM
HOLD S$2.59 STI : 3,117.37(Downgrade from BUY)
Price Target : 12-Month S$ 2.60Reason for Report : Change in recommendationPotential Catalyst: Half yearly dividendsDBSV vs Consensus : Street is too optimistic on FY12F earnings,disregrading the impact of fair value accounting perhapsAnalystSachin MITTAL +65 6398 [email protected]
Price Relative
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R e l a t i v e I n d e xS $
M 1 ( L H S ) R e la t i v e S T I IN D E X ( R H S )
Forecasts and Valuation
FY Dec (S$ m) 2009A 2010A 2011F 2012FRevenue 781 980 970 980EBITDA 302 309 313 313Pre-tax Profit 181 190 204 203Net Profit 150 158 170 167Net Pft (Pre Ex.) 145 158 170 167EPS (S cts) 16.9 17.5 18.8 18.5EPS Pre Ex. (S cts) 16.3 17.5 18.8 18.5EPS Gth Pre Ex (%) (3) 7 8 (1)Diluted EPS (S cts) 16.8 17.5 18.7 18.5Net DPS (S cts) 13.5 17.5 18.8 18.5BV Per Share (S cts) 27.5 32.2 33.5 33.3PE (X) 15.3 14.8 13.8 14.0PE Pre Ex. (X) 15.9 14.8 13.8 14.0P/Cash Flow (X) 10.4 12.5 9.5 9.0EV/EBITDA (X) 8.4 8.5 8.5 8.5
Net Div Yield (%) 5.2 6.7 7.2 7.2P/Book Value (X) 9.4 8.0 7.7 7.8Net Debt/Equity (X) 1.0 1.0 1.0 1.1ROAE (%) 65.6 58.9 57.2 55.6
Earnings Rev (%): (0.1) (2.7)Consensus EPS (S cts): 18.7 20.0Other Broker Recs: B: 11 S: 3 H: 6ICB Industry :TelecommunicationsICB Sector: Mobile TelecommunicationsPrincipal Business: MobileOne is one of the maintelecommunication operators in Singapore.
Source of all data: Company, DBS Vickers, Bloomberg
At A Glance Issued Capital (m shrs) 906Mkt. Cap (S$m/US$m) 2,348 / 1,913Major Shareholders
Axiata Group (%) 29.3Keppel T&T Ltd (%) 19.7Singapore Press Holdings (%) 13.7
Free Float (%) 37.3Avg. Daily Vol.(000) 805
Singapore Company Focus
M1Bloomberg: M1 SP | Reuters: MONE.SI
Fair value accounting versus NBN
YTD total returns of 15% for M1 vs 11% for StarHub &1% for STI.
FY12F mobile earnings at risk due to fair valueaccounting while non-mobile contribution may not besignificant.
Downgrade to HOLD at unchanged DCF based (WACC8.4%, terminal growth 0%) TP of S$2.60
FY12F mobile earnings at risk. Under fair value accounting(FVA), additional service revenue over the contract periodattributed to the smartphone is recognized upfront ashandset revenue a practice unique to M1. This practiceboosted 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 lowerdepreciation and leased circuit costs and (ii) significanthandsets revenue due to high demand for smartphones. Withsmartphone penetration exceeding 60% in Singapore,smartphone sale is likely to slowdown in FY12F. This may
have an adverse impact on M1s handset revenue and nomajor cost savings are expected either.
Non-mobile contribution may be insignificant in FY12F.Overall, broadband may contribute S$15-16m of earnings byFY15F. However, it may take over 2 years to reap significantprofit from the broadband business. M1 needs to offer higherprice discounts for its broadband service due to the lack ofpay TV offering. Margins would also be affected by additionalcost of leasing international bandwidth and the lack of scale.
Potential half yearly DPS of 6.5 Scts priced in. Althoughofficial dividend policy is minimum 80% payout ratio, we
project M1 to maintain 100% payout in 2011F despite lowerfree cash flow than earnings due to FVA.
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M1
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Segmental BreakdownFY Dec 2009A 2010A 2011F 2012F 2013FRevenues (S$ m)
Post Paid Cellular 495 502 524 523 519Pre Paid Cellular 70 77 86 95 117IDD Revenue 131 129 128 126 124Equipment Sales 86 271 233 236 239
Total 781 980 970 980 999Income Statement (S$ m)FY Dec 2009A 2010A 2011F 2012F 2013FRevenue 781 980 970 980 999
Other Opng (Exp)/Inc (119) (114) (105) (105) (106)
Operating Profit 183 194 209 208 207Other Non Opg (Exp)/Inc 0 0 0 0 0
Associates & JV Inc 0 0 0 0 0
Net Interest (Exp)/Inc (8) (4) (4) (5) (5)Exceptional Gain/(Loss) 6 0 0 0 0Pre-tax Profit 181 190 204 203 202Tax (31) (32) (35) (36) (35)Minority Interest 0 0 0 0 0
Preference Dividend 0 0 0 0 0
Net Profit 150 158 170 167 167Net Profit before Except. 145 158 170 167 167
EBITDA 302 309 313 313 313
GrowthRevenue Gth (%) (2.3) 25.4 (1.0) 1.0 2.0
EBITDA Gth (%) (3.5) 2.1 1.5 0.0 0.1
Opg Profit Gth (%) (4.7) 6.0 7.3 (0.3) (0.3)
Net Profit Gth (%) 0.6 4.8 7.5 (1.2) (0.3)
Margins & RatioOpg Profit Margin (%) 23.5 19.8 21.5 21.2 20.7
Net Profit Margin (%) 19.2 16.1 17.5 17.1 16.7
ROAE (%) 65.6 58.9 57.2 55.6 55.6
ROA (%) 18.4 17.6 17.2 16.4 16.4
ROCE (%) 25.8 25.0 24.3 23.1 23.1
Div Payout Ratio (%) 80.0 100.0 100.0 100.0 100.0
Net Interest Cover (x) 24.2 44.9 48.1 43.0 42.9Source: Company, DBS Vickers
Margins Trend
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
21.0%
22.0%
23.0%
24.0%
25.0%
2009A 2010A 2011F 2012F
OperatingMargin% Net IncomeMargin%
Surged because M1started to apply fair valueaccounting from FY10onwards
Our own estimate,
although official policy isminimum 80% payout
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Company Focus
M1
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Balance Sheet (S$ m)FY Dec 2009A 2010A 2011F 2012F 2013FNet Fixed Assets 612 598 609 617 620
Invts in Associates & JVs 0 0 0 0 0
Other LT Assets 83 83 83 83 83
Cash & ST Invts 7 9 31 9 3Inventory 8 10 10 10 10Debtors 120 253 281 297 303Other Current Assets 3 3 3 3 3Total Assets 834 956 1,018 1,019 1,023ST Debt 0 0 0 0 0
Other Current Liab 224 274 274 278 282
LT Debt 250 297 347 347 347
Other LT Liabilities 115 94 94 94 94
Shareholders Equity 245 291 302 300 300Minority Interests 0 0 0 0 0Total Cap. & Liab. 834 956 1,018 1,019 1,023Non-Cash Wkg. Capital (92) (8) 20 33 34
Net Cash/(Debt) (243) (288) (316) (338) (344)Debtors Turn (avg days) 46.9 69.5 100.5 107.7 109.5Creditors Turn (avg days) 197.5 142.2 158.8 156.2 153.6Inventory Turn (avg days) 8.4 6.0 6.7 6.6 6.5Asset Turnover (x) 1.0 1.1 1.0 1.0 1.0Current Ratio (x) 0.6 1.0 1.2 1.2 1.1Quick Ratio (x) 0.6 1.0 1.1 1.1 1.1Net Debt/Equity (X) 1.0 1.0 1.0 1.1 1.1Net Debt/Equity ex MI (X) 1.0 1.0 1.0 1.1 1.1Capex to Debt (%) 48.0 33.7 33.5 32.5 31.7
Z-Score (X) 3.3 4.0 4.0 4.0 NA
Cash Flow Statement (S$ m)FY Dec 2009A 2010A 2011F 2012F 2013FPre-Tax Profit 181 190 204 203 202
Dep. & Amort. 119 114 105 105 106
Tax Paid (35) (31) (32) (35) (36)
Assoc. & JV Inc/(loss) 0 0 0 0 0
Chg in Wkg.Cap. (44) (86) (31) (13) (1)
Other Operating CF 0 0 0 0 0Net Operating CF 221 188 246 260 272Capital Exp.(net) (120) (100) (116) (113) (110)
Other Invts.(net) (14) (20) 0 0 0
Invts in Assoc. & JV 0 0 0 0 0
Div from Assoc & JV 0 0 0 0 0
Other Investing CF 0 0 0 0 0Net Investing CF (134) (120) (116) (113) (110)Div Paid (120) (120) (158) (170) (167)
Chg in Gross Debt 0 47 50 0 0
Capital Issues 0 9 0 0 0
Other Financing CF 22 (1) 0 0 0Net Financing CF (97) (66) (108) (170) (167)Currency Adjustments 0 0 0 0 0
Chg in Cash (10) 2 22 (22) (6)
Opg CFPS (S cts) 29.8 30.3 30.6 30.3 30.2Free CFPS (S cts) 11.4 9.7 14.3 16.3 17.9Source: Company, DBS Vickers
Asset Breakdown (2010)
Debtors -29.1%
Net FixedAssets -68.7%Associates'/J
Vs 0.0%
Bank, Cashand Liquid
Assets -1.0%
Inventory -1.2%
Capital Expenditure
0
20
40
60
80
100
120
140
2009A 2010A 2011F 2012F
Capital Expenditure (-)
Assuming S$95mcapex and S$22m paidfor spectrum.
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Company Focus
M1
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Quarterly / Interim Income Statement (S$ m)
FY Dec 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011Revenue 249 223 246 262 258
Other Oper. (Exp)/Inc (27) (28) (30) (29) (25)Operating Profit 49 51 49 48 53Other Non Opg (Exp)/Inc 0 0 0 0 0
Associates & JV Inc 0 0 0 0 0
Net Interest (Exp)/Inc (2) (2) (1) (1) (1)
Exceptional Gain/(Loss) 0 0 0 0 0Pre-tax Profit 48 50 48 46 52Tax (9) (9) (8) (8) (9)
Minority Interest 0 0 0 0 0Net Profit 39 41 39 39 43Net profit bef Except. 39 41 39 39 43
EBITDA 80 80 79 48 53
GrowthRevenue Gth (%) 15.2 (10.4) 10.1 6.8 (1.8)
EBITDA Gth (%) 3.0 4.5 (0.8) (39.6) 10.7
Opg Profit Gth (%) 6.9 3.2 (3.5) (2.8) 10.7Net Profit Gth (%) 6.2 3.6 (3.4) (2.0) 10.1
MarginsOpg Profit Margins (%) 19.8 22.9 20.0 18.2 20.5
Net Profit Margins (%) 15.8 18.3 16.0 14.7 16.5
Margins Trend
0%
5%
10%
15%
20%
25%
30%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
OperatingMargin% Net IncomeMargin%
Source: Company, DBS Vickers
Benefited from lowerdepreciation charges as someassets were fully depreciated
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Industry Focus
Singapore Telecom Companies
Page 13
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)BUY (>15% total return over the next 12 months for small caps, >10% for large caps)HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)FULLY VALUED (negative total return i.e. > -10% over the next 12 months)SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)Share price appreciation + dividends
DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson(www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSRGO). For access, please contact your DBSV salesperson.
GENERAL DISCLOSURE/DISCLAIMERThis report is prepared by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities
(Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report isintended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any meansor (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which acceptsresponsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein shouldcontact DBS Vickers Securities (USA) Inc (DBSVUSA) directly and not its affiliate.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers toDBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressedare subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document doesnot have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is forthe information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separateindependent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claimsfor loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document.This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary ofDBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in thesecurities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in,
and may effect transactions in securit ies mentioned herein and may also perform or seek to perform broking, investment banking and otherbanking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there canbe no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and itmay not contain all material information concerning the company (or companies) referred to in this report.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates andassumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates onwhich the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actualresults. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIEDUPON as a representation and/or warranty by DBSVR, DBSVS and/or DBSVH (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or riskassessments stated therein.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to thecommodity referred to in this report.
DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or researchdepartment, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US personswishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussedin this document should contact DBSVUSA exclusively.
ANALYST CERTIFICATIONThe research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companiesand their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensationwas, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 12 Jul 2011, the analyst andhis / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report(interest includes direct or indirect ownership of securities, directorships and trustee positions).
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Industry Focus
Singapore Telecom Companies
Page 14
COMPANY-SPECIFIC / REGULATORY DISCLOSURES1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as of
08-Jul-2011
PT. DBS Vickers Securities Indonesia ("DBSVI") has a proprietary position in Indosat, XL Axiata and Telekomunikasi Indonesiarecommended in this report as of 12 July 2011.
2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of11 Jul 2011.
3. Compensation for investment banking services:i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12
months, and within the next 3 months receive or intends to seek compensation for investment banking services from thecompany mentioned.
ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investmentbanking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain furtherinformation, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed inthis document should contact DBSVUSA exclusively.
RESTRICTIONS ON DISTRIBUTIONGeneral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or
located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would becontrary to law or regulation.
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Hong Kong Securities and Futures Commission.
Singapore This report is being distributed in Singapore by DBSVR, which holds a Financial Advisers licence and is regulated by the MAS.This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an ExemptFinancial Adviser as defined under the Financial Advisers Act. Any research report produced by a foreign DBS Vickers entity,analyst or affiliate is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors asdefined in the Securities and Futures Act, Chap. 289 of Singapore. Any distribution of research reports published by aforeign-related corporation of DBSVR/DBSVS to Accredited Investors is provided pursuant to the approval by MAS ofresearch distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
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This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning ofthe Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK isintended only for institutional clients.
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United ArabEmirates
This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3rd
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Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the DFSA regulatory criteria tobe a Professional Client. It should not be relied upon by or distributed to Retail Clients. DBS Bank Ltd, Dubai is regulated bythe Dubai Financial Services Authority.
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