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Starhub FY2011 Results–Back to stable cash flow levels

Drizzt — Thu, 02 Feb 2012 19:57:30 +0000

Starhub announced their full year 2011 financial results. Overall, my take is that they got back to pre-iphone competition level of operations. I would not say it is spectacular but rather, the reasons operation wise, why we like Starhub is finally back.

Here are some of my takeaways:

Profitability

Gross profit 4th quarter grew by 15.3%. Considering the handset subsidies costs over the past 2 years, its good to see that growth is maintained.
Gross profit full year grew by 16.3%. Considering past 2 years of competitive landscape, its good to finally see growth overall instead of profit drawdowns year on year.

Business Segments

4th quarter mobile revenue grew by 3.1% and full year mobile revenue grew by 3.1%. A note that mobile revenue is the biggest contributor to the top line.
4th quarter Pay TV revenue grew by 7.5% while full year Pay TV fell by 4.9%. This is the only segment that shows negative growth owing to the loss of BPL. Here is where competition is intense and we do not yet have visibility how the new IDA rules on cross carrying of content will do to Starhub’s Pay TV.
4th quarter and full year broadband grew by 2.7% and 2.4% respectively.
Fixed network grew by 1.5% overall.
We are seeing a 5% fall in pre-paid mobile revenue versus a 5% rise in post-paid mobile revenue. The ratio of pre-paid to post-paid revenue is 1:3.88.
Post-paid ARPU was S$76 for the quarter versus S$73 last year. Higher ARPU was due to higher subscription revenue from increasing mix of “SmartSurf” plans, which is their 3G voice and data plans.
In terms of voice calls to data usage, there is a 9% reduction in voice calls and a 16% rise in overall data usage, reflecting a shift towards data. This trend looks set to continue and had it not for the bundled plans, it will be difficult for the telecom to explain to end user why they still pay S$44 for a voice+data plan.
Post-paid churn have increased to 1.2% versus 1.1% last year. This is somewhat of a small concern as although it is relatively small, would indicate that given the release of the same set of iPhones and Android phones, consumers would prefer competitors more than Starhub.
Pay TV ARPU was lower year on year. However, churn remain constant. This shows that to retain customers, the margins are affected to offer more competitive packages.
Broadband ARPU was lower year on year as well.
Fixed Network Services was the surprise where they grew Data & Internet by 1% and Voice services 4% for the year. Data accounted for 5 times that of Voice.The higher take up was attributed to increase take-up for NBN services by retail service providers.
The higher voice services revenue was attributed to higher subscription of local voice services and increased interconnect revenue but offset by lower IDD revenue.

Business Costs

We are seeing a 22.8% rise on cost of equipment sold due to higher subsidies of smart devices. Particularly significant is the 68% rise in cost of equipment for the 4th quarter which looks to indicate that more smart devices are sold and greater subsidies are required. This will only get worse when LTE gets deployed next year and more subsidies are required to make people switch to LTE compliant handsets.
We are seeing a 6.8% rise in Staff costs and 8.5% rise in Marketing and Promotion costs versus a drastic reduction in Operating Lease, Repair and Maintenance and other expenses. Probably my gripe here is that costs are rising much faster than the added revenue.

Cash Flow Analysis

Operating Cash Flow was significantly lower due to higher inventories and receivables for the quarter. This come as a surprise but perhaps is an operation decision to hold more stocks.We will need to observe future operating cash flow for tell tale signs of stress in operational cash generation.
I was surprise by the high capital expenditure of 116 mil in 4th quarter versus the previous three quarters which add up to almost 120 mil. Last year this time the capex is also very high in the 4th quarter. Capex remains 10% of operating revenue inline with company full year guidance.
We were expecting much lower capex so this was against my very own estimates. It looks to follow the management capex guidelines of not more than 11% of operating revenue
Free cash flow was S$450 mil versus S$400 mil full year. This is greatly attributed to increase in operating cash flow due to higher depreciation and lower capital expenditure.
Dividend payout remains at S$343 mil for $0.20 dividend payout. This is higher than net profit but well within the free cash flow levels
Capital expenditure was S$246 mil versus S$277 mil of depreciation, showing a consistent replenishment of assets, thus Starhub do not run the risk of erosion of NAV.
Net debt repayment was S$143 mil versus S$90 mil last year. This shows management’s commitment to reduce debts

Debt Analysis

Net debt was S$483 mil versus S$568 mil last year. Management looks to continue to use excess free cash flow to pay down debts
Net debt to assets is at 31% which is at a comfortable level
Net debt to EBITDA is at 0.69 which is at a very healthy level, far lower than the 1.1 level management is targeting.
With a free cash flow of S$450 mil it also means that by not paying any dividends, Starhub can theoretically pay off their debts in 1.07 years.

Growth outlook for 2012

There will be a continued shift from voice to data
Content cost will remain high despite the new cross carry guidelines
Take up for NBN is set to continue but currently hampered by operational issues which are pending resolution with various parties.
Revenue growth is forecasted to grow in the low single digit range.
EBITDA margin as a percentage of service revenue is set to remain at 30%
Capex guidance is expected not to exceed 11% of operating revenue
Dividend payout to remain at 20 cents

Conclusion

I was somewhat disappointed that there isn’t much mentioned of their plans to differentiate from the competition. I written recently the future trend of telecoms in Singapore (read here) and it would be paramount that with a LTE and NBN pipe, Starhub provides the best content to shift subscribers or provide the best QOS.

Else they will end up in this endless lowest switching cost game.

My forecast of higher dividends looks set to miss since free cash flow is forecasted to be lower than S$450 mil this year and capital expenditure will not significantly reduce.

Still you ask yourself whether you are contented with a currently yield of 7% for a service utility that people will continue to use for the foreseeable future.

Disclosure:Vested

I run a free Singapore Dividend Stock Tracker . It contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly here.

A peak into the future of telecom profitability 2012-Singtel, Starhub and M1

Drizzt — Sun, 22 Jan 2012 02:14:06 +0000

Telecom stock’s profitability is affected by technology substitutes, size of capital expenditures and the ability to monetize and fight for market share.

We talk a lot of telecom stocks at Investment Moats, and if you would like to know what I thought about them and their direction take a look at the following articles

Now I thought its time we take a peak again at the future to see if its still rosy for the telecom stocks going forward.

Near term economic moat

Demand

In the near term, telecom stocks should do pretty well. Mobile communication have become a utility and in Singapore perhaps data centric communication have become of a utility for many.

Singapore have the highest mobile smartphone penetration rate in the world. If you look at the amount of screen starers in MRT and bus you will realise how much Singaporean’s enjoy their smartphone data lifestyle.

The churn to cancel data looks very low which means that the telecom stocks can maintain their customer base for data.

For this to happen, mobile data phone plans need to remain at an affordable range.

More and more working adults are carrying more than one mobile plans. Specifically mobile data broadband. Else they are going on dual sim. This is likely to increase the amount of ARPU per customer.

Tiered Pricing

Starhub’s indication to move into tiered pricing should help better price differentiate their customer base and monetize usage. This should translate to higher revenues. The problem with the current all you can eat buffet plan is that the telecom companies cannot charge customers for higher usage.

Subsidies

Subsidies competition with other telecom companies are likely to remain which means we should not see this cost going down.

This year may see the roll out of LTE for all three telecoms and in that case expenditure may increase due to subsidies to improve adoption through subsidizing of LTE handsets.

Capital Expenditure

Infrastructure costs should remain constant or less. Judging by Starhub being able to save 30% of capital expenditure and operating expenditure (see here) compare to last time means that latest technology is cheaper and provide the necessary data requirements needed by consumers.

With an aggressive depreciation of older equipment, it means deprecation is higher than capital expenditure.

Regulation

Regulation conditions remain controlled. The last big policy change was the cross selling of all Pay TV content. This should reduce the aggressive bidding of content.

The question is whether IDA will force the telecom companies from reducing their phone plan prices. Voice on LTE and 3G are not as expensive cost wise compare to last time.

With the technology now, the telecom companies may enjoy expanding margins. If voice is so cheap and no one uses SMS, shouldn’t your price plans be reduced? I honestly see IDA forcing them to reduce the prices and thus ARPU can be maintained.

The downside could be if IDA tells the telecom companies they cannot charge $5 for caller ID and $10 for dual sim,

Competition

Competition wlll be intense as always. In fact at current quality of service, product offering and prices, I do not see a difference between the three telecom companies.

One telecom company may choose to reduce its prices due to lower operation costs. This would spark off a price war down to the lowest price based on Nash equilibrium.

The telecom companies are likely not going to but tiered pricing will mean the three telecom companies coming up with different price plans each that make it difficult for you to compare, somewhat like what insurance companies do.

Each companies are offering value added software solutions but I reckon it does not differentiate them because they do not provide huge value add.

Who will win?

Its difficult to differentiate between the 3 even now, but I believe Singtel is the current winner in market share due to their network having a better coverage which provides a better quality of service.

However, Starhub remains nimble and provides the best free cash flow with Singtel following closely due to their lower capital expenditure cost.

Future telecom trend drivers

Multiple Technology Offering a Quality Data Pipe

We can’t tell what other wireless technology is going to be dominant after HSPDA+/LTE but do not discount other mediums coming into the picture.

Traditional mobile telephony and SMS is going to die soon and what consumers see is who can provide me with the best “data pipe” to access the internet or make a call to communicate.

Be it WIFI, broadband, WIMAX, LTE/3G, FEMTOCELL, the telecom operators can take advantage of technology and integrate them into a comprehensive data pipe.

We all talked about the backhaul problems with growing data demand from HD movie streaming on the go, one area the telecom operators can look at is to use FEMTOCELL to reduce the load and move it via broadband fibre optics.

Customers will judge by who gives the best coverage for the lowest dollar all else being equal.

Possibility: Medium. Singapore is small, and the telecom operators may be able to upgrade their infrastructure to be able to handle a dense small area such that they do not need supplementary technology like FEMTOCELL and integrated WIFI.

The competition from cheap new entrants to kill margins

As technology gets sophisticated another problem faced by the 3 telecom companies is a 4th player. For a small country like Singapore, what used to be pretty high cost to set up fibres and all may be circumvented by advancement in WIMAX and other wireless radio technology that it becomes easy for them to set it up.

We take the case of FREE.fr which through its fibre broadband network and set-top boxes with WIFI and FEMTOCELL is able to offer unlimited voice calls, SMS, data at half the incumbent’s costs [full article]:

By offering a flat-rate, high-speed Internet connection for 30 euros ($43) a month. That gives Free.fr’s three million subscribers a connection speed of roughly 28 megabits per second over DSL, free IPTV (and a free set-top box), a free Wi-Fi hub, and unlimited voice calls to some 70 countries.

“We are a broadband service provider,” was his matter-of-fact reply. “Everything else — from voice to IPTV to storage – is just a feature that rides on this data service.” For the rest of the telecom industry, long addicted to metered minutes and billable items, this is rebellious thinking

This is game changing and making the incumbents sit up. The incumbents who is living on metered calls and SMS have a monster on their hands. How do they competed? Free.fr’s network is going to grow if they don’t do something like this.

This is made possible through shrewd innovative thinking:

“Since it is our own set-top box, we can innovate around it,” he says. “In the U.S., they buy their set-top boxes from other providers.” That’s a mistake and lost opportunity, Niel says and proceeds to outline how pivotal these set-top boxes are for his company and its future.

For example, Free.fr used the set-top box for automatically sharing a portion of one’s broadband connection via Wi-Fi with other Free.fr customers. Over five million set-top boxes means Free.fr has a free Wi-Fi cloud enveloping major cities such as Paris. Even when away from home, you can easily get broadband instead of resorting to an expensive 3G network.

This Free.Fr free Wi-Fi network is going to play a pivotal role in the soon-to-be-launched service, which will be using 42 Mbps HSPA+ technology. The company has built a network of 15,000 macrocells, but those 5 million “nano cells” are going to be the key difference maker, Niel points out.

Free.fr’s newer set-top boxes will have built-in femtocells. On top of that, Free is going to be beefing up its macrocells with high-capacity fiber connections being fed by Iliad’s dark fiber. And when the time comes, he is going to embrace LTE and include that in his network as well. “We will go to wide area network (3G and 2.5G) when we are not in Wi-Fi coverage,” he tells me. (I got a sneaking suspicion Free would be pushing iPhones into the market pretty heavily.) If they pull it off, it’s going to be pretty spectacular and once again, show what the telecom of tomorrow looks like.

The worse possible impact to the incumbent is that

Revenue and market share down
ARPU halved
Capital Expenditure needs to rise

It will just kill those legacy telecom companies

Meanwhile, Les Echos reports that other French operators were “shocked and astonished” at the aggressiveness of their pricing, and quotes Rudolf van der Berg at the OECD pointing out that Free’s service is more open to the Internet than the Dutch operators who are covered by a net-neutrality law. (How many other mobile operators provide a full USENET feed?)

The initial upshot has basically been all about price, though - Fitch Ratings warns that French operators are likely to see their margins drastically reduced, and indeed all three existing mobile operators and several of the MVNOs have already cut prices, although they are trying to hold the line on the top of the price range while matching Free’s prices on their discount offers. That makes sense unless Free users are mostly early adopters (like, ah, Stéphane Richard thinks).

Possibility: Medium. I think the key for Free.fr to be so successful was their acquisition of dark fiber in France. In Singapore, the whole island have been wired by Singtel which have relinquish the fibre assets to the NBN OpCo. There is no monopolization of fibre optics. Without that form of exclusivity, a new entrant or any of the telco can provide this level of deployment exclusively.

They can however provide a good quality data pipe and charge a low fee to under cut the rest. In that scenario, the rest will have the capability to meet that low price. It becomes a lose lose situation for all the telecoms.

Commodity data pipes – why should I switch?

The previous two points builds to this current point: Given that in the future, digital broadband set top boxes are standardize and fibre optics are available to all, and that technology is able to cover the island with LTE wireless data access well, what is the difference between the 3 telecom operators?

If your answer is that each telecom would value add to their customers by providing end user services and apps, then my answer to you is that not many would subscribe or think that it is a differentiating factor.

The content aspect is actually provided by the major cloud or content players such as Amazon, Apple, Google, Facebook.

The major payment solutions are provided by banks,Paypal, Mastercard and Visa.

The telecoms are just pipes.Even now with all the regulations from IDA, we can’t really point to the difference between the 3 telecoms. The biggest differences being quality of service.

You cannot charge a good premium if you cannot differentiate and this is a big problem for telecoms. There is a high threat that a newcomer will come in and undercut bringing everyone to a Nash equilibrium low price.

Possibility: Very High. It is already happening

Telecom not being able to outdo Disruptors Apple, Google, Amazon and Facebook

Supported by hundreds of thousands of software developers, Apple, Google and Facebook’s platforms are fuelling innovation in consumer and, increasingly, business services on both the fixed and mobile Internet. Amazon has set the benchmark for online retailing and cloud computing services, while Skype is reinventing telephony, using IP technology to provide compelling new functionality and features, as well as low-cost calls.

On their current trajectory, these five companies are set to suck much of the value out of the telecoms services market, substituting relatively expensive and traditional voice and messaging services with low-cost, feature-rich alternatives and leaving telcos simply providing data connectivity. At the same time, Apple, Amazon, Google and Facebook have become major conduits for software applications, games, music and other digital content, rewriting the rules of engagement for the media industry.

In a Telco2.0 online survey of industry executives conducted in September 2011, respondents said they expect Apple, Google, Facebook and Skype together to have a major impact on telcos’ voice and messaging revenues in the next three to five years . Although these declines will be partially compensated for by rising revenues from mobile data services, the respondents in the survey anticipate that telcos will see a major rise in data carriage costs (see Figure 15 – The potential combined impact of the disruptors on telcos’ core services).

Unlike telcos, the disruptors are generally growing quickly and are under little, or no, pressure from shareholders to pay dividends. That means they can accumulate large war chests and reinvest their profits in new staff, R&D, more data centres and acquisitions without any major constraints. Investors’ confidence and trust enables the disruptors to spend money freely, keep innovating and outflank dividend-paying telcos, media companies and telecoms equipment suppliers.

By contrast, investors generally don’t expect telcos to reinvest all their profits in their businesses, as they don’t believe telcos can earn a sufficiently high return on capital. Figure 16 shows the dividend yields of the leading telcos (marked in blue). Of the disruptors, only Microsoft (marked in green) pays a dividend to shareholders.

Figure 16: Investors expect dividends, not growth, from telcos

Source: Google Finance 2/9/2011

Reducing Barriers – SPH, SingPost and Vodafone

The lower technology cost and technology innovation may bring about other entrants.

SPH and SingPost have their own crumbling business models, they are looking at creating a content pipe as well, similar to the telecoms.

I suspect we may see a merger of SPH with Starhub or M1 due to the synergy there. Starhub and M1 lack the content people want, SPH have a large content and they are an advertising business. This can be a marriage make in heaven.

Possibility: Medium.

Telecom as a payment service provider versus MasterCard, Visa, Apple, Google

We talked about ways to differentiate but moving into payment is more about leveraging on the close relationship with the end users.

Instead of going into banks and viewing on the computer what is it that we have on ourselves more than anything else? Our smartphone.

The smartphone have become the platform to do internet banking at DBS, OCBC, but this is more than that.

I believe what the telecom operators will be looking at is leveraging on their already large customer base to become their payment solutions thereby earning small transaction fees by going through them.

The obvious answer is that Telcos charge customers a flat fee for the privilege of being their customers – for managing their bills, providing call centers and guaranteeing them a unique telephone number. If Visa relied on the same, which by analogy would make sense (it provides bills, call centers and “unique” credit cards) , its business model would collapse. Visa needs to make money by providing payment services to merchants and banks – services to the customer is just the channel.

So the obvious way for Telcos to exploit their relationship with their customers is to be the same – by becoming a billing and payment provider. Instead of the credit card with chip ‘n’ pin – they have the Phone Number + SIM.

- Telco Professionals.

In the last five months there has been a wave of billing partnerships between device and/or platform vendor app stores and telcos – both in mature and emerging markets. Examples include RIM/Blackberry (with Vodafone), Microsoft (Orange), Nokia (Reliance, UK operators), Google/Android (AT&T).

Banks in Canada and South Africa have applied for banking license. Your Singtel, Starhub and M1 billing is synonymous with credit facilities provided by banks in that you make use of the services and pay at the end of the month.

VISA, Mastercard does the service of managing credit and debit transactions between merchants (bricks and mortar or software)

Apple and Google app stores provide the content infrastructure content providers demanded which then leverage on VISA and Mastercard.

Google itself is playing this smartphone payment game with Google Wallet, like Square and Paypal. They are essentially Peer to Peer transaction solution leveraging on internet as a space and smartphone as a transaction medium. But they still have a bank or VISA backend. Take a look at this comparison of Google Wallet vs Square vs Paypal charges, and that is why the telcos are trying to edge in. The money in payment is there.

Where is the pie for the telecom operators? For one thing pre-paid is a huge opportunity there. Some may not know that in many countries such as Thailand and India, most of the population is still on pre-paid.

In 2008 about 17% of the US mobile subscriber base were on prepaid deals, but since the GFC (Global Financial Crisis) approximately 65% of net new subscribers are prepaid users. In emerging markets like India and China 90%+ of the subscriber base is prepaid, and the same counts for sub-Saharan Africa, and broadly across Eastern Europe and Asia. So what does this have to do with banking?

Prepaid subscribers for mobile phones generally speaking are more likely to be at the lower end of the scale for retail banking (less profitable, underbanked) or even in the unbanked segments. These are customers who don’t have extensive multi-bank relationships, and who increasingly are moving to products like prepaid debit cards to facilitate their day-to-day banking needs.

So guess what happens when you combine a prepaid debit card with a prepaid mobile phone? It’s a marriage made in heaven! What’s the difference between making a telephone call, an ATM withdrawal or a debit card transaction at a merchant – they are all just transactions from a value store.

- finextra.

The biggest benefactor of this will be Singtel out of the 3 local telecoms.

The problem for local telecoms is that their own app store dreams are either in dream state or not working. People would rather use Apple and Google’s app store which uses Mastercard and VISA mainly.

As long as the local content doesn’t get attractive, I believe this payment revenue stream will not take off.

The company’s digital services unit, headed by Nordic and broadcast businesses chief Kristin Skogen Lund, announced a deal with Google in November to let its customers in 11 countries pay for Android apps on their phone bills, and will also have its own shelf in Android market. More deals will follow, Baksaas said.

- Telenor.

The number of announced partnerships suggests that telcos clearly find the potential revenues from such deals attractive. It would be an easy, if not exactly a large, revenue stream for individual operators, which requires little investment. But providing billing to third party app stores raises questions about the telco’s own app store strategies. Arguably, such partnerships boost third party app store’s attractiveness and convenience at the expense of telcos’, particularly as many (e.g. Apple, Google) have far greater number of applications, and higher download volumes. We suspect there is a hard calculation at play here. The billing revenues from such deals are on the table today, while fierce downward pressure on ARPU and revenue growth means that there will always be telcos keen to go down this route. Hence, in effect this is no different to the classic wholesale/retail strategy dilemma that telcos have had to face in other areas (e.g. MVNOs).

All said, the rapid acceleration of smartphone penetration, combined with the dominance of the handset and platform vendors app stores, and the slow progress of cross-telco app store initiatives (e.g. WAC) will continue to put telco content strategies under pressure. By making paying for apps on other app stores more convenient, this move will add to this pressure, regardless of whether telcos acknowledge the fact either internally or externally. In effect, third party billing could be counter-productive to realizing telcos own content provider dreams – but it may well be a nice and more profitable improvement on a pure ‘bit pipe’ nightmare.

- OVUM.

Telecom as Identification Managers

The other thing that shapes the future for telecom is identity management. Think about this: Your phone number is becoming like an ID. This ID is gotten from a telecom operator after certain verification of your credentials. The ID takes the form of a SIM card.

What the telecom can perform is authenticate and verify credentials between your ID with the government and various services that requires it. We are not talking about an application but a build in protocol into the telecom’s 3G / LTE network to provide this form of authentication and credentials verifications.

The smartphone is a multi input device that may in the future provide multi factor authentication that is required.

Possibility: Medium to Low. The possibility of ID management is high, but why I say low is that it is likely to be taken up by the regulators and the government to provide the standardization.

Without standardization, this will be the value add that telecom can provide. This will differentiate one telecom from another.

But the main reason you will want to authenticate is to make use of a myriad of local and online services and to do that you have to follow a certain ID management standard. If you follow a certain ID management standard, your competing telecom can just do the same thing and you end up back to square one.

Conclusion

The future outlook for Singapore telecom as of now looks as if differentiation is a failure.

They fight on giving subsidies, freebies instead of lowering their prices
Their cloud solution does not seem to have become the strategic drivers people have hope for but perhaps its still early stage
They boost mediocre quality of service when I spoke to friends from different carriers
They all boost lackluster customer service with possibly M1 being better there.

In the end, failure to differentiate makes them a “data pipe”. You will likely go with the cheapest and best QOS pipe. In the end they become like power generation, high capex and regulated profits. They may still provide yields, though I don’t see the yield growing like Kingsmen, Boustead or Keppel.

If IDA or new entrants doesn’t force them I believe they will not under cut each other. Status Quo. If something like Free.fr starts happening here or IDA looks over at overseas markets and see the 3 of them not bringing down prices you can see ARPU hit.

The margins will depend on how well the 3 telecom can optimize their infra, capex versus providing adequate to good quality of service. At the moment Starhub looks to be doing this well. Maintaining the margins would mean maintaining the free cash flow.

I think we may see Starhub or M1 taking up the mobile payment route by applying for banking license. They may be merge with SPH because they have the same issues and could very well help each other or hug each other to cry.

As usual, I am not an expert in this field and would be interested to hear you guys opinion on this matter.

Do you guys see other opportunities or threats?

Look for dividend stocks with strong fundamentals–They are likely to outperform after a crisis

Drizzt — Sat, 14 Jan 2012 08:05:34 +0000

Lee King Fuei manages the Schroders’ Asian Equity Yield fund and focuses on dividend investing. Here are some of his insights gain from researching on dividend investing in the latest issue of The Edge:

When he realize that his cash rich companies paying out good dividends are underperforming, he carried out a research to see whether there is a paradigm shift so that Asian dividend investing doesn’t work any more. What he found out is that this strategy that focus on good quality companies doesn’t work that well during bubble built up. This may give a good indication towards a market top in the future.

Further example during the Asian Financial Crisis in late 1990s, high-dividend stocks underperformed in the months preceded.
This was the case before the dot com bust in 2000 as well.

In the aftermath of a crisis, high-dividend stocks tend to outperform for several years to which he attributes strongly to behavioral finance.
He believes currently the fund is heading towards another post-crisis outperformance.
Here is why he thinks investors should focus on dividends:

High Dividend Stocks in Asia are also relatively cheap now
Asia will grow more than US or Europe
Asian stocks offer the highest dividend yields other than Europe, which are under pressured
Currently an unusual case of high dividend yields but low opportunity costs due to importing low interest rates from US. He cites this is a once in a life time opportunity.
As corporate governance standards in Asia are generally weak, dividends are strong indicator of the underlying cash-generating strength of the company’s business.
King Fuei in his research identified that there is a positive correlation between dividend payouts and subsequent earnings growth.
When the company pays a strong dividend, it strongly signals that they know the cash flow subsequently can sustain it.

King Fuei differentiates dividend stocks into two category

Dividend Cows - Large companies, large market share, steady cash flows. Examples DiGi.com, Telstra Corp, Taiwan Mobile and Fortune REIT

Perform best during down markets
Safe Haven

Dividend Growers – A track record for paying dividends yet at the same time see growth in earnings. Dividend per share will grow. Examples Jardine Strategic and Jardine Matheson.

He likes stocks that deal with Asian consumption and properties. This is because as people get richer one of the things they will consume more is properties. He likes Swire Pacific and UOL Group.
He says that you need both Dividend Growers and Dividend Cows. The two complement each other to tide you through bull and bear markets.

That is certainly a good article I feel. I have a problem categorizing the stocks in my stock portfolio tracker, I really like his terms, perhaps I shall give my dividend stocks with different characteristics the same kind of categorization.

What do you guys think? How many dividend growers do you have and how many dividend cows do you have?

Keppel Corp:Lumpy Cash Dividend Rocks

Drizzt — Sun, 25 Dec 2011 03:31:39 +0000

We did an exercise recently on Noble Group to see how dividends, splits, rights and bonus shares affect certain stocks. By popular demand, I decide to profile one of Singapore biggest conglomerate Keppel Corp.

You can view all the factsheets on my Google Spreadsheet here [SGX Singapore Stocks Factsheet >>]

Keppel Corp Price 11 Years

Keppel Corp have been the favorite stocks for a lot of rich people or people aspiring to be rich. It is one of the more prominent stocks that people that do not look at the stock market everyday would come across.

Business wise, it is pretty diversified across ship building, repair and rig building, properties and oil and gas infrastructure. All of which is what have been driving the Singapore economy and what have been in demand for the past 10 years.

It is no surprise that the price movement of this blue chip stocks mirrors the general movement of the STI.

Speculators have been handsomely rewarded had you picked this up during the recession in 2001-2003 or 2009.

The most significant drop in 2007 was the result of a 2 for 1 stock split and factoring that, the low of 2009 should have been $8 instead of $4.

Keppel Corp’s uneven cash distributions

(Click to view larger image)

Had you held Keppel since 2001 you would have done pretty well despite going through 2 bull runs and a bear run.

Purchasing at a low of $3.26 would have yielded you an unrealized gain of 534.36% and total dividends of 202.73%.Annualized unrealized gain is 18% and dividend collected is 10%.

Not as spectacular as Noble’s 11 year price movement, but nevertheless I wouldn’t be sad about this investment at all. It has a good yield and capital growth.

One thing you would notice is that the distribution from Keppel can be very uneven. As a lot of their Rig building and property related business is very lumpy in profits, their dividend distribution ends up being lumpy.

This is why a lot of dividend hungry folks like me don’t go for stocks like this. However, as stated in the Noble’s article, what matters is the earnings growth and Keppel was powered by 2 very strong trends taking place from 2001-2011: Property and Oil & Gas. The return turned out to be much better than any REITs or dividend stocks that pays predictable returns.

Year	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
Profit	$565	$240	$300	$380	$410	$480	$460	$1380	$720	$780	$894
YOC	17%	7.3%	9.2%	11.6%	12.5%	14.7%	14.1%	42%	22%	23.9%	27%

If we tabulate the annual returns, there are only 2 lumpy periods (2001 and 2008). Else Keppel have been steadily raising their dividends every year. Your yield on cost have been climbing at a rate of roughly 6% per year.

What if you overbought it?

Now everyone would say that this is only a good investment if you bought it in deep recession. I think everyone would have been afraid now to hold a stock if they did not bought at the “right” price.

Ultimately what made Keppel a good company to me was this

Management rode the trend on 2 major trends
Their profits despite what the stock market did, continue to grow
The management is shareholder friendly in that they return increasing payouts at a sensible level to investors

Price is what you pay for value is what you get. If you pay the equivalent of $18 (there was a split in 2007) which is about todays price of $9, your returns in 11 years would still be 51%. The majority of the returns (36%) coming from dividends.

Make a copy of my spreadsheet and try this: change the original purchase price and see how much you would have to overpay in order for you to lose money in 11 years.

I did that, and turns out you need to buy Keppel Corp at $27 in order for you to start losing money.

Conclusion

I guess for me this exercise shows a few things

Your portfolio will benefit immensely by holding 1 to 2 stocks that benefit from future growth.
Do not always worry that dividends are lumpy. Worry more about future free cash flow projections based on cash flow growth. Estimate or project the likely dividend returns for the next 10 years.
Certain stocks are share holder friendly. The dividend return acts as protection against future management or business incompetence.

Buffet Tiered 3G Plan to be abolised

Drizzt — Sat, 24 Dec 2011 01:12:22 +0000

At Investment Moats, I talked about it pretty early that we may eventually follow the US in abolishing all-you-can-eat mobile data plan to one where you are charge based on your usage.

Do read these articles if you haven’t:

This week we finally got more information on how 4G plans is going to be in Singapore. For Singtel, they will be offering lower data cap in LTE plans. Eventually they will remove 3G all together.

First stage pricing: New 4G plan will bundle 10GB of LTE data along with existing 50GB of 3G data for an additional $10 on top of $59.90
Second stage: Upon the LTE roll-out reaching 80% of users by end 2012, 50GB 3G data cap will shrink for new subscribers of the plan and for existing subscribers on contract expiry.
Third stage: When LTE roll out reaches 95% by 1Q 2013, 3G data cap may be dropped altogether, leaving new subscribers with 10GB of LTE data.

Singtel said that 11% of users account for 60% of data traffic and tiered pricing is specifically to charge these group of users more so as to align to capital expenditure as these guys wear out the infrastructure more than the rest of us.

Overall, I see the 3 telcos all doing that. The take up will be slow since on average not many will see the upside of this. I wonder if their projected dates will come to fruitarian.

How it will affect telco profitability

Much will depend on the rollout

Higher subsidies for 4G handset will increase cost
Tiered pricing and no reduction in price plan will increase revenue
4G LTE ready infrastructure are more cost effective
Singapore have the world’s highest smartphone penetration rates

I see an upside for the telcos in 2012-2013 definitely.

The telcos’ crusade against virtually unlimited mobile data usage might soon be upon 3G shores. StarHub and SingTel are taking a good look at revising their 3G price plans, the two telcos told BT yesterday.

StarHub said that it may ‘review current (3G) pricing plans and consider introducing usage-based data pricing’, in response to BT’s queries.

This, it said, was ‘to ensure optimal network quality for our customers’. Currently, StarHub has three mobile broadband modem plans that offer unlimited data allowances. It also caps the local data usage bill at $30 a month for its mobile phone subscribers.

When it launches its own Long Term Evolution (LTE) – or 4G – network next year, it will not offer an unlimited data option, it said.

SingTel will be reviewing its 3G price plans, which include its mobile broadband plans that carry a data usage allowance of 50 gigabytes (GB).

This comes two days after it moved to start weaning high data-usage consumers off generous 3G data caps with a new 4G pricing structure.

By 2013, when 95 per cent of its users have access to the 4G network, new 4G data subscribers will have to make do with a 10GB cap on data, paying for the additional data that they use.

SingTel also revealed that 11 per cent of its 3G subscribers on dongles and tablets account for a staggering 60 per cent of data traffic.

‘It’s unsustainable and when you grow it, it becomes a challenge,’ said Yuen Kuan Moon, SingTel executive vice-president, digital consumer group.

StarHub and M1 did not reveal their own data figures, but industry observers believe the usage patterns are similar to SingTel’s.

M1 is staying tight- lipped on both its existing 3G price plans and approach to pricing LTE usage next year.

‘We regularly review all our service offerings to ensure they are compelling and competitive,’ its spokesman told BT.

It has the same narrow view of unlimited data usage, however. ‘Mobile network resources are limited, and the experience of the majority of customers should not be adversely affected by a minority of customers who regularly consume large amounts of data.’

While SingTel’s new 4G service currently applies only to dongle modems, StarHub’s review of its 3G price plan could apply across several devices – dongles, smartphones and tablets.

Analysts have pointed out for a while that the real battle for average revenue per user will be fought not over the dongle platform, but on smartphones and tablets, where increasing data usage is cannibalising lucrative voice calls and SMSes.

Starhub and Singtel results inline

Drizzt — Thu, 10 Nov 2011 23:56:29 +0000

Starhub and Singtel both announced their Q3 and Q2 results respectively the past 2 days. For folks that are new to Investment Moats, analysis on the Singapore Telecom Stocks have been some of the more popular articles. [Analysis here, here, here and here ]

I won’t run through most of the fundamental numbers because telecom stocks provides results that does not deviate much from forecasts. And perhaps that is why we like about them.

As a summary here are my key take away on the 2 telecom results.

Starhub

Profit was 7.6% lower while revenue was 3.6% higher
Debt on balance sheet is going down. Starhub have reduced debt since last year from 810 mil to 647 mil. This reduce their interest expense. Interest expense have always been low due to favorable interest rate Starhub enjoys. debt was a worry for people that don’t like Starhub, but to pay 647 mil, Starhub can pay it off with 1 year of their operating cash flow. This debt is a non issue and in fact looking to be the best among Singapore’s 3 telcos.
Free cash flow for this quarter was 150 mil versus 80mil last year. This is enormous. 9 months free cash flow is 430 mil. Remember for Starhub to pay their 20cent dividend they need 340 mil. This means that 3 quarters of cash flow can more than pay their full year dividend.
The main reason for better free cash flow is this years capital expenditure was substantially less. Capital expenditure is a double edge sword. If you spend on bad investments it is bad for share holders, if you don’t spend to replace or buy higher ROA assets, over a longer term it will be bad for Starhub competitively. Their capital expenditure is only 50% of their depreciation, will they lose their edge in the future?
The yearly debt payoff is 300 mil. If they pay off the remaining debt in 2 years, we could see a big jack-up in dividends. A jack-up to 30 cent dividend is not a demanding expectation. But probably won’t be for the next 2 years.

Singtel

Net profit was down 1.2%, Revenue was up 3.9%, EBITDA was flat. Various subsidiary telecom companies cancelling out each other. Boring.
Except for the Australian dollar, the other currencies are depreciating against the Sing dollar. This thus impacted the emerging market’s subsidiary telecoms.
Operating cash flow this quarter was down 15% from last year. The main reason is a lower dividend received from emerging market telcos.
Free cash flow was 900 mil. Unlike Starhub, depreciation almost equals capital expenditure. Singtel have always been growth focus and this done the right way is a good thing. However, in the past their investments have lower ROA then if they give back to share holders due to lower ROA then Singtel Singapore market. Remember that to pay out 16.8 cents dividend, Singtel needs around 2650 mil. They will be able to meet this with their cash flow.
Singtel will only at most pay out 70% of earnings as dividends and based on projection that will only be 2515 mil, which can only pay 15.8 cents dividend. Long story short, don’t expect dividends to increase soon.
Net debt is 6491 mil versus 4478 mil. Compare to Starhub, debt is climbing but still not a concern. Debt is good if it brings about good ROA. We are still not seeing it in their regional moves now.
Bharti is still a problem child at the moment. That is all.

Conclusion

Overall, I see Starhub a one up over Singtel. The prospect based on figures definitely look better. The only caveat is whether they are not making enough capex. I also see the prospect of Starhub raising dividends more likely then Singtel. Should my guess is right on the dividend paying capability, Starhub is a better buy right now.

Macquarie International Infrastructure Fund (MIIF) Q3 2011 and 9 month results: 8% yield locked in

Drizzt — Wed, 09 Nov 2011 22:57:29 +0000

We profiled Macquarie International Infrastructure Fund (MIIF) a while ago as an infrastructure based trust that provides a 8%-11% yield at current price of $0.49 to $0.50 cents. [Commentary here and here]

We are anticipating the quarter results since they have increased the stake in Taiwan Broadband Communications and we would like to see whether they can sustain their dividend yield or the dividend yield potential based on this increased stake.

Results of Q3 and 9 Mth 2011 are out [slides and report here]

Recap the premise we highlighted here in the first commentary:

The dividend guidance from MIIF is $0.055. That is 11.2% yield. To pay out that, MIIF needs 1297 mil outstanding shares x $0.055 = 71 mil.

Taiwan Broadcasting Corp (TBC) will contribute SGD 47 mil – SGD 49 mil per year. This is from its 47% share in TBC. Based on the original 20% stake in TBC, in FY 2010, TBC have loan amortization, TBC paid out 13 mil. In FY 2008, TBC have no loan amortization, TBC paid out 18 mil. Going forward, we know that TBC will not be paying loan amortization and that cash flow have risen 10% since then. This works out to 18 x 47.5/20 x 110% = 47 mil.

Hua Nan Expressway (HNE) will contribute SGD 20 mil per year. HNE have been struggling with a de-tolled expressway. Also in 2014 onwards, loan amortization will increase for HNE, any growth from 2014 onwards are likely to be eaten by the increase in loan amortization.

Changshu Port (CXP) will contribute SGD 5 mil per year.

Management Fees are estimated to come up to SGD 10 mil per year.

Estimated Safe Dividend Potential: 47 + 20 + 5 – 10 = 62 mil. This is equivalent to $0.048 cents. At current price, the yield is 9.6%

Taiwan Broadband Communication (TBC)

By far the largest portion of MIIF portfolio now accounting for 51% of profit. EBITDA was 6.3% higher to last year.

Market leading broadband and digital TV services driving significant increases in multi-product sales. Digital TV is a key next growth phase. Currently it represents only 10.7% of total cable TV, and management thinks that substantial growth opportunities via successful up-selling of digital TV products to basic cable TV subscribers exist.

Net adds across all sectors are slowing. We have to watch whether that becomes a trend. Doesn’t mean a big problem but it might mean churning and what the management promise a conversion to digital may not take place.

EBITDA margin is getting stronger.

Projected FY 2012 Cash Flow contribution to MIIF dividend payment

Year to date, MIIF received a total distribution of 29 mil.

This constitute a payment of 10 mil in March 2011 and 19 mil in September 2011.

We note that the purchases of TBC by MIIF is broken down in this way

Total cost of purchase is S$479 mil.
Initial acquisition of S$161 mil in Jul 2007. (33.6%)
Acquisition of S$174 mil in March 2011. (36%)
Securities issue consideration of S$143 mil in June 2011. (30%)

The 10 mil is made up of solely (2).

The 19 mil is made up of (2) and (3) plus 50% of (4).

Should profitability stay the same,

Half year payout in March 2012 should be = 19 mil x [1 / (33.6%+36%+15%)] = 22mil

The estimated cash flow from TBC for FY2012 will be = 22 mil x 2 = 44 mil.

Another computation is = 10 mil x [47% stake/ 20% stake] x 2 = 47 mil.

Based on 44 mil we have a shortfall to meeting my estimates highlighted in the previous report of 47 mil but it is a close enough estimate.

Withholding tax issue

There is an additional caveat. TBC received an assessment from the Taiwan tax authority claiming additional withholding tax on shareholder loan interest paid by TBC to its parent entity for the years 2006 to 2009

How substantial is this? I am still in the midst of trying to find out. But take a look at how in the report this is worded:

Management is of the view that no additional withholding tax is due as TBC has been fully compliant with all applicable rules and legislation and that it has documentary evidence to support the treatment it has adopted Based on the documentation submitted to the Taiwan tax authority, management is confident that TBC has been fully compliant with all applicable rules and legislation in relation to TBC’s withholding tax payments to date. TBC continues to work actively with the Taiwan tax authority to achieve a resolution of this matter

So they are replacing that they feel they are compliant to that a report submitted they feel confident that they meet the rules. We hope that this do not become a potential land mine.

Hua Nan Expressway (HNE)

Total vehicle volumes were lower by 9.5% due to the reduction in non-passenger vehicles which collectively was down 21.3% pcp. This is the result of lower manufacturing activity in the region and lack of buildup due to the Asian Games.

In addition the detolling of Xinguang Expressway contributed to a 5.9% decline in passenger vehicles.

Management is expecting to see lower manufacturing and commercial activity but will be offset by the opening of Guanghe Expressway in late 2011 and increase in vehicle ownership.

The reduction looks abit crazy coupled with escalating expenses.

Projected FY 2012 Cash Flow contribution to MIIF dividend payment

Hua Nan distributes once per year in September and for the past year it distributed S$ 22 mil.

We estimate a conservative 10% fall in contribution due to lower economic outlook. The FY2012 estimate cash flow contribution will thus be S$20 mil, which is inline with our estimates above.

Changshu Xinghua Port (CXP)

Revenues were higher due to higher cargo volumes which were attributed to a large increase in steel and log handled. Apparently management did quite a lot of marketing on logging.

However expenses were higher as well cause by higher sub-contractor costs, equipment rental due to increase in log volume. EBITDA margins grew as well.

Management sees the port benefiting from international steel trade and they are looking to diversify cargo types. However operating cost becomes an issue.

Projected FY 2012 Cash Flow contribution to MIIF dividend payment

CXP pay once per year in September as well. We estimate that the growth and cost cancel each other and that revenue should stay stagnant.

Thus for FY2012 the estimated contribution should be S$ 5.3 mil, which is inline with our estimates above.

Management Fees

There is a substantial increase of management fees. As management fees is calculated based on [Mkt Cap – Cash] x 1.5%, an investment in TBC causes a reduction in cash and increases management fees for the quarter from 0.9 mil to 1.9 mil

We estimate that for FY 2012, this amount will be 1.9 mil x 4 = 7.6 mil.

This figure will go down if the share buy back increases. This figure will go down if the share price of MIIF falls and go up if MIIF share price increases.

Estimated FY2012 Dividend Potential

Based on the results of these major contributors we estimate that for FY2012 the cash flow generated that MIIF can pay out as dividend = $44 mil + $20 mil + $5.3 mil – $7.6 mil – $3 mil (other costs) = S$ 58.7 mil

After numerous share buy back the current outstanding number of shares is 1254 mil.

This translates to a DPU of $0.047. At current share price of $0.50, the yield potential is 9.4%.

We are not far off from the estimation.

What is of note is that TBC, which is the main GEM here contributes $0.035 to the overall DPU which in itself translates to a nice yield of 7% based on current share price. This is equivalent to the highest yielding telco on SGX which is Starhub.

The caveat is that there are many other cost that I still have to make sense of. The gem in this investment is your forecast of TBC as well as how affected HNE and CXP is to a downturn in China.

The guidance is for a dividend payout of S$0.055 which I honestly think is a high figure compare to my $0.047 cents estimation. They need nearly 69 mil for that. If they do note pay management fees they could probably hit that.

I would rather buy this slowly based on my estimation. But secretly I am wondering what else I have not factor into my computation.

China Merchant Pacific (CMHP): Dividend yield on track

Drizzt — Sun, 06 Nov 2011 03:56:41 +0000

We profiled and introduce SGX listed chinese toll road operator China Merchant Pacific (CMHP) recently stating that this could become a good dividend income stock. [Analysis >>]

This week its Q3 2011 report was out. Specifically, they had a major acquisition and so we have speculated that it can pay out a good 8-9% dividend income annually on a 50-60% net profit payout.

[SGX Q3 2011 Results >>]

CMHP pay out SGD 0.045 in 2011 and at current share price of SGD 0.60 that works out to a 7.5% yield. The guidance for 2012 onwards is to pay out SGD 0.055 which comes up to a 9.1% yield on 50-60% payout.

Profit Composition Analysis

We have the maiden contribution from Yongtaiwen expressway (51% owned by CMHP)

In an additional information summary, CMHP showed the figures for its underlying assets.

Traffic was up for all 4 toll roads QOQ and YOY.
The greatest traffic growth being Guihuang and Yuyao.

Here is the profit contribution break down by toll roads

Yuyao although there are traffic growth but profit was down 15% due to higher direct expenses.
You can see how important Guihuang was to CMHP as it is this toll road that provides the biggest profit contribution. It should be noted that currently CMHP receives 100% of Guihuang’s profit contribution which will revert to its 60% share of the joint entity in 2014. We want to see this continue to grow as after 2014 we should see profit of Guihuang go down by 40%.
The maiden contribution from Yongtaiwen was inline and gives CMHP a huge income boost. Yongtaiwen have thus become CMHP’s most important profit contributor.
2010 profits was boosted by the disposal of Luomei expressway to the tune of HKD 40 mil. Without this, this years result will see a more significant improvement from 2010.

Question: How much have Guiliu and Guihuang grown since 2004? What is the expected growth rate of Yongtaiwen?

The thing about toll roads is that they grow as the population, affluence and trade between inter joining places increase. We have seen substantial growth in both Guiliu and Guihuang.

The annualized growth rate for Guiliu and Guihuang’s traffic since 2004 was 7%. Do I expect it to continue growing? It depends. There is only this much traffic the roads will be able to take and at some point growth has to taper off.

But the surprising thing is that Guihuang is on track to grow massively this year on estimation from 3 quarters.

In comparison, Yongtaiwen’s traffic does not seem to change much since 2010. I suspect CMHP bought into a very mature toll road that have already grown quite a fair bit.

Question: How will full year 2011 profit contribution from toll roads look?

We use a 7% annualized growth rate for both Guiliu and Guihuang and a conservative 2% annualized growth rate for Yongtaiwen.

Since Yongtaiwen will only contribute 2 quarters, the estimated total profit contribution for 2011 will be 94+175+146 + 22 (Yuyao not on table above) = 437 mil

Question: How will full year 2012 profit contribution from toll roads look?

With a full year of contribution from Yongtaiwen with the same annualized growth rate, the estimated total profit contribution will be 100 + 187 + 297 + 20 (Yuyao not on table above) = 604 mil

Question: How will full year 2015 profit contribution from toll roads look?

In 2015, Guihuang will contribute 60% instead of 100%. We do expect that perhaps, Yuyao will be sold. There could be further acquisitions to augment the earnings.

But lets assume Yuyao is still around but declining at 10% per year.

The total profit contribution from toll roads will be 122 + 137 + 315 + 14 = 588 mil

Possible dilution

The current outstanding number of shares is 718 mil. CMHP additionally have 135 mil redeemable convertible preference shares (RCPS).

Should these be converted it may mean a possible 19% share dilution. How this will impact current share holders is that current share of earnings and dividends will be diluted.

CMHP is likely to convert in the future should they need to free up cash to make further acquisitions.

The total enlarged (diluted) number of shares is therefore 854 mil.

Interest Expense

CMHP was previously unleveraged, but with the purchase of Yongtaiwen they will be taking on HKD 1.4 bil in debt.

I enquired and got wind that the likely interest rate for the debt will be around 3%-4%.

This will work out to an annual interest expense of 1400 * 0.04 = 56 mil per year.

Dividend Sustainability

In the past CMHP have paid out 4 amounts of dividends, SGD 0.04, 0.045, 0.05, 0.055. The guidance is SGD 0.055 for next year.

Based on existing number of shares of 718 mil, to pay out these dividends, CMPacific will need at least

0.04: 176 mil (current yield based on SGD 0.60): 6.66%
0.045: 198 mil (7.5%)
0.05: 220 mil (8.3%)
0.055: 242 mil (9.1%)

Should we estimate based on dilution, where all RCPS be converted, CMHP will need at least

0.04: 209 mil
0.045: 235 mil
0.05: 261 mil
0.055: 287 mil

All other things being equal, we are concern about 3 different profitability period, FY2011, FY2012 and FY2015.

Taking our previous profit from toll roads contribution above deducting interest expense from debt servicing

FY2011: 437 – 56 = 381 mil
FY2012: 604 – 56 = 548 mil
FY2015: 588 – 56 = 532 mil

Safe to say whether it is diluted or not diluted, CMHP will be able to pay out any of those dividends. The question is how much will be paid out.

We know that CMHP do not pay out 100% as dividends. I am supportive of this policy if

Cash is used to make accretive acquisition
Cash is used to pay down debt
Capital Replacement. Do note that toll roads have a concession and are thus self-liquidating assets so you have to build up capital to buy more toll roads or renew existing toll roads

Based on undiluted number of shares (718 mil), the earnings yield is

FY2011: 381 mil / (718 * 0.60 * 6.13) = 14%
FY2012: 548 mil / (718 * 0.60 * 6.13) = 20%
FY2015: 532 mil / (718 * 0.60 * 6.13) = 20%

Diluted number of shares (854 mil), should CMHP convert the shares tomorrow at SGD0.60, the earnings yield is

FY2011: 381 mil / (854 * 0.60 * 6.13) = 12%
FY2012: 548 mil / (854 * 0.60 * 6.13) = 17.4%
FY2015: 532 mil / (854 * 0.60 * 6.13) = 16.9%

If we estimate that CMHP pays out 55% of their earnings and keep 45% as retained earnings, CMHP will be able to pay out

FY2011: 381 mil * 55% = 209 mil
FY2012: 548 mil * 55% = 301 mil
FY2015: 532 mil * 55% = 292 mil

We can conclude that all assumptions taken into consideration, CMHP can probably cover

FY2011: undiluted dividend of SGD 0.045 and diluted dividend of SGD 0.04
FY2012: undiluted dividend of SGD 0.055 and diluted dividend of SGD 0.055
FY2015: undiluted dividend of SGD 0.055 and diluted dividend of SGD 0.055

That works out to a pretty good 7.5% yield for FY2011 and anywhere between a 9.1% yield for FY2012 and FY2015 should you buy it now at SGD 0.60.As usual the devil is in the detail. The assumptions are:

Guiliu and Guihuang no impairment. Annualized growth rate at 7%
Yongtaiwen no impairment. Annualized growth rate at 2%
Yuyao not sold. Annualized growth rate at –10%
No acquistions

Servicing the HKD 1.4 bil of debt

Some how or rather, the debts on the balance sheet will need to be cleared.

Assuming FY2012 CMHP retained 45% of profits, CMHP will be able to use 246 mil to clear its debt.

That would mean they can clear the debt in 5.6 years.

Alternatively, should share price trade above NAV, they can choose to do a rights issue to convert the debt to equity.

Debt on underlying toll roads

A worry from my past experience with MIIF is that the underlying assets are heavily funded by debt and could be a problem during periods where refinance is an issue.

For CMHP, only the recent acquisition have debts. The other 3 do not. The current profile is that Yongtaiwen have 500 mil in cash and 1.7 bil in interest bearing debt.

Based on the interest expense, we estimate the interest rate to be around 5.8%

Since there is depreciation accounted under Yongtaiwen, it is safe to say that this depreciation can be used to pay down the debts.

The profit we compute should be net of this depreciation and based on the third quarter reported Amortization of intangible assets, this amounts to a full year depreciation of possibly 62 mil * 4 = 248 mil.

To clear the net debt of 1.2 bil, Yongtaiwen could probably take 4.8 years to clear it.

Conclusion

All in all we are pretty satisfied with this results. I wouldn’t say this is a solid yield stock but toll roads are pretty defensive. It is even better if its not very levered and we can see the underlying assets have the ability to pay down debts.

A 55% payout is good for a company with many self-liquidating assets. It allows for rejuvenation provided the 45% retained is put into good use.

The caveat is always the growth or impairment of the underlying assets. We have to be aware that like all infrastructures there run the risk of major natural disaster catastrophe.

This asset in the long run I am expecting it to yield like First REIT which is around the 8% to 9% region. It has the same geographical risks yet with a defensiveness during recession.

Currently invested with a small position, but I was hoping to collect it cheaper but it didn’t even drop back to the SGD 0.46 level. I have a feeling that it will trend back to NAV of SGD 0.80.

The future growth comes with more acquisition and the caveat is to monitor to see if the assets are quality and not an asset dumping exercise from parent CMH.

Quick Take on HPH Trust: Analysts touting 9% yield

Drizzt — Fri, 28 Oct 2011 23:18:15 +0000

We did an article some time back on HPH Trust. [Analysis here >>] Since then the price went down to a low of 59 cents and came back up at 68 cents. Why is this stock continue to be weak? Analyst are still thinking that there is a good risk versus reward for this.

The general consensus during IPO was that HPH will grow 8.5% in 2011 and 8.4 in 2012. Turns out instead of growing based on GDP growth, volume have fell 4.6% instead.
DMG Analyst think that the port assets owned by HPH are relatively mature and unlikely to deliver much more than single digit growth even if economic situation improve.
CITI Analyst says the original estimate DPU was 5.9 US cents (45.88 HK cents) for 2011 and 6.59 US Cents (51.24 HK cents) for 2012 could be in jeopardy. He estimate that it may be 34 HK cents and 45 HK cents instead.
CITI Analyst thinks HPH relatively expensive at 20 times earnings versus Cosco Pacific and China Merchant International Holdings.
Analyst have indicated that the problem for HPH is that volume and export slowdown cannot be anticipated easily.
Several trustee manager believe that the stock price have factor in a lot of the bad news.
Analyst think that the support is at 60 US cents. They are forecasting DPU of 5.5 US cents for 2011 and 5.9 US cents for 2012. That’s 8% and 8.6% yield based on share price of 68 US cents.

An Eternal Income Portfolio just like a Living Bridge

Drizzt — Sat, 22 Oct 2011 01:23:40 +0000

I came across this very interesting post that introduce us to a Living Bridge. A living bridge is one built from the roots of a tree trained to grow across a small river and take root on the opposite bank.

What happens is that you have a bridge that is very sturdy that strengthens itself naturally. Some of these construction is even double decker. This bridge will serve the people and the people’s children and the people’s children children.

To do that, every one ( you, your children and children’s children) will have to be taught how to maintain and create the bridge.

This is somewhat synonymous with what you want to do when you go about creating an income portfolio. A well structured portfolio not only will serve you, but perhaps provide a good income to your children with your passing.

This is no joke as it means that the compounding takes place over a long period.

But in order for this to happen you have to

Learn and create a good portfolio
Teach your offspring how to manage money well
Ensure they subscribe to the benefits of delay gratification and maintaining such a portfolio
Mandate this legacy

I don’t think I can explain it as well as the article here. Do read it.