This is an update of my prior article on SmarTone published on February 29, 2020. SmarTone’s share price has decreased by -28% from HK$5.87 as of February 27, 2020, to HK$4.21 as of October 12, 2020, since my last update. SmarTone trades at 2.2 times consensus forward next twelve months EV/EBITDA, and it offers a consensus forward FY 2021 (YE Jun) dividend yield of 5.9%.
SmarTone’s underlying net profit attributable to shareholders was down -24% YoY in 1H 2020 due to a fall in roaming revenue, and market consensus expects its dividends to decline YoY in both FY 2021 and FY 2022. On the other hand, 5G remains the key growth driver for SmarTone in the medium term, with expectations of higher mobile ARPUs and new revenue streams. Taking into consideration the above-mentioned factors, I maintain my Neutral rating on SmarTone.
Readers have the option of trading in SmarTone shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers STTFY and STTFF, or on the Hong Kong Stock Exchange with the ticker 315:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.
For those shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Hong Kong Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $400,000, and market capitalization is above $600 million, which is comparable to the majority of stocks traded on the US stock exchanges.
Institutional investors which own SmarTone shares listed in Hong Kong include The Vanguard Group, Dimensional Fund Advisors, BlackRock, and J O Hambro Capital Management, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers or Fidelity, or international brokers with Asian coverage like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.
FY 2020 Results Disappoint Due To Fall In Roaming Revenue
SmarTone announced the company’s 1H 2020 financial results on September 2, 2020, and its financial performance was poor but slightly better than what it guided in its earlier profit warning. SmarTone’s underlying net profit attributable to shareholders, excluding an one-off impairment loss on the network assets for its Macau business, fell by -24% YoY from HK$581 million in FY 2019 to HK$440 million in FY 2020. In the company’s profit warning issued on April 29, 2020, SmarTone had expected a much larger -30% YoY drop in its net profit attributable to shareholders.
SmarTone’s mobile service revenue, excluding volatile handset sales, declined by -3% YoY from HK$4,634 million in FY 2019 to HK$4,509 million in FY 2020 (adjusted for effects of the new Hong Kong Financial Reporting Standard 16 or HKFRS16 to be comparable on a like-for-like basis), mainly due to a -25% YoY fall in roaming revenue. The drop in roaming revenue is no surprise, as international travel restrictions imposed due to COVID-19 had led to a sharp fall in tourist arrivals in Hong Kong.
The company’s mobile post-paid ARPU (Average Revenue Per User) also decreased by -6% YoY from HK$224 per month in FY 2019 to HK$210 per month in FY 2020, as roaming is a high-margin business segment, which means that lower roaming revenue translates to lower ARPU. Due to the negative effects of operating leverage and the lower revenue contribution from the high-margin roaming business, SmarTone’s EBITDA (also adjusted for the effects of HKFRS16) fell by an even larger -9% YoY from HK$1,793 million in FY 2019 to HK$1,626 million in FY 2020.
In addition, the enterprise business boasts lower profitability vis-a-vis the roaming business. In its 1H 2020 results announcement, SmarTone disclosed that the “enterprise business (including enterprise solutions) has seen strong growth” in the first half of the year. But SmarTone acknowledged at the company’s 1H 2020 earnings call on September 2, 2020, that “enterprise solutions is not a very high-margin business” with profit margins in the 10%-20% range.
FY 2021 Outlook Dependent On Roaming Revenue Recovery
Sell-side analysts see SmarTone’s EBITDA declining -5% YoY to HK$2,300 million in FY 2021, and its underlying net profit attributable to shareholders remaining flat YoY at HK$379 million this year. The key swing factor for SmarTone’s FY 2021 earnings is the extent of recovery in roaming revenue, which in turn is dependent on the easing of international travel restrictions put in place due to COVID-19.
SmarTone stressed at its 1H 2020 results briefing on September 2, 2020, that “it is pretty hard to tell what happens on the roaming side”, but the company did note that it expects overall revenue growth for FY 2021 “to be steady” without providing “exact guidance.” Market consensus expects SmarTone’s revenue to increase by +1.3% YoY from HK$6,986 million in FY 2020 to HK$7,075 million in FY 2021.
5G Remains Key Medium-Term Growth Driver
Looking beyond COVID-19 headwinds, 5G remains the key growth driver for SmarTone in the medium term.
For SmarTone’s core mobile services business, an increase in the 5G take-up rate in Hong Kong over time should lead to gradual growth in mobile ARPUs going forward. The launch of iPhone 12 with 5G connectivity could potentially be one of the catalysts that drives a significant increase in 5G penetration rate in Hong Kong.
Separately, 5G also leads to new revenue streams for SmarTone. One example is that SmarTone has plans to launch a new 5G home broadband service, which is expected to cost HK$148 per month as compared to average monthly fees for existing fixed line broadband services that could be in excess of HK$500 per month. SmarTone’s new 5G home broadband service will target potential customers living in areas where there is either no fiber access or competing broadband services are very costly.
Valuation And Dividends
SmarTone trades at 3.2 times trailing twelve months EV/EBITDA and 2.2 times consensus forward next twelve months EV/EBITDA based on its share price of HK$4.21 as of October 12, 2020. As a comparison, the stock’s five-year and 10-year mean consensus forward EV/EBITDA multiples were 4.5 times and 4.4 times, respectively. SmarTone is also valued by the market at consensus forward next twelve months’ EV/EBIT and P/E multiples of 9.6 times and 12.7 times, respectively.
SmarTone offers consensus forward FY 2021 (YE Jun) and FY 2022 dividend yields of 5.9% and 5.1%, respectively. The company declared a final dividend per share of HK$0.150, which brought full-year FY 2020 dividends per share to HK$0.295. This represents a -24% YoY decline in absolute terms as compared to FY 2019 dividends per share of HK$0.390, and a dividend payout ratio of 75% for FY 2020 (same as that for FY 2019). Market consensus expects SmarTone’s full-year dividends per share to further decline to HK$0.250 and HK$0.215 for FY 2021 and FY 2022, respectively.
It is noteworthy that SmarTone repurchased 3.07 million shares or 0.27% of the company’s outstanding shares in September 2020 at an average share price of HK$4.20.
SmarTone is cheaper than most of its Hong Kong telecommunications peers on forward earnings multiples, as per the peer comparison table. On the flip side, SmarTone’s forward dividend yields are less attractive.
Peer Valuation Comparison For SmarTone
Consensus Forward Next Twelve Months’ EV/EBITDA
Consensus Forward Next Twelve Months’ EV/EBIT
Consensus Forward Next Twelve Months’ P/E
|Consensus Current Year Dividend Yield||Consensus Forward One-Year Dividend Yield|
|HKT Trust and HKT Limited (OTCPK:HKTTY) (OTCPK:HKTTF) [6823:HK]||9.2||15.7||15.1||6.9%||7.2%|
|HKBN Group Limited (OTC:HKBNF) (OTC:HKBNY) [1310:HK].||11.5||22.7||30.0||5.3%||6.5%|
|Hutchison Telecommunications Hong Kong Holdings Ltd (OTCPK:HTHKY) (OTCPK:HTCTF) (OTCPK:HUTCY) [215:HK]||0.45||2.7||19.9||3.4%||2.7%|
The key risk factors for SmarTone include a larger-than-expected cut in future dividends, lower-than-expected ARPUs in the new 5G era, and a longer-than-expected time for the company’s roaming revenue to recover to normalized levels prior to COVID-19.
Note that readers who choose to trade in SmarTone shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.