M1 – DBSV

23 July 2014
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Declining handset subsidies

  • 2Q14 net profit of S$43.9m (+12.1% y-o-y, +2.5% q-o-q) was 4-5% ahead our estimates. Declared interim DPS of 7Scts (+2.9% y-o-y) or 75% payout ratio
  • Postpaid acquisition costs declined sharply, partly offset by a drop in International Call Service (IDD) revenue.
  • BUY with TP of S$3.85 for mid single-digit growth and 4.6% yield

Highlights

Cost reduction offset weak IDD revenue. Postpaid acquisition cost per subscriber declined sharply to S$268 (-19% y-o-y, -13% q-o-q). It was partly offset by a drop in IDD revenue to S$23.7m (-20% y-o-y, -1% q-o-q).

Tiered data plan seeing fast adoption. About 58%of postpaid subscribers (54% in 1Q14) adopted the tiered data plan, with 20% (16%) exceeding their caps. M1 expects adoption of tiered plans to stabilise at around 65%.

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SATS – OCBC

23 July 2014
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Uninspiring 1QFY15 results

  • 1QFY15 results below forecasts
  • Focus on creating operating leverage
  • Maintain HOLD

 

1QFY15 results below expectations

SATS’s 1QFY15 results came in below our expectations. Revenue increased 0.2% YoY to S$434.5m, or 6.4% below our forecast. Food Solutions revenue dropped by 0.9% to S$262.7m due to weaker performance from subsidiary TFK. The drop is smaller compared to the previous quarter’s 5.7% as the effect of Quantas’ move to Dubai from Changi Airport is absent in the current quarter’s YoY comparison. Gateway Services revenue increased by 2.0% to S$171.2m, which we deem to be largely in line with the 2.5% growth in flights handled in Singapore. Despite top line growth, PATMI dropped 6.3% YoY to S$43.3m, which is 4.6% below our estimate. This is due to: 1) lower operating margin (-0.3ppt to 9.1% in 1QFY15) mainly caused by higher staff costs, and 2) lower contributions from associates and JVs (-16.8% YoY to S$10.4m in 1QFY15) on the back of muted Asian cargo volumes.

Creating operating leverage is multi-year process

Management guided that headcount reduction will continue as processes are made more efficient. Capex spending is rising (S$14.2m in 1QFY15 vs. S$12.8m in 1QFY14) and will stay elevated. Additionally, airlines at existing Changi Airport terminals are still switching to self-check-in processes, eventually reducing the need for staff. With regional airlines struggling, we think the cost-saving switch will come in the foreseeable future. We note that initiatives to create operating leverage are multi-year processes which involve clients as well. Thus, we are not too worried about the current fall in operating margin.

M&A to tap on regional air traffic growth

Management said they are on the lookout for M&A opportunities to grow inorganically. SATS is well-poised to do so with a healthy net cash balance of S$270m and interest coverage ratio of 99x as of Jun-14. This is likely a key source of overseas growth going forward, to enjoy economies of scale in a capital intensive business. Incorporating the latest results and retaining a 20x FY15F PER, we derive a lower TP of S$3.20 (previous: S$3.23). Maintain HOLD.

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