SGX Yield Stocks

All engines firing

• Good start with 1Q12 net profit of S$134.4m (+ 21% yo-y) beating our estimates

• Strong order win momentum in FY12 implies record orderbook levels of close to S$13bn

• Healthy operating cash flows secures dividend outlook

• Maintain BUY and S$3.40 TP

Highlights

Good start to the year. STE reported better-than-expected 1Q12 results, with net profit up 21% y-o-y to S$134.4m on the back of flattish revenues. 1Q12 earnings account for close to 24% of our FY12F, higher than the historical range of 19-22%, as 1Q is generally a seasonally slower quarter for STE. However, we prefer to be conservative and our earnings estimates are unchanged for FY12.

Aerospace and Electronics were the key revenue drivers in 1Q12, as Land Systems revenue declined with the completion of the UK Warthog programme in 1H2011. Gross margins improved across all key segments. While the company had to incur S$7.1m additional SG&A expenses for the Singapore Airshow in 1Q12, this was more than offset by associate contribution of about S$10.8m from Experia, the event organizer of the Singapore Airshow. Operating cash flow in 1Q12 was exceptionally strong at S$546m, due to advance payments/ deposits on newly secured contracts.

Our View

Record orderbooks provide healthy earnings visibility. STE has had a string of major contract wins YTD, including an S$880m contract from the Royal Navy of Oman, contract for building 2 AHTS vessels for Swire Pacific, and a PTF conversion order for 15 B757-200s, among others. Total announced new orders exceed S$1.9bn already in FY12, compared to about S$3.2bn order wins announced in full-year FY11. This brings the outstanding orderbook to an estimated record level of ~S$13bn.

Recommendation

Maintain BUY. Given the recent spate of contracts and attempts at revving up some inorganic growth engines, STE’s growth trajectory seems to be on track. STE looks set to make bigger strides in the Electronics and Land Systems sectors, and has recently teamed with US-based Fortune-500 company Science Applications International Corporation (SAIC) to bid for the US Marine Personnel Carrier program in future. Given the healthy earnings visibility, strong balance sheet and attractive dividend yield of over 5.5%, we maintain our BUY call on the stock with an unchanged TP of S$3.40.

Associates to grow after two year hiatus

• FY12 core earnings of S$3676m (-3.3% y-o-y) in line with earnings drop due to 41% decline in Bharti’s contribution.

• Final DPS of 9 Scts (including interim DPS of 6.8 Scts) translates to 68% payout ratio and 5% yield; Singtel likely to see high single-digit growth in FY13F.

• Buy for attractive valuation (12.5x PE versus 13.2x hist. avg.), decent growth (FY12-14F EPS CAGR of 5%) and yield (5.6% based on 70% payout ratio).

Highlights

Stable Singapore EBITDA guidance due to start-up losses at Digital Life segment. FY12 EBITDA was stable at S$2.24bn (-0.5% y-o-y) despite 2.3% growth in revenues due to higher mobile connections and costs of acquiring triple play customers. Management guided for low-single digit revenue growth but stable EBITDA on the back of start-up losses at Digital Life. Capex to rise 5% to S$950m due to network enhancements and expansion of Kim Chuan Data Centre.

Stable Optus EBITDA guidance, keeping in mind lower mobile termination rates. FY12 EBITDA was up 1% to A$2357m on the back of a 0.9% growth in revenues. Guidance of low single-digit revenue growth but stable EBITDA due to lower mobile termination rate of 6 cents (prev 9 cents), from January 2012. Staff reduction to help contain costs. Capex to decline 8% to A$1.1bn due to more site-sharing with VHA.

Associates likely to grow 20% in FY13F after two years of decline. FY12 post-tax earnings contribution dropped 12% to S$1414m as Bharti’s 41% decline offset 5% & 31% growth at Telkomsel & AIS respectively. We expect associates to register 20% growth in FY13F on the back of Bharti’s 50% growth (consensus projects 75% growth) and growth at other associates. Bharti’s weakness was due to 3G amortisation costs and paper loss on foreign debt due to weak Indian rupee. Going forward Bharti should register strong growth on a low earnings base as amortization costs are already factored and EBITDA is improving in both India and Africa. Strong SGD is a key risk though.

Lacking Catalysts

Within expectations. FY12 results and dividends were in line with market expectations. FY13 looks set to be a repeat of FY12, but with the additional dampener of start-up losses from its new Digital L!fe division to contend with. Guidance was subdued, with no catalysts to drive either growth or yield. We maintain our SELL call, with a SOTP-derived target price of $2.82. The dividend yield of 4-5% is not attractive when compared to M1 or StarHub’s better yields and higher potential for earnings upside.

Nothing much to shout about. Underlying net profit of SGD3,676m (down 3% YoY) for FY12 and SGD1,023m (up 3% YoY) for 4Q12 were in line with expectations as 4Q12 benefited from seasonally lower operating costs. However, free cashflow declined YoY to SGD3.5b on the back of lower dividend contributions from associates and higher capex in Singapore and Australia. As a result, final dividend was kept at SGD0.09 a share (68% full year payout).

Subdued guidance. FY13 guidance was subdued, with Singapore and Australia revenue to grow in the low single digits and EBITDA to remain stable. Management expects margins to stay under pressure this year as the Digital L!fe division will still be in start-up stage. Australia is preoccupied with fend off competitors willing to sacrifice margins for market share, while in Singapore, TV content cost could be a source of downside to earnings as the Barclay’s Premier League and other “iconic” content comes up for bidding. The current slide in the Indian rupee could also turn into a longer-lived trend.

No upside for dividends. Also, with free cashflow expected to remain stagnant and SingTel already paying out 83% of free cashflow as dividends, there is unlikely to be further upside to dividends. Further, capex is expected to rise further this year on the back of heavy investments in expansion of 4G network coverage and new investments in data centers to support new business initiatives, such as a new cloud computing service targeted at SMEs.

SBS Transit Q1 profit falls 59%

SBS Transit on Friday reported a 59.2 per cent decrease in year on year net earnings to $$4.84 million for the first quarter ended March 31, 2012.

Revenue increase of 4 per cent year on year to $191.28 million was insufficient to offset the 9.3 per cent increase in operating expenses.

Bus Operations incurred an operating loss of $3.7 million as compared to an operating profit of $0.5 million a year ago due mainly to higher fuel cost, higher depreciation, higher staff costs and higher repairs and maintenance costs, offset by higher bus fare revenue.

Revenue from rail operations for 1Q12 at $34.2 million was higher by 5.3 per cent compared to 1Q11 due to the increase in average daily ridership, offset by the decrease in average fare.

Off to a Strong Start

Strong profit growth. ST Engineering (STE) reported a strong set of 1Q2012 results, with Net Profit of SGD 134.4 mil reflecting an increase of 21% YoY. These results were broadly within our FY2012 expectations – we will be maintaining our forecasts and BUY recommendation based on STE’s historical P/E mean of 19x. STE’s growing orderbook, contributed by all four business segments this quarter will continue to provide earnings visibility and resilience amidst the backdrop of global economic uncertainty.

Boosted by healthier margins across the board. Although 1Q2012 revenue came in almost flat YoY, healthier net margins of 8.7% versus 1Q2011 margins of 7.1% boosted profits. Encouragingly, all four business segments posted improved margins, led by ST Marine which benefited from a favourable sales mix.

Strong cashflow. Another highlight of STE’s 1Q2012 financial performance was its strong operating cashflow at SGD 547 mil, which contributed to an improvement of its net cash position to SGD 565 mil from SGD 2.2 mil, and providing support for our forecasted FY2012 DPS of SGD 0.17 (increase of 10% vs FY2011).

Outlook positive. Management forecasts a positive outlook for three of its four business segments. Its Aerospace, Electronics and Marine sectors are expected to record higher PBTs in 1H2012 vs 1H2011. Only its Land Systems segment is expected to show comparable profit.

Solid business fundamentals – Maintain Buy. STE has a solid business model underpinned by defence contracts (40% of 1Q2012 revenue), with earnings visibility continually provided by its growing orderbook. Its business segments continue to show positive macro trends to support growth and provide a basis for earnings resilience. We reiterate our BUY recommendation for STE pegged at 19x FY12 PER, based on its 10-year historical PER mean.