Month: November 2009
SingTel – AmFraser
Stronger S$ to mute overseas earnings growth in 1HFY10
• We expect SingTel Ltd’s (SingTel) upcoming 2QFY10 (YE March) and 1HFY10 results to be muted by the strength of the Singapore dollar (S$) against most regional currencies.
• Telco earnings from overseas made up 64% of SingTel’s 1HFY09’s net profit of S$1.75bil. Significant contributors are wholly-owned Optus in Australia with 18%, 30.4%-owned Bharti Airtel in India with 23% and 35%-owned Telkomsel in Indonesia with 16%. Rest comprises 21.4%-owned AIS in Thailand, 47.3%-owned Globe Telecom in the Philippines, and to a negative extent from losses at 45%-owned PBTL in Pakistan and 30%-owned Warid Telecom in Bangladesh.
• Growth in 2QFY10 earnings for SingTel on YoY comparison will be dampened, as movements in the S$ ranged as such: +1% against A$, +5% against Indonesia Rupiah, +7% against Indian Rupee, +3% against Philippine Peso and -3% against Thai Baht.
• For SingTel’s 1HFY 10, dampening effect on growth YoY will be felt more, as movements in the S$ in 1HFY10 over 1HFY09 ranged as such: +7% against A$, +5% against IDR, +8% against INR, +3% against PhP and -2% against THB.
• But better 1HFY10 performances at Telkomsel and Bharti will save the day. Off a depressed April-September performance last year, Telkomsel enjoyed a robust 34% YoY growth for April-September 2010 and net profit of IDR 7,243bil (S$1bil). Due to a weaker 2QFY10, Bharti’s 1HFY10 net profit grew 20% YoY to INR 48,883bil (S$1.5bil).
• Flipside, a QoQ comparison shows up best for its overseas telco contributions. S$ is mostly softer: -6% against A$, -3% against IDR, about flat against INR and THB, and +3% against PhP.
• In particular, the translation effect will not worsen contribution from Bharti’s weaker 2QFY10 further. While Bharti has reported 16% YoY net profit growth for 2QFY10 to INR 23.7bil, this represented a fall of 6% over 1QFY10.
• We expect 2QFY10 as well – to be the weakest quarter at Optus, in similar vein to operations in Singapore, mainly due to upfront costs for launch of new model iPhone 3GS (a repeat of last year’s trend). Thankfully, the 6% depreciation in S$ will help boost Optus’s contribution.
• On a HoH comparison, 1HFY10 earnings will show a stronger pick up over 2HFY09 as the S$ trended as such: -16% against A$, -6% against IDR, +1% against INR and THB and +3% against PhP.
• All that said, we expect SingTel to report 1HFY10 net profits of at least S$1.9bil. SingTel is scheduled to release results next week – 11 November.
• On a separate note, SingTel will increase its 30.43% stake in Bharti Airtel to 31.95% on 12 November 2009, at a consideration that will range from Indian Rupee 18.1bil to – 30.1bil. Increase represents a 1% boost to SingTel’s earnings.
StarHub – CIMB
Weak 3Q expected; shadow cast by BPL
3Q09 results preview
Maintain Underperform. StarHub will be releasing its 3Q09 results on 10 Nov. We are expecting a core net profit of S$75m-78m, flat to down 3.6% qoq on the back of a 0% to 2% decline in revenue. We expect margins to be flat qoq and a DPS of another 4.5cts, in line with guidance. We retain our earnings forecasts but raise our DCFbased target price to S$1.76 from S$1.58 (WACC 9.4%, LT growth 1%) following our rollover to CY10. Maintain UNDERPERFORM on potential de-rating catalysts from: 1) an expected spike in churns at its pay-TV division; 2) some unravelling of its hubbing model; and 3) prospects of losing more content to SingTel.
Revenue to be uninspiring. We are expecting revenue weakness at its mobile and fixed broadband divisions but stable pay-TV and fixed-network revenue on a qoq basis. As with M1, we believe StarHub’s mobile business (51.1% of revenue) came under pressure in the quarter from more competitive tariff plans, bundling discounts and lower roaming and IDD revenue. However, this could have been cushioned by wireless broadband growth as StarHub gained customers at the expense of M1. In fixed broadband (11.3% of revenue), downtrading had not fully played out during the quarter, which could continue to dampen ARPU and revenue. Pay-TV revenue (18.9% of revenue) is expected to be fairly stable as pay TV is one of the cheapest forms of entertainment in Singapore. Finally, in fixed network services (15% of revenue), we expect both the voice and data components to be stable.
Margins should be flattish. We expect flat margins in 3Q09 on the back of rising content costs due to step-up clauses in its content offerings and the addition of content. Cost of services, the bulk from content costs, made up about 15.9% of revenue in 2Q09. Moreover, with the growth in wireless broadband, we believe there would be more pressure on operating lease costs, which constitute about 7.7% of revenue, to cater for backhaul requirements.
SingTel unlikely to accept StarHub’s offer? StarHub has extended an olive branch to SingTel. It has offered to carry BPL matches over its cable platform for free. We regard this as an astute move to stanch potential customer defections come Aug 2010. However, we believe SingTel is unlikely to take up the offer because it:
• Could lose some control over the quality of its offering as programming is carried over StarHub’s network and through StarHub’s set-top boxes. This is probably why such a model has not been used anywhere else in the world.
• May introduce a more updated set-top box which offers greater functionality over StarHub’s to increase user appeal.
• Probably wants churners from StarHub to sever all relationships with StarHub. The continued use of StarHub’s set-top boxes would not achieve this.
Valuation and recommendation
Maintaining earnings forecasts and UNDERPERFORM rating but with a higher target price. We make no adjustments to our earnings forecasts but raise our DCFbased target price (WACC 9.4%, LT growth 1%) to S$1.76 from S$1.58 as we roll over to CY10. Maintain UNDERPERFORM on potential de-rating catalysts from: 1) a spike in churns at its pay-TV division; 2) an unravelling of its hubbing model; and 3) prospects of losing more content to SingTel. The rights to the football World Cup 2010 would be open for bidding at end-2009 and we believe SingTel will be aggressive.
STEng – CIMB
Earnings recovery priced in
• Results in line, maintain Underperform. 3Q09 net profit of S$120m (+8% yoy) was in line with our expectation and consensus. 9M09 net profit of S$314m (-15% yoy) forms 70% of our FY09 forecast. We raise our target price from S$2.78 to S$3.09, still based on blended valuations as a result of our earnings upgrade and lower WACC assumption. However, we maintain Underperform as we see limited catalysts to justify premium valuations (18x CY10 P/E) against a modest 3-year earnings CAGR of 4%.
• 3Q09 revenue dipped 2.2% yoy to S$1.3bn with weaker-than-expected revenue from Land Systems because of lower-than-expected project milestone completion, offset by stronger shipbuilding recognition for Marine. Qoq, revenue was down 4% from weaker sales in Electronics, offset by a surge in Marine.
• Aerospace margins improved but still far from historical levels. 3Q09 PBT margins for Aerospace improved 2.7% pts qoq to 14.9% but fell short of our expected 16%. 9M09 PBT margins of 12% were still much lower than their historical average of 20% due to a steep learning curve for the PTF conversion programme. While management sees a potential pick up in the aviation sector from 2010 as airlines resurrect their mothballed aircrafts, we see limited upside for FY10 Aerospace earnings as we have already assumed 20% growth in PBT from a stronger MRO baseload and higher margins.
• Marine stronger than expected. 3Q09 PBT of S$25m (+18% yoy) was above our expectations from a favourable sales mix due to higher shipbuilding at VT Halter Marine US. Shipbuilding margins also improved to 6% (from 3% in 3Q08).
• Earnings estimates raised by 2% for FY10-11 but lowered by 0.3% for FY09, to incorporate: 1) stronger revenue but lower margins for Aerospace; 2) higher margins for Land Systems and Marine; and 3) stronger revenue for Electronics.
• Strong order book. Order book was S$10.3bn, of which S$970m is expected to be recognised in 4Q09. Order-win momentum has accelerated with S$858m new orders secured in Oct 09.
• Earnings recovery priced in. STE is trading at 18x CY10 P/E, slightly above its 5-year average of 17x. We believe current valuations have priced in modest earnings growth (8-12%) expected for FY10 and FY11.
STEng – DBS
Promising set of results
• Net profit of S$120m(+11% qoq) is in line with expectations
• Strong rebound in aerospace margins q-o-q, as PTF conversions become profitable
• We expect MRO market recovery in FY10
• Maintain BUY; revised TP of S$3.30, attractive dividend yield of 4.8%.
Group PBT up 7% q-o-q. 3Q09 revenue of S$1.35b (down 2% y-o-y, 4% q-o-q) and net profit of S$120m (down 7% yo-y, up 11% q-o-q) were in line, and 9M09 net profit of S$314m equates to 74% of our full year projections. 3Q09 PBT of S$149m, though, was higher, driven by strong performances in the Aerospace and Land Systems segments.
Margin recovery in Aerospace to 3Q08 levels. Aerospace PBT climbed 15% q-o-q, as margins improved further to 15% vs.12% in 2Q09 – on the back of profitable PTF conversions. Land Systems PBT jumped 62% q-o-q on the back of a better product mix.
Order backlog still looking good. Orderbook at the end of 3Q09 stood at S$10.3b, down slightly from the end-2Q number of S$10.7b. About S$0.9b of this will be delivered in 4Q09. However, going by the S$865m of order wins already announced in Oct’09, the orderbook should be more than replenished at the end of 4Q09.
Maintain BUY. Our earnings estimates for FY09 remain unchanged, since 4Q09 may be impacted by a weaker USD. However, given our view that the MRO players could lead the recovery in the air travel industry, and given the better visibility of the profitability of the PTF conversions, we re-look our assumptions for the Aerospace segment and revise up our FY10 and FY11 EPS estimates by 6% and 3%, respectively. Our target price is correspondingly revised to S$3.30, still pegged to 20x FY10 earnings. While STE has outperformed the STI index since our recent upgrade, we believe it still has some way to run, given that it is still trading at valuation premiums much lower than the historical average of 40%.
STEng – BT
ST Engg Q3 profit drops 6.7% to $120.3m
It says it continued to get new orders, contracts despite a challenging market
ST Engineering yesterday reported net profit for the third quarter to Sept 30, 2009 fell 6.7 per cent to $120.3 million, from $128.9 million a year ago, largely due to substantially higher taxation and a lower share of results from associates.
Revenue was largely stable, falling 2.2 per cent to $1.35 billion from $1.38 billion in the same quarter last year. But cost of sales fell 4.8 per cent, helping to lift pre-tax earnings 3.3 per cent to $149.1 million.
Fully diluted earnings per share fell to four cents from 4.29 cents.
The company also recorded a 45 per cent increase in other income to $12.9 million, largely due to $9.9 million received in the quarter from the government’s Job Credits scheme.
As at end-September, the company’s cash and cash equivalents and short-term investments totalled $1.64 billion and advance payments from customers stood at $1.37 billion. Net cash from operating activities for the quarter doubled to $197 million from $100.5 million a year ago. This was due to lower income tax paid and favourable working capital movements, the company said.
The company said its land systems and marine sectors recorded higher before-tax profit, offset by profitability at its aerospace division, a major contributor. ST Engineering said this was due to lower turnover partially offset by profit from its ongoing 757 freighter conversion programme.
Quarter on quarter, aerospace profitability was higher by 15 per cent or $9.3 million, while land systems was higher than in Q2 by some 62 per cent, or $10.7 million. Overall, quarter-on-quarter profit before tax rose 7 per cent and commercial sales made up 62 per cent of group turnover.
The group’s order book remained strong at $10.3 billion, with about $970 million due for delivery in the last quarter of 2009.
President and chief executive officer Tan Pheng Hock said: ‘In Q3 2009, the group continued to secure new commercial orders and also won several new contracts from governments around the world despite a challenging market.’
The company said it expected, barring unforeseen circumstances, to achieve comparable turnover and before-tax profit in 2009, compared to 2008. Turnover for its aerospace segment is expected to be stable, but profitability could be lower, the company guided.
ST Engineering gained seven cents or 2.4 per cent to close at $2.95 yesterday, just one cent off its 12-month high of $2.96 reached on Oct 21.