Month: September 2010
SATS – OCBC
Datapoints suggest another quarter of growth
Continued growth in demand. We expect SATS Ltd to deliver another positive set of results when it reports its 2QFY11 performance in Oct. The international air travel and freight markets continued to show strengthening of demand in Jul, despite uncertainties about global economic growth in 2H10. According to the International Air Transport Association (IATA), international revenue-passenger-kilometers (RPKs) and scheduled freight traffic in Jul were up by 9.2% and 22.7% YoY respectively. This follows a 11.6% YoY growth in travel market and 26.6% YoY growth in cargo traffic in Jun. More importantly, both the Asia-Pacific passenger and cargo demand continued to outperform the industry average with a 10.9% and 25.3% YoY growth in Jul. As such, we believe that SATS may potentially gain from this continued expansion in demand, given its significant exposure in the region.
Sound performance at customer side. In the announcement by its customer Singapore Airlines on Wed, we also note that the airline’s system-wide passenger carriage grew by 0.1% YoY in Aug. This marks another month of positive growth in the quarter. While the growth rate was lower than the 3.6% YoY growth clocked in Jul, this was partially due to earlier commencement of Ramadan. In Sep, we expect the passenger demand to register relatively stronger growth as Ramadan ends early in the month. For its cargo segment, we also understand that the overall traffic had continued to improve by 9.0% YoY, repeating the 8.2% YoY increase in Jul. These improvements are likely to lead to further demand for SATS’ services, and in turn better financial performance for its 2QFY11.
Integrated pig farm progressing as planned. Further to the JV agreement in May to develop an integrated pig farm in Jilin Province, China, we also note that SATS had begun construction of the 100,000sqm site. The building of the farmis expected to be completed in nine months, with an annual production of 100k pigs in the first phase. While it will not contribute to earnings in the current fiscal year, we are confident that it will provide SATS with another avenue of growth in the years ahead, considering the strong support from both the Singapore and Chinese governments.
Maintain BUY. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and generous dividend payouts. We are keeping our fair value of S$3.30 as the developments are consistent with our expectations. At current level, we see an attractive 19.1% upside potential in the stock. Maintain BUY.
SMRT – CIMB
Muted outlook
• Downgrade to Underperform from Neutral with lower target price of S$1.95 (from S$2.31). We cut our DCF-derived target price for SMRT to S$1.95 (WACC: 8.4%, terminal growth 2%) from S$2.31 after: 1) cutting our EPS estimates by 3-4% for FY12-13; 2) adjusting for higher capex assumptions; and 3) re-aligning discount rates with our house rates. We remain wary of losses on the Circle Line with the opening of more stations in 2011 and margin pressure from rising fuel and electricity costs. Valuations are also rich at 19x CY11 P/E. As such, we downgrade the stock to Underperform and recommend a switch to peer, ComfortDelgro (Outperform, target S$1.83), which trades at a more reasonable 13x CY11 P/E. We see de-rating catalysts from higher-than-expected operating expenses.
• Circle Line may not break even as fast as North East Line (NEL). NEL took over three years to break even and this was achieved with the help of a large population catchment in North-East Singapore (about 15% of the local resident population) and rationalisation of bus routes. In the absence of such advantages, we estimate that Circle Lind could take four years or more after the opening of all stages to break even.
• Future contracts could be less lucrative. With proposed amendments to the Rapid Transit Systems Act, we believe future contracts awarded could be less lucrative.
SMRT – CIMB
Muted outlook
• Downgrade to Underperform from Neutral with lower target price of S$1.95 (from S$2.31). We cut our DCF-derived target price for SMRT to S$1.95 (WACC: 8.4%, terminal growth 2%) from S$2.31 after: 1) cutting our EPS estimates by 3-4% for FY12-13; 2) adjusting for higher capex assumptions; and 3) re-aligning discount rates with our house rates. We remain wary of losses on the Circle Line with the opening of more stations in 2011 and margin pressure from rising fuel and electricity costs. Valuations are also rich at 19x CY11 P/E. As such, we downgrade the stock to Underperform and recommend a switch to peer, ComfortDelgro (Outperform, target S$1.83), which trades at a more reasonable 13x CY11 P/E. We see de-rating catalysts from higher-than-expected operating expenses.
• Circle Line may not break even as fast as North East Line (NEL). NEL took over three years to break even and this was achieved with the help of a large population catchment in North-East Singapore (about 15% of the local resident population) and rationalisation of bus routes. In the absence of such advantages, we estimate that Circle Lind could take four years or more after the opening of all stages to break even.
• Future contracts could be less lucrative. With proposed amendments to the Rapid Transit Systems Act, we believe future contracts awarded could be less lucrative.
Telco – Macquarie
Singapore telecoms sector
Misplaced fears on 3G auction
Event
There appear to be fresh concerns over a possible increase in competition in the mobile market post the 3G auction date announced by IDA (Infocomm Development Authority). We believe the fears are misplaced and that the market should concentrate on the more important event of NGNBN. We reiterate our view that StarHub is the best proxy to NGNBN and any weakness in the share price over the 3G auction event should be seen as an entry opportunity.
Impact
What is up for grabs?
⇒ 3 lots of 2 X 5MHz 3G spectrum up for auction: Reserve price of S$20m/lot has been set with the auction date as 15 November.
⇒ These lots have been lying idle since 2001: Ever since the three telcos were awarded 3G spectrum in 2001, these three lots have been lying idle.
What are the possibilities?
⇒ A fourth mobile operator could jump in: Two lots of 2 X 5MHz should be sufficient for a new mobile operator to start operating in Singapore with a target base of 1m subscribers. The reserve price is also attractive.
⇒ One of the existing telcos could bid for the future: In the light of exponentially increasing data traffic, one or more of the existing telcos could bid for one or more slots. This could spike up the reserve price.
⇒ If no one bids, IDA could distribute the spectrum: The three telcos have been asking for this for a while. However, IDA has been resisting this proposal as it wants a transparent auction and a higher price for lots.
⇒ Spectrum remains idle: The existing telcos have upgraded to HSPA+ network and are trialling LTE technology, which should aid network capacity as greater traffic occurs. There is also room to re-farm the 2G spectrum. Thus, the three telcos could abstain from bidding for spectrum.
Outlook
Remote possibility of a fourth player: We expect the likely outcome to bein favour of existing telcos, as we do not see a new player entering the Singapore mobile market in a hurry. Our reasons are:
⇒ Singapore is 140% penetrated in mobile: We believe penetration is at its peak with annual growth in mobile expected to be in the low single- digits. We doubt new operators would want to enter such a market.
⇒ Requires huge capex to roll out services: In addition to spending at least S$40m for two lots of spectrum, the new operator will have to shell out at least S$200–300m in upfront investments.
⇒ Virgin Mobile entered in 2002 but lasted only a year: In the less competitive market of 2002, a fourth player lasted but a year.
⇒ Only an international player with capacity to absorb initial losses could enter: Given the high capex and long gestation period to recover costs, we believe the probability of local players entering such as LGA or SuperInternet is low. An international player could take a chance on the improving 3G market and play on differential pricing.
Telco – Macquarie
Singapore telecoms sector
Misplaced fears on 3G auction
Event
There appear to be fresh concerns over a possible increase in competition in the mobile market post the 3G auction date announced by IDA (Infocomm Development Authority). We believe the fears are misplaced and that the market should concentrate on the more important event of NGNBN. We reiterate our view that StarHub is the best proxy to NGNBN and any weakness in the share price over the 3G auction event should be seen as an entry opportunity.
Impact
What is up for grabs?
⇒ 3 lots of 2 X 5MHz 3G spectrum up for auction: Reserve price of S$20m/lot has been set with the auction date as 15 November.
⇒ These lots have been lying idle since 2001: Ever since the three telcos were awarded 3G spectrum in 2001, these three lots have been lying idle.
What are the possibilities?
⇒ A fourth mobile operator could jump in: Two lots of 2 X 5MHz should be sufficient for a new mobile operator to start operating in Singapore with a target base of 1m subscribers. The reserve price is also attractive.
⇒ One of the existing telcos could bid for the future: In the light of exponentially increasing data traffic, one or more of the existing telcos could bid for one or more slots. This could spike up the reserve price.
⇒ If no one bids, IDA could distribute the spectrum: The three telcos have been asking for this for a while. However, IDA has been resisting this proposal as it wants a transparent auction and a higher price for lots.
⇒ Spectrum remains idle: The existing telcos have upgraded to HSPA+ network and are trialling LTE technology, which should aid network capacity as greater traffic occurs. There is also room to re-farm the 2G spectrum. Thus, the three telcos could abstain from bidding for spectrum.
Outlook
Remote possibility of a fourth player: We expect the likely outcome to bein favour of existing telcos, as we do not see a new player entering the Singapore mobile market in a hurry. Our reasons are:
⇒ Singapore is 140% penetrated in mobile: We believe penetration is at its peak with annual growth in mobile expected to be in the low single- digits. We doubt new operators would want to enter such a market.
⇒ Requires huge capex to roll out services: In addition to spending at least S$40m for two lots of spectrum, the new operator will have to shell out at least S$200–300m in upfront investments.
⇒ Virgin Mobile entered in 2002 but lasted only a year: In the less competitive market of 2002, a fourth player lasted but a year.
⇒ Only an international player with capacity to absorb initial losses could enter: Given the high capex and long gestation period to recover costs, we believe the probability of local players entering such as LGA or SuperInternet is low. An international player could take a chance on the improving 3G market and play on differential pricing.