Month: January 2013
SingTel – CIMB
Exits Pakistan
SingTel is selling its 30% stake in Warid Telecom (WT), which was acquired in mid-07, for US$150m (S$185m) or an 86% loss on its total investment of S$1.31bn. It will book in a loss of S$238m in FY13. We raise our SOP-based target price for SingTel by 1 Sct to S$3.23.
This is to reflect the sale proceeds as we had used WT’s carrying value of S$38m in our SOP. No change to our forecasts as we have stopped equity-accounting WT since SingTel reclassified it as “asset held for sale”. SingTel is an Underperform given policy risks and stiff competition and we prefer StarHub or Axiata.
What Happened SingTel announced that it is selling its 30% stake in WT to its JV partner Warid Telecom Pakistan (WTP) for US$150m and the right to receive a 7.5% share of the net proceeds from any future sale by WTP. WTP owns the remaining 70% of WT. SingTel had ceased to equity-account for WT after reclassifying it as an “asset held for sale” on 1 Jul 12.
What We Think
The sale proceeds, excluding the value of any future sale by WTP, represent a loss of 86% on SingTel’s total investment of S$1.31bn in WT. Besides fierce competition and high sales tax, Pakistan’s political and economic climate has deteriorated since SingTel acquired WT. The Pakistani rupee (PKR) also halved in value relative to the S$ over the course of SingTel’s investment from S$39.8/PKR in mid-07 to S$79.1/PKR currently.
With SingTel exiting Pakistan, all eyes will be on its 45%-owned CDMA-based PBTL in Bangladesh, which it has also reclassified as “asset held for sale”. To date, SingTel has invested S$238m in PBTL. The loss in Pakistan should not overshadow SingTel’s excellent track record of investing in regional mobile players that has made it become Southeast Asia’s largest telco.
What You Should Do
As SingTel faces policy risks in India, stiff competition in Australia and margin pressure in Singapore, switch to StarHub (Outperform), our top Singapore telco pick, or Axiata (Outperform) for exposure to emerging market telcos. We expect StarHub to raise its quarterly dividend from 5 Scts to 6 Scts while Axiata could pay more than the 65% guided. Both telcos have solid FCFE generation and low gearing
SingPost – DBSV
S$179m spent on acquisitions so far
• 3Q13 underlying profit of S$39.8 (+2% y-o-y, 22% q-o-q) and interim DPS of 1.25 Scts were in line
• Acquired two more companies for S$97m, taking amount spent on acquisitions to S$179m over the last two years
• Limited disclosure on acquisitions so far. The stock is not cheap at 17x PE. HOLD with revised TP of S$1.14.
Highlights
Divergence between revenue and operating profits. Top line grew 14% y-o-y versus a decline of 3% in operating profits. E-commerce activities for all the segments and new contribution from Novation Solutions (acquired in May 2012) were key drivers of top-line growth. Corporate overheads seem to be the main culprit as operating profits were up across all the segments but group operating profit was still down.
Two more acquisitions in logistics sector recently. In Dec 2012, Singpost paid S$37m for a 100% stake in General Storage Pte Ltd which operates a self-storage business in Singapore, and also carries net debt of S$15m on its books. In Jan 2012, Singpost agreed to pay S$60m for a 62.5% stake in Famous Holdings Pte Ltd which is a freight consolidator and forwarder with offices in six countries. Both the acquisitions aim to consolidate Singpost’s position in the logistics space in the region.
Limited disclosure on acquisitions. Singpost has not disclosed earnings or PER multiples, making it difficult for us to track the progress. The acquisitions are funded by S$350m of perpetual bonds issued in Mar 2012, accounted as equity in our model.
Recommendation
Not cheap at 17x PER, maintain HOLD at revised TP of S$1.14. We adjust long-term growth rate to 0.5% (as evident from 9M12) from 0% earlier while cost of equity remains at 6% in our DDM
SingPost – DBSV
S$179m spent on acquisitions so far
• 3Q13 underlying profit of S$39.8 (+2% y-o-y, 22% q-o-q) and interim DPS of 1.25 Scts were in line
• Acquired two more companies for S$97m, taking amount spent on acquisitions to S$179m over the last two years
• Limited disclosure on acquisitions so far. The stock is not cheap at 17x PE. HOLD with revised TP of S$1.14.
Highlights
Divergence between revenue and operating profits. Top line grew 14% y-o-y versus a decline of 3% in operating profits. E-commerce activities for all the segments and new contribution from Novation Solutions (acquired in May 2012) were key drivers of top-line growth. Corporate overheads seem to be the main culprit as operating profits were up across all the segments but group operating profit was still down.
Two more acquisitions in logistics sector recently. In Dec 2012, Singpost paid S$37m for a 100% stake in General Storage Pte Ltd which operates a self-storage business in Singapore, and also carries net debt of S$15m on its books. In Jan 2012, Singpost agreed to pay S$60m for a 62.5% stake in Famous Holdings Pte Ltd which is a freight consolidator and forwarder with offices in six countries. Both the acquisitions aim to consolidate Singpost’s position in the logistics space in the region.
Limited disclosure on acquisitions. Singpost has not disclosed earnings or PER multiples, making it difficult for us to track the progress. The acquisitions are funded by S$350m of perpetual bonds issued in Mar 2012, accounted as equity in our model.
Recommendation
Not cheap at 17x PER, maintain HOLD at revised TP of S$1.14. We adjust long-term growth rate to 0.5% (as evident from 9M12) from 0% earlier while cost of equity remains at 6% in our DDM
SingPost – Kim Eng
Looking For Better Yield Elsewhere
Results slightly better than expected. SingPost 9MFY3/13 results were better than expected. 9MFY3/13 revenue increased by 14.5% yoy to SGD476.3m and net profit excluding one-off items was slightly up by 0.5% to SGD109.1m. However due to rich valuation, we maintain our HOLD rating but slightly upgrade our target price to SGD1.21.
Top line grew strongly. We appreciate Singapore Post’s transformation effort as we saw positive revenue growth momentum in recent quarters. In 9M FY3/13, SingPost recognized revenue growth in all business segments despite the continuous decline in letter volumes. The growth was mainly driven by consolidation of new acquired subsidiary Novation Solutions as well as e-commerce volumes.
Cost pressure prevented bottom growth. Despite respectable top line growth, net profit hardly made any growth (up by only 0.5% yoy) in 9MFY3/13 compared with a year ago. We expect further improvement in revenue following recently announced M&As. However inflationary cost pressure, gradual shift to lower-margin Logistics business and the cost for transformation will continue to weigh on margins and prevent significant net profit growth.
Still early to judge recent M&As. SingPost announced a few M&A deals recently including SGD60m for 62.5% stake in Famous Holdings, a sea freight consolidator and freight forwarder as well as SGD37m for 100% in General Storage, a self-storage provider in Singapore. We understand that those new subsidiaries are currently profitable and acquisition costs were also reasonable. But since those new acquisitions are bigger than previous M&As, in our view much more effort must be put in to fully merge the new subsidiaries with existing business to create real synergy.
HOLD for rich valuation. SingPost’s current dividends yield of 5.2% is not very attractive relative to its historical average of 6.0%. On PER basis, current 17.2x PER is also approaching historical high. We slightly upgrade our earnings forecast to reflect better-than-expected results and recent acquisitions but maintain our HOLD rating.
SATS – CIMB
Ready for take-off
We turn positive on SATS, prompted by a breakthrough in Changi Airport’s volumes intertwined with a recovery in profit margins as food inflation peters out. Benefitting from booming air travel in Singapore, SATS offers stable earnings growth and yields of over 4%.
We upgrade it from Neutral to Outperform, with catalysts expected from its margin recovery and continued air-traffic strength. We lift FY14-15 EPS by 1% for higher volumes and raise our target price, now on 16.8x CY14 P/E, 1 SD above its 8-year mean (from 14.4x, 8-year mean). We believe our higher valuation can be justified by breakthrough volumes and better margins.
Volumes at a new high
A breakthrough in the number of flights handled by Changi Airport prompts us to revisit SATS, the airport’s dominant ground handler. In Nov, Changi Airport handled an average of 920 flights per day, crossing the 900 mark for the first time ever. We were previously wary of a margin contraction and cautious on volume growth, as flights handled appeared to have levelled out at around 880 per day. The recent breakthrough is evidence of success in the airport’s measures to improve air traffic.
Margins have bottomed out
SATS’s profit margins have also bottomed out, we believe. Easing food inflation leaves room for further margin expansion. 2Q13 profit margins were the best in six quarters as food inflation tapered off. We see a further easing in food inflation and productivity gains. SATS’s core net profit margin has the potential to improve 0.4% pt to 9.9% in FY13, in our estimation. Margins could grow further in FY14 if food inflation is kept at bay.
Upgrade to Outperform
We upgraded SATS from Underperform to Neutral last quarter on evidence of a margin recovery. We now upgrade it to Outperform, seeing stronger-than-expected air traffic through Singapore as an additional catalyst.