Author: kktan
MIIF – DBSV
Winding down is the best option
• Board initiates orderly process to divest stakes in underlying assets to realise true values
• Process could be lengthy and difficult though
• Special dividend from payout of excess cash in the near term should help support share price
• Maintain HOLD with higher TP of S$0.65
Current structure not best suited to realise value . Following the completion of a strategic review, the Board of Directors of MIIF are of the opinion that its current structure may not be suitable to realise the value of its underlying businesses, and that the stock is likely being undervalued by the market. As a result of the higher than-ideal cost of equity, MIIF’s strategy of driving growth by investing in Asian infrastructure businesses also cannot be executed properly.
Fund to wind down over time. As a result of these observations, and given the lack of acquisition opportunities, the Board has decided to distribute existing excess cash to shareholders via a special dividend, and commence the process of an orderly sale of its interests in its four assets. As and when the divestment of these assets is completed, the proceeds will be distributed to shareholders. The corporate-level debt facility will not be drawn down and lapse upon maturity. To ensure alignment of interests with shareholders the manager’s fee structure will be changed in due course.
Positive step, but upside may be limited. This strategy is intended to close the gap between share price and fund NAV. Without an acquisition story, we reckon the fund fee leakage was a key reason for this valuation gap. Excluding fund fees, our valuation for MIIF stands at about S$0.65 per share, still lower than fund NAV (internal MIIF estimates) of S$0.70 per share, as we are less optimistic on valuations for Hua Nan Expressway. We think it could eventually prove difficult and time consuming for MIIF to realise the true values of its investments, and given the uncertainties involved in the process, current entry levels don’t look attractive enough to us. In the near term though, investors can look forward to a special dividend of about 3.0Scts from the payout of existing excess cash reserves, in addition to the 2.75Scts final dividend for 2H-FY12. This should lend support to the share price.
STEng – OCBC
RESILIENT EARNINGS THROUGH DIVERSIFIED BUSINESSES
- Solid 9M12 results, as expected
- Increasing earnings visibility
- Downgrade to HOLD on price outperformance
Good price performance for 2012 YTD
STE has been having a good run, and YTD its share price has climbed 44%, outpacing the STI Index, which climbed only 19%. In the uncertain economic environment, investors have been seeking defensive businesses with good dividend yields and STE’s share price has benefited. The growth in air passenger traffic has supported the earnings of MRO providers. For 9MCY12, the aerospace division registered 9.3% YoY growth in pre-tax profit to S$226.7m. Apart from its aerospace segment, which contributes the most to its top-line and bottom-line, the other business lines are fairly defensive in nature, due to government-related projects. Commercial sales formed 65% of total sales in 3Q12 (versus 62% in 3Q11).
Overall solid results, as expected
To recap, 9M12 results were in line with our expectations, with earnings per share of 13.79 S cents (on a fully diluted basis) forming 76% of our FY12F estimate of 18.2 S cents. As of end-Sep, STE’s order book stood at S$12.5b, of which about S$1.4b is expected to be delivered in 4Q12. STE expects to achieve higher revenue and PBT for FY12, compared to FY11.
Order book has been growing over the LT
As we noted in our 28 Sep report, STE’s order book (as at the end of each year) has on average grown faster than the following year’s annual revenue. The order book grew 16% p.a. between end-2005 and end-2010, from S$5.38b to S$11.5b, while annual revenues grew 6% p.a. between FY06 and FY11. This trend suggests that the average tenure of order book contracts has been increasing. The fact that the order book has been growing faster than revenue implies increasing earnings visibility into the future.
Downgrade to HOLD
We maintain our fair value of S$3.90 on STE but downgrade it to a HOLD, since the share price has run up a fair bit already. We would be buyers at S$3.66.
Land Transport – DMG
Slower ridership growth for operators
Slower ridership growth a dampener for operators. From Jan – Oct 12, train ridership is up 8.5% versus previous period’s 9.8% and bus ridership is up 3.8% from Jan – Oct 12 versus previous period’s 6.1%. We believe slower ridership growth is partially attributable to slower population growth (Singapore’s population growth has slowed to 2.5% in mid 2012 versus its prior 5-year CAGR of 3.3%). We also think population growth could remain soft given the government’s stance on managing foreigner inflow and moderating Singapore’s GDP growth expectations. As operators continue to face cost pressures, we maintain our NEUTRAL call on the sector, with preference for ComfortDelGro (CD) (S$1.72 BUY TP S$1.85) for its cheaper valuations and overseas growth potential over SMRT (S$1.69 NEUTRAL TP S$1.60).
Jan – Oct 12 ridership for rail and bus growing, albeit at a more moderate pace. Ridership for rail and bus continues to grow, due to population growth, as well as high car purchasing costs. However we believe growth is moderating. From Jan – Oct 12, train ridership is up 8.5% versus previous period’s 9.8% and bus ridership is up 3.8% from Jan – Oct 12 versus previous period’s 6.1%. The slower pace in ridership growth coupled with an environment of higher repair and maintenance and staff costs will likely weigh on operators’ margins.
Population growth slowing down. Singapore’s population growth has slowed to 2.5% in mid 2012 versus its prior 5-year CAGR of 3.3%. The Ministry of Transport (MOT) has capped Singapore’s annual vehicle growth rate at 0.5% pa from Feb 13 to Jan 15, and COE (Cat A) prices has spiked 50% YoY to S$78,523 in Dec 12. While we expect more commuters to switch to rail and bus transportation due to the higher car ownership cost, this may not be able to compensate against expected softer population growth given the government’s stance on managing foreigner inflow and moderating Singapore’s GDP growth expectations. We think catalysts for the operators could come from a fare revision formula expected in 1H13.
ComfortDelGro remains our preferred pick due to cheaper valuations and overseas potential. We remain NEUTRAL on Singapore’s land transport sector due to slower ridership outlook stemming from slower population growth as well as cost pressures that could cling in the near term. We favour CD over SMRT due to the former’s cheaper valuation and greater overseas exposure. CD’s overseas operations accounts for 46% of its EBIT. CD’s average overseas EBIT margin of 12.7% is also higher than the 10.4% for its Singapore operations. CD is currently trading at a more attractive 14.5x FY13 P/E vs SMRT’s 19.0x FY13 P/E (FYE Mar).
SIAEC – Kim Eng
Time to Fly, Time to BUY
Upgrade on relative valuations, attractive yields. We upgrade SIA Engineering (SIE) to a BUY based on undemanding valuations versus its peers like ST Engineering and HK Aircraft Engineering Co (HAECO) and attractive dividend yields of 5.1-5.6% p.a. Our target price of SGD4.95 implies 15% upside, backed by resilient earnings and strong cashflows. We continue to like the aviation engineering sector for its resilient growth prospects.
Under-appreciated within sector. Headlining our rationale for upgrading SIE is its relative value that has emerged within the aviation
maintenance, repair and overhaul (MRO) sector. SIE currently trades at a lower PER of 16x versus its peer average of 18.3x, while dividend yield of ~5.3% is a full percentage point higher than its peer average of 4.3%.
Sector outlook rosy, SIE well-poised to benefit. Industry forecasts for the aviation MRO sector are still showcasing steady growth especially in Asia. In addition, we favour SIE for its ability to continue growing its non-SIA customer base as an affirmation of its service quality. This allows SIE an enviable balance between a diversified customer base and a foundation to lean on: SIA’s MRO business.
Resilient business supports attractive yields. SIE’s record of profitability seems to corroborate the thesis of resilience within the aviation MRO sector. Even during times of global economic crises, SIE’s earnings remained stable and, together with strong cashflows, formed the basis of an increasing dividend payout trend.
Favoured play in aviation engineering: Upgrade to BUY. We now peg SIE’s valuation based on 18.3x FY3/14 PER, one standard deviation above its historical mean. Target price is accordingly raised to SGD4.95, implying 15% upside with an attractive 5.3% dividend yield adding to its investment case. SIE is now our pick in the aviation MRO sector based on its undemanding relative valuations. Upgrade to BUY.
TELCOs – DBSV
Three keys:4G, NBN & Spectrum
- No premium pricing for 4G, but lower data caps will drive moderate growth; Extra 1GB costs S$5-6 now (free before) Expect market shares to change in corporate data market as StarHub spends capex on top of Broadband Network (NBN) to extend its reach
- Spectrum sale could be a burden especially for smaller telcos with higher gearing
- Top pick: StarHub for higher dividend yield, superior growth and lower gearing than peers
Lower data caps to drive growth M1’s attempt to charge an extra S$10 for 4G service did not succeed as SingTel did not respond in kind. How can a Telco charge a premium when real 4G speeds are limited to few spots? We understand 4G speeds drop sharply as a user moves away from 4G base stations. However, Telcos are using 4G as an excuse to lower data-caps, which should benefit ARPU moderately. Currently, heavy data users (~10% of the total) have to pay S$5-6 to enjoy an extra 1GB or S$20 for additional 2GB bundled with more voice minutes and SMS.
StarHub may gain market share in corporate data space. SingTel leads in the corporate data market with ~ 80% share of a market that is worth over S$1.5bn. StarHub has less than 20% share as it did not have cables that reach commercial buildings. Progress has been slow on this front as NBN provides access to the buildings but not the individual floors due to operational issues. However, it is ready to spend some capex to wire up the buildings now. Recently, StarHub also started to offer data-mining services to small & medium size enterprises to strengthen its business relationships.
Telcos may have to spend S$80m-S$100m in spectrum auction in 2013. The regulator is expected to re-farm and auction the 1800MHz, 2.3GHz and 2.5GHz spectrum bands in 1H13. The cost is significant for smaller players with higher gearing.
BUY StarHub for 5.8% yield. StarHub’s net debt to EBITDA stands at 0.5x compared to 1.0x for peers. This implies it can afford to pay additional S$350m dividends (21 Scts DPS or 5.5% yield) to reach 1.0x net debt to EBITDA. With spectrum sale due in 1H13, it is even more important to have lower gearing.