Author: kktan
SPH – OCBC
RESILIENT RETAIL MALLS
•Retail rentals to be relatively resilient
•Growth in retail landlord segment
•Further pressure on ad revenues likely
Resilient retail mall landlord business
In the face of an increasingly uncertain macro environment, we expect SPH’s retail landlord business to provide a stable counterweight to its core print business which is expected to face pressure from dipping ad demand. The retail business, comprising of the Paragon and the Clementi Mall, contributed S$47.9m of profits before tax (PBT) in 1HFY12, making up a respectable 22% of total PBT. Given the limited retail pipeline in the Orchard area over FY12-13 (est. 543k sq ft net floor area), we expect rentals at the Paragon to stay relatively resilient. In addition, we expect the strategic location of the Clementi Mall, now fully leased, at Clementi MRT station and strong foot traffic of 60k daily to underpin rental levels.
Expect growth in retail mall segment
Going forward, SPH’s retail landlord business is set to grow with the expected completion of the Sengkang commercial development by 2016. Won in a tender in Jan 2012 for S$328m, the 99-year Sengkang site is expected to yield a retail mall with ~284k sq ft GFA which would add another suburban mall similar to the size of Clementi Mall into SPH’s retail portfolio. We also believe that SPH’s 70:30 partnership with UEL would create considerable synergy between UEL’s property development experience and SPH’s mall management capabilities. Moreover, with group investible funds at S$0.9b as of end Mar 2012, we believe there is sufficient capacity for SPH to allocate additional capital into its retail strategy ahead.
Maintain BUY at unchanged S$4.05 fair value estimate
For the current fiscal year, however, we expect to see sustained downward pressure on SPH’s core print advertisement and circulation business as demand softens in an increasingly uncertain macro environment. In 1HFY12, we saw newspaper ad revenue dip 2.3%, driven mostly by falling classified ad demand which fell 6.5%. On the other hand, newsprint costs are expected to stay relatively stable ahead and we believe SPH has some flexibility in managing staff costs should the top-line weaken further. Maintain BUY with an unchanged fair value estimate of S$4.05.
SPH – OCBC
RESILIENT RETAIL MALLS
•Retail rentals to be relatively resilient
•Growth in retail landlord segment
•Further pressure on ad revenues likely
Resilient retail mall landlord business
In the face of an increasingly uncertain macro environment, we expect SPH’s retail landlord business to provide a stable counterweight to its core print business which is expected to face pressure from dipping ad demand. The retail business, comprising of the Paragon and the Clementi Mall, contributed S$47.9m of profits before tax (PBT) in 1HFY12, making up a respectable 22% of total PBT. Given the limited retail pipeline in the Orchard area over FY12-13 (est. 543k sq ft net floor area), we expect rentals at the Paragon to stay relatively resilient. In addition, we expect the strategic location of the Clementi Mall, now fully leased, at Clementi MRT station and strong foot traffic of 60k daily to underpin rental levels.
Expect growth in retail mall segment
Going forward, SPH’s retail landlord business is set to grow with the expected completion of the Sengkang commercial development by 2016. Won in a tender in Jan 2012 for S$328m, the 99-year Sengkang site is expected to yield a retail mall with ~284k sq ft GFA which would add another suburban mall similar to the size of Clementi Mall into SPH’s retail portfolio. We also believe that SPH’s 70:30 partnership with UEL would create considerable synergy between UEL’s property development experience and SPH’s mall management capabilities. Moreover, with group investible funds at S$0.9b as of end Mar 2012, we believe there is sufficient capacity for SPH to allocate additional capital into its retail strategy ahead.
Maintain BUY at unchanged S$4.05 fair value estimate
For the current fiscal year, however, we expect to see sustained downward pressure on SPH’s core print advertisement and circulation business as demand softens in an increasingly uncertain macro environment. In 1HFY12, we saw newspaper ad revenue dip 2.3%, driven mostly by falling classified ad demand which fell 6.5%. On the other hand, newsprint costs are expected to stay relatively stable ahead and we believe SPH has some flexibility in managing staff costs should the top-line weaken further. Maintain BUY with an unchanged fair value estimate of S$4.05.
STEng – Phillip
Another Growth Engine
Company Overview
ST Engineering (STE) is an integrated engineering group with exposures to four key business segments: Aerospace, Marine, Electronics and Land Systems. The company is also an anchor customer of Singapore’s defence industry.
• US$49.7mn for certain assets of Pemco
• 320k sqm of space, 1.4mn manhours of capacity, 2 hangars
• B737 freighter conversion certificates acquired
• 16% increase in Group capacity
• Maintain Accumulate with unchanged TP of S$3.37
What is the news?
STE announced the acquisition of certain assets of Pemco as part of a bankruptcy proceeding. STE’s US arm VT Aerospace would assume liabilities of US$6.2mn and pay a consideration of US$49.7mn for the Tampa facility and certain assets of PEMCO. The acquisition is contingent upon the approval by the US Bankruptcy Court and is expected to be completed in July 2012. The facility occupies 320k sqm of hangar and office space at Tampa International Airport in Florida and is seen as a gateway to Latin America. STE would also acquire the Boeing B737 freighter conversion Supplemental Type Certificates from Pemco in this deal.
How do we view this?
We view this development positively as it would further extend STE’s lead as the world’s largest MRO player. This deal would increase STE’s heavy maintenance capacity by 16% and increase its exposure to the fast growing Latin American region. While it is difficult to judge as to whether STE overpaid for the assets due to the lack of financial disclosures, bankruptcy proceedings usually throw up assets at a reasonable price.
Investment Actions?
We kept our forecasts unchanged and maintain our Accumulate rating on STE. STE’s earning yield spreads and P/E multiples remain below historical averages, reflecting undervaluation in this defensive stock, in our view.
STEng – Phillip
Another Growth Engine
Company Overview
ST Engineering (STE) is an integrated engineering group with exposures to four key business segments: Aerospace, Marine, Electronics and Land Systems. The company is also an anchor customer of Singapore’s defence industry.
• US$49.7mn for certain assets of Pemco
• 320k sqm of space, 1.4mn manhours of capacity, 2 hangars
• B737 freighter conversion certificates acquired
• 16% increase in Group capacity
• Maintain Accumulate with unchanged TP of S$3.37
What is the news?
STE announced the acquisition of certain assets of Pemco as part of a bankruptcy proceeding. STE’s US arm VT Aerospace would assume liabilities of US$6.2mn and pay a consideration of US$49.7mn for the Tampa facility and certain assets of PEMCO. The acquisition is contingent upon the approval by the US Bankruptcy Court and is expected to be completed in July 2012. The facility occupies 320k sqm of hangar and office space at Tampa International Airport in Florida and is seen as a gateway to Latin America. STE would also acquire the Boeing B737 freighter conversion Supplemental Type Certificates from Pemco in this deal.
How do we view this?
We view this development positively as it would further extend STE’s lead as the world’s largest MRO player. This deal would increase STE’s heavy maintenance capacity by 16% and increase its exposure to the fast growing Latin American region. While it is difficult to judge as to whether STE overpaid for the assets due to the lack of financial disclosures, bankruptcy proceedings usually throw up assets at a reasonable price.
Investment Actions?
We kept our forecasts unchanged and maintain our Accumulate rating on STE. STE’s earning yield spreads and P/E multiples remain below historical averages, reflecting undervaluation in this defensive stock, in our view.
TELCOs – Kim Eng
SingTel Crimps The Data Pipe Further
Step forward for telcos. SingTel’s decision to cut data caps for smartphones is a big step toward better data monetisation opportunities for Singapore telcos. That said, the short-term impact will be minimal as the majority of 3G data users do not exceed 2GB of data a month. Over time however, it will encourage more data usage, especially on the video front, and this should lead users to adopt LTE as well as upgrade their plans, thus benefiting the telcos’ data revenue and margins. We retain our BUY calls on StarHub and M1, and SELL on SingTel.
SingTel reins in generous data caps. SingTel’s new 4G plans were significant not because it is the first telco to launch 4G smartphone plans, but because it has slashed data caps for both its 3G and 4G plans. From a two-tiered 12GB and 30GB (although not unlimited, these caps were still very generous), SingTel now offers four tiers of 2GB, 3GB, 4GB and 12GB. Monthly subscription prices have remained the same but SingTel has also increased the number of bundled SMS.
StarHub and M1 likely to follow suit. Now that the giant has stepped forward to lead the way, the other telcos are likely to follow. According to the media, StarHub will soon cut its single-tier 12GB smartphone and iPhone plans to tiers of 1GB, 2GB and 5GB to match its Multi-SIM plans for tablets and mobile phones. Similarly with M1, although it has said it will only unveil its plans in 2H12. Also, we think both smaller telcos will take the opportunity to do away with their unlimited plans.
Churn could rise in rush to lock in larger data caps. SingTel’s churn rate could rise in 3Q12, as its out-of-contract subscribers may switch to the other two telcos to lock in their still-generous data caps for another two years. This is especially so if StarHub and M1 hold off on dumping their higher data caps for a couple more months. We reckon this is probably why StarHub warned it would also be cutting caps soon but provided no other details.
Gradual adoption. The decision to cut down on data caps should be positive for ARPUs further out but the short-term impact will likely be minimal as the majority of data users do not exceed 2GB of data a month. Over time, more 4G handsets will become available, and the faster speeds will encourage more data usage and prompt users to upgrade their plans, thus benefiting data revenue. Higher adoption of tablets will also drive more data usage. More importantly, data margins will also benefit.
Prefer StarHub and M1 to SingTel. This development does not change our calls, which stand at BUY on StarHub and M1 and SELL on SingTel. We still like StarHub and M1 for their attractive yields of about 6%. In fact, StarHub’s yield could get more attractive as we believe its balance sheet can support a higher regular dividend. While the cut in data caps will benefit its domestic business, SingTel faces significant risks from overseas, particularly on the currency and regulatory fronts.