Author: kktan
STEng – OCBC
Lower S$3.01 fair value on more muted 2011 outlook
Lower revenue but higher PATMI. Singapore Technologies Engineering (STE) 3Q11 revenue fell 6.2% YoY to S$1.4b but PATMI edged 2.7% higher to S$133.8m. The PATMI gain was the result of total one-off gains of S$5.3m, compared to oneoff losses of S$6.9m in 3Q11. For 9M11, revenue increased by 1.8% to S$4.45b and PATMI is up 9.8% to S$375.4m. 9M11 revenue met 71.3% and 71.8% of consensus and our 2011 respective revenue estimate, while 9M11 PATMI reached 71.1% of consensus and 73.6% of our 2011 PATMI estimate.
Segmental contributions. STE’s 3Q11 segmental revenue breakdown saw Aerospace eased 4.7% YoY to S$463.7m, Electronics fell 7.8% to S$311.2m, Land Systems dropped 16.6% to S$306.8m, while Marine gained 0.2% to S$254.8m, and Others surged 40.6% to S$58.1m. Management explained that the bigger-than-expected fall in Land Systems revenue was due to earlier forecasted revenue targets being adversely impacted by the uncertain economic conditions and the delay in some projects. On the pre-tax profit line, Electronics and Aerospace segments were the stars, with their pre-tax profit gaining 10.3% and 9.8% to S$37.6m and S$73.8m respectively; but Land Systems segment recorded pre-tax profit of S$12.3m, or 54.6% lower than a year ago.
Management lowered 2011 guidance. At last Friday’s results briefing, management warned of uncertainties arising from (1) the sovereign debt issue in Europe, (2) the slowing American economy, and (3) unrest in the Middle East and North Africa. Management also lowered its guidance for 2011 revenue and pre-tax profit to be comparable to 2010 versus higher revenue and pre-tax profit previously. Nevertheless, order book remained healthy at S$11b, up from S$10.8b at end-2Q11. Incorporating management’s latest guidance into our earnings model, we have lowered our 2011 revenue and PATMI estimate by 2.4% and 1.3% to S$6.05b and S$503.2m respectively.
Maintain BUY with lower S$3.01 fair value. Given the uncertain global economic outlook and management watering down its guidance, we decided to use a lower forward P/E multiple to price STE. Instead of the 19.4x average forward P/E previously, we now use 18.5x, or half a standard deviation below its historical average, against STE’s EPS estimates over the next four quarters to arrive at a fair value of S$3.01, down from S$3.37 previously; but we maintain our BUY rating on STE.
SingTel – CIMB
Bharti’s 2Q12 below
Bharti’s 2Q12numbersmiss ourestimateswhich arebased on consensus due to upfront and non-recurring finance charges and lower-than-expectedmargins. Despite this, we remain positive on SingTel, one of our top picks in the region.
We expect SingTel’s 2QFY12 core net profit to be flat qoq and yoy. Also, SingTel islooking to buy 2% of ADVANC from Shin Corp at THB130/share, a value which we deemfair. Maintain Outperformon improving fundamentals among its units and attractive dividends.
What Happened
Bharti’s 2Q11 highlights were:1) total minutes declined for the first time, under the influence ofseasonalityand the economy;and 2) mild revenue growth(+1.7% qoq)as there wasa fall in minutes and ARPUsin India while business in Africa grew strongly thanks to elasticity gains;3) margins were firm with strengthin Africa, and 4) one-off finance cost and regulatory payments. The conference callhighlighted that irrational pricing by the smaller players has beenignoredby the incumbents and also, Bharti’s confidence in Africa as it raisesits capex guidancethere.
SingTel’s 2QFY12 core net profit could come inflat qoqand trending a little below expectations. SingTel Singapore’s core net profit should decline qoq on lower seasonal margins. Associate contributions should rise despite weak contributions from Bharti, thanks to ADVANCand Telkomsel.
Lastly, SingTel is looking to buy 2.05% of ADVANC from Shin Corp at up to THB130/share.
What We Think
While Bharti’s 2Q is disappointing and its business in India/South Asia shows the strains of defending its market leadership, we note the effectsof seasonality. We believe that recentpricing hikes would also benefit Bharti once the effects flow through. In the longer term, minutes should flow back to the incumbent especially if consolidation occurs.
We are neutral onSingTel’s proposed acquisition of ADVANC, given that the valuation is fair.
What You Should Do
Maintain OUTPERFORM.Bharti’s results, while a disappointment, do not alter our positive view on SingTel which we like for the improving fundamentals among its unitsand yields. It is one of our top picks in the region.
SingTel – BT
Bharti confident of turning around in Africa
BHARTI Airtel is confident of growing its high-speed mobile data business and turning around its struggling African operations after the Indian mobile market leader reported a bigger-than-expected fall in fiscal second-quarter profit that was its seventh consecutive quarterly profit drop.
Bharti yesterday said that net profit for the three months ended September fell 38 per cent, hit by higher interest costs, foreign exchange losses and its money-losing African operations.
The poster boy of India’s telecoms sector last year ventured into Africa by acquiring most of the mobile operations of Kuwait’s Zain in a US$9 billion deal, becoming the world’s fifth-biggest mobile carrier by subscribers.
But high costs have weighed down the firm which has yet to turn a profit there.
In India, the outlook for Bharti and its rivals have improved after they raised voice call prices by about a fifth, the first such increase in at least two years, after a vicious price war in the 15-player market squeezed profits.
The government has said that it would ease rules for telecoms mergers and acquisitions to facilitate consolidation in the crowded sector, a move seen as positive for companies such as Bharti, who were hit by stiff competition from new entrants after India issued more telecoms licences in 2008.
‘We have turned slightly overweight on the sector,’ said Sudhakar Shanbhag, chief investment officer at Kotak Mahindra Old Mutual Life Insurance, which holds telecoms stocks in its portfolio of US$1.8 billion. ‘The trigger has been that telecoms companies are getting back the pricing power and there is some element of consolidation.’
Bharti shares, valued at more than US$30 billion, were up more than 0.7 per cent by 0824 GMT after falling initially after the results were announced. The stock is up 10 per cent this year, outperforming a nearly 14 per cent fall in the broader market .
Bharti was founded by Sunil Mittal, who started his career selling bicycle parts and saw an opportunity in telecoms when India was opening the sector to private participation in the mid-1990s. Mr Mittal is India’s sixth-richest man currently, according to Forbes magazine.
Carriers in India, the world’s second-biggest mobile phone market with about 870 million users, are also betting on premium data services to boost margins after they launched third-generation (3G) networks earlier this year, although the initial uptake has been slower than expected.
Bharti has seven million 3G customers in India, with a quarter of them using the services regularly. — Reuters
STEng – BT
ST Engg Q3 profit rises 2.7% to $133.8m
Revenue slides 6.2% to $1.39b; EPS rises to 4.39 cents
SINGAPORE Technologies Engineering (ST Engineering) chalked up a 2.7 per cent rise in third-quarter net profit to $133.8 million, from $130.2 million a year ago, despite a fall in revenue.
The group’s revenue slid 6.2 per cent, from $1.49 billion to $1.39 billion, for the three months ended Sept 30, 2011. But gross profit margin rose as cost of sales fell 8.7 per cent.
Except for its marine sector which had comparable revenue, the rest of its sectors – aerospace, electronics, and land systems – registered lower revenue compared to Q3 2010.
For the nine months ended Sept 30, ST Engineering’s net profit attributable to shareholders rose 8.2 per cent year on year to $375.4 million, while revenue rose 1.8 per cent to $4.4 billion.
Earnings per share (EPS) for the group rose to 4.39 cents for Q3 2011, up from 4.31 cents a year ago.
No interim dividend was recommended for the quarter.
The group’s profit before tax (PBT) of $165.9 million in Q3 2011 was 3.8 per cent higher than Q3 2010’s PBT of $159.8 million.
All sectors recorded higher PBT except for Land Systems, where PBT dropped 46 per cent due to lower revenue and higher operating expenses. Aerospace posted a 20 per cent growth in PBT, mainly due to write-back of allowance for inventory obsolescence following the revised inventory allowance estimates, lower finance costs, and higher contribution from associates.
However, these were partially offset by higher administrative expenses.
ST Engineering had ‘revised the obsolescence rates to align more closely with the industry practices’. The effect of this change for its four sectors resulted in a write-back allowance for inventory obsolescence of $19 million to its income statement.
Electronics PBT in Q3 2011 increased 15 per cent thanks to favourable sales mix, better contribution from satellite communication product sales, and write-back of allowance for stock obsolescence. These were partially offset by the impairment in value of intangible assets and higher operating expenses.
Marine PBT improved 7 per cent, due to higher write-back allowance for doubtful debts and higher other income, but these were partially offset by lower gross profit due to unfavourable sales mix.
ST Engineering president and chief executive officer Tan Pheng Hock said: ‘The group continues to secure orders and grow its order backlog to $11 billion at the end of the quarter despite the challenging environment.’
‘Barring unforeseen circumstances, the group expects to achieve revenue and PBT for FY 2011 comparable to FY 2010.’
ST Engineering gained four cents to close at $2.85 yesterday, before its results were out.
Pay TV – BT
Greater freedom for pay TV viewers from March 2012
MDA has put out guidelines that cap early termination charges
The battle for the pay television dollar will soon intensify with a new guideline that makes it easier for dissatisfied subscribers to vote with their feet.
The Media Development Authority (MDA) has put out guidelines that cap the early termination charges (ETCs) that viewers have to pay if they cut short a pay TV contract with an operator.
From March 1, 2012, operators may charge ETCs made up only of the unfulfilled value of the subscription contract less any avoidable costs. Avoidable costs are expenses that the operator does not have to incur as a result of the contract termination. This guideline applies to contracts that are at least three months long.
A cap of 24 months will also be placed on any pay TV subscription contract so that consumers are not unreasonably tied down.
While such consumer rights are already alluded to in the Media Market Conduct Code, MDA is now spelling them out for the operators in response to consumer complaints and increasing competition.
‘In recent years, MDA has received feedback from subscribers of pay TV services that they are unfairly disadvantaged by having to pay ETCs due to unilateral changes initiated by the pay TV retailers on the channel line-up or pricing of their subscription packages,’ MDA said.
Even as disgruntled viewers clamour for redress, pay TV incumbents will have to contend with upstart competitors. The Next Generation Nationwide Broadband Network (Next Gen NBN) could mean an influx of new entrants in the pay TV field.
The response from the three main operators – StarHub, SingTel, and M1 – has been divided along the lines of who stands to gain or lose from the new guidelines.
There are more than 857,000 subscribers today, the bulk of which belong to StarHub. M1 is the newest on the pay TV scene with its 1box service which is run on a broadband network. SingTel, with its mioTV service launched in 2007, is somewhere in between.
‘SingTel’s current ETC policy already takes into account the interests of customers. We believe that there is no market failure to warrant new guidelines,’ a SingTel spokesman said.
‘Whilst we will review the new ETC guidelines . . . we are concerned that the guidelines may result in limiting consumers’ choices and deprive them of the opportunity to obtain attractive premiums.’
While StarHub said that it would ‘consider the feasibility of any new recommendations’, it suggested that alternative ETC structures be allowed to co-exist with the one laid down by the MDA in its feedback to the agency. StarHub told BT that the percentage of customers opting for early termination is ‘very small’.
M1, on the other hand, has embraced the idea of subscribers having more freedom to switch operators. ‘This will ensure that customers will not be unduly restricted or hampered should they wish to switch or terminate a pay TV service,’ it told BT.
It suggested to MDA that it go one better and allow subscribers to switch to the Next Generation Interactive Multimedia, Applications, and Services (NIMS) platform without having to pay ETCs at all for a period of time.
The NIMS platform will give consumers access to pay TV content over a broadband network.
MDA has decided against the suggestion. ‘This is something best left to commercial considerations of the pay TV retailers,’ said Toh Kai Ling, MDA’s policy director.
Operators, however, will have to toe the new line come March, or risk being ‘taken to task accordingly’, MDA said.