Author: kktan
SingTel – BT
SingTel launches $200m venture fund for start-ups
IN a shot in the arm for the local IT start-up scene, SingTel has launched a $200 million incubation fund to invest in budding infocomm companies.
The telecom giant has set up a subsidiary called Innov8 to scout for start-ups with potential.
Innov8 CEO Yvonne Kwek told BT the venture company will focus on firms with technologies relevant to SingTel’s business. This covers applications on front-end to back-end networking technology.
Mrs Kwek acknowledged that the pool of back-end technology start-ups is small, and said SingTel is interested in technologies that will augment existing infrastructure. For example, technologies to help maximise coverage and spectral efficiency would be attractive, she said.
With Innov8, SingTel hopes to bring its parent company’s clout to the table. Mrs Kwek touted the company’s ability to rope in ‘subject matter experts’ from SingTel’s pool of engineers, as well as an eventual audience of SingTel’s 350 million customers globally for IT projects that get to see the light of day.
Innov8 will invest in start-ups for a stake in their business but won’t take controlling interest, she said.
Running on a team of eight, the venture fund intends to work with government agencies and tertiary institutions to harvest talent, but intends to look beyond our shores as well.
Its $200 million fund will be reviewed regularly, but has been set for a period of three years, Mrs Kwek said.
Jeffrey Paine, managing partner at local venture investment firm Battle Ventures, said the fund has a large sum, even spread out for a global search. ‘SingTel has to look globally for new innovations,’ he said, adding that its face as a Singaporean entity is likely to be perceived as attractive to the global market.
As for the pool of mentors SingTel will bring, Mr Paine said any mentorship, however slight, will help entrepreneurs get off the ground. He said Innov8 looks to be a strong force on the venture scene because it brings to start-ups SingTel’s large amount of capital plus the company’s brand name and industry connections in the mobile sector.
Gwendolyn Tan, a partner at venture company Thymos Capital, said the injection of more funding into the industry is exciting for start-ups, but it doesn’t necessarily mean more start-ups will win funding.
‘It’s a flawed argument to say more money means more people will get funded. A company must have a winning project, regardless,’ she said.
SingTel’s search for innovative projects may indicate Innov8 will focus on later-stage start-ups that have already produced something to show for their efforts, Ms Tan reckons.
Its large pool of funding could indicate it will participate in Series A funding, otherwise known as a company’s first significant round of venture funding, she said. In Singapore, this sum is usually between $300,000 and $1 million.
Alvin Yap, founder of Singapore games outfit Nexgen Studio, said the fund’s size is attractive, but start- ups should also consider the amount of equity SingTel intends to take in them. He pointed to existing ‘bite-size funds’ doled out by the Media Development Authority (MDA), saying the government agency doesn’t take a stake in recipient companies. ‘If I had a start-up, I’d explore the fund,’ he added.
Speaking at a SingTel forum yesterday, Deputy Prime Minister and Minister for Defence Teo Chee Hean said the infocomm industry is a key driver of economic growth through productivity improvements.
Using the government- initiated TradeXchange programme as an example, Mr Teo said the neutral electronic platform for the shipping industry has led to annual efficiency savings of some $1 million. By the end of 2012, 100 companies are expected to participate in B2B transactions over the platform, he said.
SingTel’s push to acquire applications and services talent via Innov8 underscores the telco’s cloud aspirations.
Business group executive VP Bill Chang says SingTel’s cloud services arm, while making up ‘a few percentage points’ of SingTel’s overall billion-dollar infocomm business, is growing fast and has amassed a base of 100,000 seats spread out over 1,000 companies. The aim is to grow its cloud business at a compound annual rate of about 50 per cent, he said.
STEng – OCBC
Continuing to perform
Continuing to replenish its orderbook. STE Engineering (STE) has continued to perform according to our expectations. Since its 2Q10 results, we note that the group has been replenishing its orderbook via new contracts. Specifically, its electronics arm, ST Electronics, had been awarded a contract worth ~S$10.9m to provide SMART vehicle and asset tracking devices for the recovery of stolen vehicles and goods. More recently, it also won a contract worth ~S$29m to supply Automatic Meter Reading (AMR) radio transceivers for Arad Technologies’ AMR solutions. We see these developments positively as these clearly illustrate STE’s strong market position and its ability to deliver reliable and innovative solutions.
May gain from passenger and freight capacity additions. In the aerospace segment, we believe STE may potentially benefit from the return of capacity to the passenger and freight markets. According to the International Air Transport Association (IATA), passenger aircraft orders have surged at recent airshows and aircrafts have been taken from storage at a rate of 195 in 2Q and a further 84 in Jul. While few details were given about the capacity addition in the air freight market, we note that there has also been an additional 11.9% of capacity brought back in Jul (7.7% YTD). Being the world’s largest aircraft MRO service provider, we thus see potential for STE to gain from the return of passenger and freight capacity into the market, especially those coming out of storage.
Higher turnover and PBT expected in 2H10. As a note, STE had guided during its 2Q10 results that its sales and profit before tax (PBT) in 2H10 are likely to fare better than 1H10, lifted by positive contribution from its Electronics, Aerospace and Marine segments. Only the Land Systems segment is expected to post lower PBT in 2H10.
Upgrade to BUY. While STE cautioned that the aviation MRO demand is still lagging and may only see a recovery in 2H11, we believe that the group may get a boost from recent positive news and an earlier-than-expected recovery in the MRO market. As such, we raise our FY10-11 forecasts by 0.4-0.8% to factor in our more optimistic view. With just over a quarter to year end, we also roll our valuation to FY11. At 21x FY11F EPS, our fair value is in turn raised to S$3.66 (S$3.28 on 20x blended FY10/11F EPS previously). We upgrade STE to BUY as we now see a total expected return of 15%.
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.
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.