Author: kktan
STEng – DBSV
Towards a strong 2H
• 2Q earnings rose 14% y-o-y in line, no change to our forecasts
• Aerospace division recovery on track, with higher growth expected in 2011
• Maintain BUY with S$3.55 TP; total return of 13% including dividends
Recovery in full swing. The Group reported an expectedly strong set of 2Q results with headline net profit of S$124m, up 14% y-o-y and 34% q-o-q. Revenue was up 8% y-o-y to S$1.5bn, on the back of the continuing recovery in Aerospace division as well as strong auto sales in Land Systems, which helped the division post record revenues in 2Q10 (+ 51% y-o-y). Bronco/ Warthog deliveries to the UK MOD will commence full steam in 2H10 and should be complete by 1H-FY11. Group PBT margin recovered from 8.6% in 1Q10 to 10.4% in 2Q10, driven by improving margins at Aerospace and Electronics divisions.
Aerospace will be the key driver. The aviation recovery will continue to drive Aerospace earnings, though the heavier checks will mostly lag the recovery and will likely kick in towards 2H11, according to management. In the meantime, the S$1bn Jet Airways order win has been followed by other long-term orders from Delta Airlines and Jetstar Group, which will keep the hangars busy. To position itself for the imminent upturn in MRO spending next year, STE has added one hangar in the US and the Xiamen engine facility will come on-stream by end-2010. A new MRO facility at Guangzhou is also expected to be ready by 2012-13.
Maintain BUY, potential yield of ~4.5%. The group ended the quarter with an orderbook of S$11.3bn and gross cash of S$1.7bn, and we remain confident of our FY10-11 forecasts. Our TP is unchanged at S$3.55. A weaker USD will be the key risk, going forward.
STEng – CIMB
Steady growth
• In line; maintain Outperform. 2Q10 net profit of S$124m (+14% yoy) met our expectations and consensus, with 1H10 accounting for 45% of our FY10 forecast. Qoq profits improved in all businesses with Aerospace being the clear leader. Our earnings estimates and target price of S$3.62 are unchanged, still based on blended valuations. We continue to like STE for its: 1) defensive revenue; 2) sustainable high ROEs (30%); and 3) decent dividend yields of about 5%. We see catalysts from more sizeable order wins, M&As and a stronger pick-up in Aerospace.
• Aerospace: more upside in 2011 from MRO pick-up. Aerospace’s 2Q10 PBT of S$64m (+5% yoy, +50% qoq) met our expectations. PBT margins expanded 320bp qoq to 12.8% from stronger work volume. Management attributed this to PTF deliveries and maintenance contracts. There had been no strong pick-up in MRO jobs yet in 1H10 despite the recovery in the global aviation industry as heavy maintenance spending usually lags by 6-12 months, depending on airlines. Therefore, we are likely to see positive spillover in 2H11, providing earnings upside to the division. Aerospace recently secured a heavy maintenance and C-checks contract from Delta Airlines for 75 units of its 757 aircraft. No amount was disclosed but we estimate the contract value at more than US$100m.
• Steady growth in Electronics. PBT of S$35m (+5% yoy, +23% qoq) was spurred by a good sales mix and stronger contributions from iDirect. PBT margins improved 380bp yoy and qoq to 11% from the sale of better-margin products. We expect steady growth from Electronics on the back of the execution of train and transportrelated contracts secured in 1H10.
• Balance sheet remained strong. The group had a net cash position of S$334m. Given its robust balance sheet, we believe it is still on the lookout for acquisitions to power its longer-term growth. Although order book shrank slightly to S$11.3bn in 2Q10 from S$11.8bn in 1Q10, this is still considered high against its historical order books.
STEng – BT
ST Engineering’s Q2 net profit rises 14% to $124m
SINGAPORE Technologies Engineering’s net profit rose 14.1 per cent year on year to $124 million in the second quarter, boosted by sharply higher revenue from the sale of land vehicles and equipment.
Its land systems division, which makes specialised military and industrial vehicles, contributed most to the increase in net profit, due to higher project deliveries and vehicle sales.
Its Q2 net profit of $124 million was 33.5 per cent higher than in Q1. For the first half of the year, ST Engineering’s net profit was $216.8 million, up 11.8 per cent year on year.
The group, whose businesses include aircraft repair, shipbuilding, and electronics and weapons manufacturing, had $11.3 billion in outstanding customer orders at end-June. And it expects $2.2 billion of these to be delivered in the current H2.
Part of ST Engineering’s sales come from supplying the Singapore Armed Forces and other military customers. Commercial sales made up 60 per cent, or $913 million, of its Q2 turnover.
Temasek Holdings has a 50.5 per cent stake in the company, comprising a direct holding of 49.6 per cent and smaller stakes held by Temasek-linked companies such as DBS Group and Keppel Corporation.
ST Engineering’s Q2 earnings per share came in at 4.11 cents, up from 3.62 cents a year back and 3.08 cents in Q1 this year. Its share price ended unchanged at $3.26 yesterday, before the earnings announcement.
The group expects 2010 full-year turnover and pre-tax profit to be higher than last year barring unforeseen circumstances, ST Engineering president and chief executive Tan Pheng Hock said in a statement. An interim dividend of three cents a share has been declared, unchanged from the payout a year back.
Turnover at two of ST Engineering’s four main business segments – aerospace and marine – was little changed in Q2 compared with a year ago, at $501 million and $246 million, respectively. A third segment, electronics, reported a 10 per cent drop in turnover to $314 million, due to lower-value project milestone completions during the quarter. But a sharp rise in turnover from the land systems division to $407 million – up 52 per cent from a year ago – boosted the group’s overall turnover 8 per cent year on year to $1.52 billion.
Pre-tax profit rose at all four main business segments in Q2, compared with Q1 and a year ago. The group expects profits to rise in the second half of the year for the aerospace and marine divisions compared with H1. It expects profit to be lower for the land systems segment and little changed for the electronics division.
SMRT – AmFraser
A second round of disappointment
• SMRT Corp Ltd results surprised the market on the downside: in addition to net profit fall of 21% YoY to $38.2mil in 1QFY11, management now guides “the profitability of FY2010 may not be maintained.”
• As we were at the low-end of the full-year forecast range with FY11F EPS at 10.3 cents representing 4% YoY fall, we are comfortable maintaining our estimates. We also maintain our Fair Value at $1.99
and HOLD rating.
• SMRT’s fare business – i.e. train and bus operations which account for 78% of operating revenue
– saw sharply lower operating profit. Operating margins for MRT plunged to 21% from 32% year ago, while bus business went into operating loss of $0.8 mil, compared to $1.2mil in 1QFY10.
• MRT daily ridership growth of 13% YoY to 1,589 in 1QFY11 and 8% YoY to 833 for bus, gives little encouragement against unavoidable cost pressures. While 1QFY11 margins improved from the first round of nasty surprise in 4QFY10, managment guides that “the new Circle Line will continue to operate at a significant loss over the next 12 months.” Circle Line 1,2 and 3, reached daily ridership of 145,000, but this still falls far short of projected 200,000.
• Ramped up requirements for line CCL 1 and 2 since April 2010 opening, and preparation for CCL 4 and 5 (13 stations) opening in FY12, will ensure no let up in cost increases. At the same time, savings from Jobs Credit will cease from July 2010.
• In 1QFY11, staff costs rose 10% YoY due to 3% rise in headcount to 6,600, and made up 39% of total operating costs. At the same time, fuel costs jumped 29% YoY due to higher prices and consumption,
and accounted for 20% of total operating costs.
• After neutralized impact in 1QFY11 from fare cuts implemented on 1 April 2009, average MRT fare fell 1% YoY to 89.7 cents while that for bus fell 2% YoY to 65 cents. The new fare structure from July 2010 will be mildly positive, offsetting much of the end to a 3% temporary cut for April 2009 to June 2010.
• A buoyant economy continued to boost the segments of rental of commercial space and advertising. Combined, revenues rose 13%, and made up 10% of total operating revenues. SMRT’s lettable space expanded 8% YoY to 31,217 sq m with average occupancy rate ar 98.6%.
• Other disappointments: (1) Despite 3% rise in taxi revenue, operating profit dived 41% YoY due to higher repair and maintenance costs as well as increased hirer benefits paid out. (2) Client Nakheel PJSC is terminating its contract with SMRT for the operation and maintenance of Palm Jumeirah.
• Capex projection is now slightly tempered to S$150mil for FY11F, with $30-40mil allocated for taxi operations and about S$50mil for train.
SMRT – BT
Circle Line weighs heavy on SMRT
SHARES in SMRT Corp slipped 12 cents – or 5.4 per cent – in trading to close at $2.10 yesterday, after SMRT cautioned last week that it may not be able to maintain FY2010’s profitability for the current financial year ending March 31, 2011.
For the next 12 months, profitability is expected to be impacted by higher staff costs, volatility in energy prices and continuing losses for the Circle Line.
A DMG research report said: ‘We believe that Circle Line operations could remain a drag on earnings for FY11-12, considering that Stages 4-5 will only be completed in 2H11 (SMRT’s FY12), and may require a period of gestation to provide any possible accretion to SMRT’s bottom line.’
While ridership on the Circle Line has risen from an average daily ridership of 124,000 to nearly 145,000, the break-even target lies at about 200,000, analysts said.
The group has also recently switched from a transfer rebate system to a distance-based charging one, which may have a negative impact on fare revenue in the next 12 months.
For its fiscal first quarter ended June 30, SMRT registered a 20.7 per cent fall in net profit to $38.24 million, despite revenue rising 9 per cent to $235.34 million.
Analysts were upbeat on its retail business. ‘Advertising will benefit from the upcoming major events (such as Youth Olympic Games and Formula One) while rental will benefit from the addition of rental spaces from refurbished train stations and new Circle Line stations,’ Phillip Securities Research analyst Toh Wei Kiong wrote.
Citi Investment Research maintained a ‘sell’ on the stock, with a target price of $1.90 while Phillip maintained a ‘hold’, downgrading its fair value estimate from $2.36 to $2.18.
DMG called a ‘sell’ on SMRT with a target price of $2 and a ‘buy’ on ComfortDelGro (target price: $1.78), citing Comfort’s 15 x FY10 P/E, versus SMRT’S 20 x FY11 P/E multiple.