Author: kktan
SATS – OCBC
On board flight to recovery
Results in line with expectations. SATS Limited reported a good set of 4QFY10 results yesterday. Revenue was up 19.6% YoY (-10.1% QoQ) to S$390.6m due to S$165.1m contribution from Singapore Food Industries (SFI) and higher aviation revenue of S$218.7m, while PATMI was up 10.2% YoY (-12.9% QoQ) to S$46.5m, driven by higher contribution from overseas associates which more than offset the lower jobs credit benefit of S$1.5m for the quarter. Both revenue and earnings were spot on with our expectations. For FY10, revenue raked up a growth of 44.9% to S$1,538.9m, whereas PATMI registered a 23.5% rise to S$181.2m. The group ended the fiscal year by proposing a final dividend of 8 SG cents. Including interim dividend of 5 SG cents, total FY10 dividend translates to a payout ratio of 78% (up from 73% in FY09) and a yield of 4.7%.
Operating data for aviation business. 4QFY10 saw higher aviation business volumes across all operations, reflecting the recovery of the aviation industry and the Singapore economy. However, growth from meals produced and cargo throughput in the quarter was still not enough to bring the volumes back to pre-crisis level on an annual basis, resulting in declines of 6.8% and 3.7%, respectively. On brighter note, passengers and flight handled rose 6.7% and 8.2% respectively due to more traffic from low-cost carriers and the addition of Tiger Airways to its customer base.
Performance at SFI. According to management, revenue at SFI declined 7.1% in FY10 (as opposed to estimated 5.0% decline in SATS ex-SFI contribution), due to lower food distribution revenue from its Singapore operations, discontinuation of operations at Cresset in UK and the weaker pound. However, due to cost management and synergies from integration, pre-tax profit and earnings improved by 72.4% and 92.9%, respectively. We understand that the integration process post-SFI acquisition is now substantially completed, with S$12.2m savings expected per annum (S$7.0m savings achieved thus far).
Maintain BUY. Going forward, SATS expects to see improvements in activity level in FY11 as airlines gradually reinstate their capacities on the back of increased flights and cargo throughput. In Singapore, it is expecting to benefit from the opening of the two integrated resorts and iconic events such as the Youth Olympic Games and F1 Singapore Grand Prix. As the results and outlook are in line with our view, we are holding our FY11F revenue intact for now. Our DCF-based fair value also remains at S$3.27, implying a 17.6% upside potential. Maintain BUY.
SATS – BT
SATS profit surges as revenue hits record
Full-year results get boost from SFI consolidation and offshore associates
FULL consolidation of Singapore Food Industries (SFI) and stronger contribution from offshore associates boosted the results of mainboard-listed Singapore Airport Terminal Services (SATS) during a year when its aviation business was under pressure.
The company, which ceased to be a Singapore Airline (SIA) subsidiary in September last year and is now 44 per cent owned by Temasek Holdings, yesterday unveiled record revenue of $1.54 billion for the year ended March 31, 2010.
This was a 45 per cent rise from the previous year’s $1.06 billion, and was due to some $634.4 million in contribution by SFI, which SATS acquired in February last year.
Net profit was up 24 per cent to $181.2 million, from $146.7 million, boosted by strong contribution from overseas businesses, especially ground-handling associates in Indonesia and Hong Kong.
During its January-March final quarter, the company boosted its net profit by 10 per cent to $46.5 million, on a 20 per cent rise in revenue to $390.6 million. The previous corresponding quarter’s numbers included two months of contribution from SFI.
The company had $196.4 million in cash, with free cashflow up 22 per cent to $190.1 million. Having prematurely paid down its outstanding $200 million MTN facility several months ago, it had virtually no debt.
SATS declared a final dividend of 8 cents per share, which when added to the 5 cents interim payout, totalled 13 cents for the year – 30 per cent more than the previous year and a record payout ratio of 78.1 per cent for normal dividend.
Besides the fact that food is becoming an increasingly huge portion of SATS’ business, what was striking about this set of results was the fact that its overseas associates – in which SATS had patiently placed a lot of faith for so many years – started paying off.
During the fourth quarter, contribution by overseas businesses – including associates – rose a whopping 225 per cent to $13 million. For the full year, their contribution grew by 89 per cent to $41.9 million.
The overseas business accounted for 27.3 per cent of revenue, almost four-fold from the previous year’s 7.5 per cent.
CEO Clement Woon pointed out that SATS’ Indonesian business did well as the country’s aviation industry remained largely unscathed by the industry slowdown last year. Meanwhile, the Hong Kong cargo handling business continued riding on the East Asian economic recovery.
With SFI now fully integrated and with its UK-based Daniels Group business a market leader, food now accounts for 67 per cent of SATS’ revenue, leaving aviation with just 32.2 per cent (the rest is corporate business). But in terms of segmental business, aviation is 56.7 per cent, down from 86.6 per cent a year earlier. Non-aviation business accounts for 43.1 per cent.
Mr Woon also expressed confidence that SATS’ joint venture in India with Air India will soon deliver on its promise by clinching airport contracts around the country.
‘We are now positioned to bring in the business,’ said Mr Woon, who has been instrumental in charting the transformation of the erstwhile SIA subsidiary.
Going forward, he expressed confidence that SATS was well positioned to ride the pickup in the global aviation market in particular, and the global economy in general.
Separately, SATS yesterday also announced that it has secured a 5-plus-5 year A$224 million contract from Singapore Armed Forces to provide logistics and support services in Australia.
SATS shares closed trading yesterday at $2.78.
STEng – CIMB
Turnaround year
• Maintain Outperform, results in line. 1Q09 net profit of S$92.8m (+9% yoy) was below our initial expectation of S$112m and consensus (S$121m), forming 19% of our FY10 forecast. The star segments were Marine and Electronics, offsetting Aerospace weakness. However, we expect stronger subsequent quarters to make up for the shortfall as management guides for better turnover and PBT in FY10 vs. FY09. Our earnings estimates are unchanged with our target price still at S$3.62, based on blended valuations. We see catalysts from more sizeable order wins and a stronger pick-up in all divisions.
• Aerospace seasonally weak; aviation industry bottomed out. 1Q10 Aerospace PBT of S$42.7m (+7% yoy) was below our expectation mainly due to a slower-than expected pick-up in the components division and fewer milestone completions. Sales in the US remained strong on the back of long-term contracts with airlines. Aerospace delivered three PTF projects in 1Q10. We believe there is room for improvement in its PTF margins as another 12 deliveries are expected in subsequent quarters. We expect 2Q10 earnings to be stronger (above S$58m) as management guides for a better 1H10 vs. 1H09 (S$101m). Management also sees the aviation industry bottoming out and expects MRO spending to resume in 6-9 months’ time.
• Stronger outlook for Marine and Electronics. Marine’s order book has been ‘healthy’ with brisk shipbuilding at VT Halter Marine US and Singapore yards. Management also sees more enquiries on specialised vessels in Singapore which could offset weaker rates in ship repair. Electronics is expected to be positive from more milestone completions for LTA’s Circle Line, the Taiwanese MRT, satellite communications and software system projects.
• Land Systems hit by forex loss. 1Q10 PBT of S$22.8m (-14% yoy) was affected by lower sales in the Munitions & Weapons division. The group also booked a S$6m forex translation loss as a result of euro weakness.
• Record-high order book. Group order book reached S$11.8bn with YTD announced wins of about S$1.9bn mainly from Aerospace. About S$3.2bn will be recognised in the coming quarters. Operational cash flows improved 18% yoy to S$457m in 1Q10.
STEng – DBSV
Currency issues derail earnings slightly
At a Glance
• Net profit of S$93m (including forex losses) was slightly below our estimates as Aerospace earnings disappointed
• Earnings should, however, gather momentum in 2H10 as new projects in Aerospace, Land Systems contribute
• Management more upbeat on prospects for rest of year, expects FY10 Group PBT to be “higher” than FY09
• Maintain BUY with reduced TP of S$3.55 as we trim our FY10 EPS estimates by 3.6% on account of weaker US$
Comment on Results
Weak margins and forex losses. Owing to a slowdown in the components business, Aerospace division margins weakened to 9.6% in 1Q10 vs. 12.9% in 4Q09 and PBT declined 26% q-o-q. As a result, the Group’s reported net profit of S$92.8m (up 9% y-o-y, down 28% q-o-q), on the back of S$1.36bn in revenues, came in slightly below our estimates, even after adjusting for a forex loss of S$8.3m. Being more heavily exposed to the heavy maintenance business, the ongoing recovery in air travel has had a more lagged effect on STE’s MRO business than earlier anticipated. Land Systems PBT was also down 13% y-o-y, partly due to a weak Euro.
Recommendation
Management seemed more upbeat about the Group’s prospects for the rest of the year, as they now expect FY10 PBT to be “higher” than FY09 PBT, rather than “comparable” as guided at end-FY09. This comes on the back of a robust orderbook of S$11.8bn, up significantly from the S$10.3bn as of end-FY09. The new contract from Jet Airways (India) should commence in 2Q10, and a majority of the Warthog deliveries to the UK MOD are also scheduled for 2H10. On the PTF conversion front, 3 aircraft were redelivered in 1Q10 and another 14 aircraft are scheduled for redelivery in FY10, thus adding to Aerospace division profitability. Key risk is currency. Every 1 % change in USD/SGD rate affects topline by S$13m and bottomline by about S$1.3m. Thus, given the prospects of a weaker US$ –our economist recently revised his end-FY10 USD/SGD target to 1.34 from 1.38 – we trim our FY10-11 EPS estimates by 3-4% and adjust our TP to S$3.55. Maintain BUY; given the largely stable earnings base and decent dividend yield of 4.5%.
SingTel – DBSV
Reversal of traditional role
• Mature markets to outshine regional associates in 4Q10F – a reversal of traditional role.
• SingTel may report 4Q10F profit of S$973m (+1% yoy, – 2% qoq) in line with street expectations. Special dividends cannot be ruled out, in our view.
• FY11F earnings lowered by 2.5% due to weaker than expected Telkomsel. TP lowered to S$3.40
• BUY quality blue chip at 12x PER (Hist. average 13.4x)
Expect in line 4Q10 results on 13 May, despite weak associate numbers. Consensus has not caught up with the strong Singapore earnings (up 7% yoy) and Optus earnings (up 17% yoy in AUD) in 9M10, attributed to exclusive iPhone advantage in Singapore and decrease in debt & interest expenses at Optus. While we know that Bharti and Telkomsel are down sequentially in 4Q10F, Singapore and Optus should be up sequentially in a seasonally strong 4Q10F.
Growth from regional associates and Optus. Despite potential single-digit earnings decline at Bharti, associate contribution should witness low-single digit growth, thanks to (i) lower losses at Warid, PBTL and (ii) single-digit earnings growth at Telkomsel, AIS. Optus earnings are expected to register single digit growth (in AUD terms) helped further by strong AUD. Singapore earnings may not grow due to high content costs and the launch of National Broadband Network.
Special dividends cannot be ruled out with 4Q10F results. We believe that Bharti would manage its debt (for Zain acquisition) through free cash flow and listing of tower subsidiary Bharti Infratel (rather than raising equity at AirTel level). This leaves SingTel with the flexibility of paying out additional 8-10 Scents in special dividends, in our view.