Author: kktan
Starhub – DBSV
Broadband, prepaid mobile decline
- 3Q14 net profit of S$ 97.7m (+2.5% y-o-y, +4% q-oq) was 3% below our expectations
- Service revenue growth weak on lower broadband, prepaid revenue
- 5Scts interim dividend declared, in line with expectations.
- Maintain HOLD with unchanged TP of S$4.30
Highlights
Revenue impacted by broadband, prepaid mobile
- Competition contributed to the continued decline in broadband revenues which fell 4.0% q-o-q. Prepaid revenues were impacted by SIM ownership restrictions. However, overall revenues were boosted (+2% y-o-y, +3 qo-q) by higher handset sales.
Profitability improved by grant income
- Despite being impacted by lower revenue levels, higher adoption grant income led to a q-o-q improvement in the bottom-line. However, profit margins are likely to decrease in 4Q14 with higher handset sales expected.
Outlook
Price competition in fixed broadband
- Competition in fixed broadband is eroding Average Revenue Per User (ARPU) for StarHub, resulting in lower earnings. The decline in ARPU is unlikely to reverse in the near term with StarHub likely to pursue its current strategy to preserve market share.
Postpaid to support mobile revenue
- Postpaid growth is likely to support the mobile segment despite weaker prepaid revenue. With higher portion of consumers moving to tiered data plans, postpaid ARPU is likely to see further improvement.
Valuation
Given healthy cash generation, we use discounted cash flow valuation (WACC 6.5%, terminal growth 0%) to derive a target price of S$4.30. Besides mid single digit growth, the stock offers FY14F yield of 4.8%.
Risks
Decline in mobile roaming
- A potential decline in mobile roaming could offset the gains from mobile data-repricing and broadband margins may decline sharper than expected.
Starhub – DBSV
Broadband, prepaid mobile decline
- 3Q14 net profit of S$ 97.7m (+2.5% y-o-y, +4% q-oq) was 3% below our expectations
- Service revenue growth weak on lower broadband, prepaid revenue
- 5Scts interim dividend declared, in line with expectations.
- Maintain HOLD with unchanged TP of S$4.30
Highlights
Revenue impacted by broadband, prepaid mobile
- Competition contributed to the continued decline in broadband revenues which fell 4.0% q-o-q. Prepaid revenues were impacted by SIM ownership restrictions. However, overall revenues were boosted (+2% y-o-y, +3 qo-q) by higher handset sales.
Profitability improved by grant income
- Despite being impacted by lower revenue levels, higher adoption grant income led to a q-o-q improvement in the bottom-line. However, profit margins are likely to decrease in 4Q14 with higher handset sales expected.
Outlook
Price competition in fixed broadband
- Competition in fixed broadband is eroding Average Revenue Per User (ARPU) for StarHub, resulting in lower earnings. The decline in ARPU is unlikely to reverse in the near term with StarHub likely to pursue its current strategy to preserve market share.
Postpaid to support mobile revenue
- Postpaid growth is likely to support the mobile segment despite weaker prepaid revenue. With higher portion of consumers moving to tiered data plans, postpaid ARPU is likely to see further improvement.
Valuation
Given healthy cash generation, we use discounted cash flow valuation (WACC 6.5%, terminal growth 0%) to derive a target price of S$4.30. Besides mid single digit growth, the stock offers FY14F yield of 4.8%.
Risks
Decline in mobile roaming
- A potential decline in mobile roaming could offset the gains from mobile data-repricing and broadband margins may decline sharper than expected.
SIAEC – DBSV
Navigating through turbulence
- 2QFY15 earnings disappoint, down 41% y-o-y
- Affected by deferments/cancellations of heavy aircraft checks, extension of engine check intervals
- Cut FY15/16F earnings by 23%/11% to factor in lower workload, margins
- Dividend cut also likely in FY15; downgrade to FULLY VALUED with lower TP of S$3.80
Worst quarterly showing in a long time. 2QFY15 net profit of S$42.1m was down 41% y-o-y and 21% q-o-q. Revenue dropped by 3%, dragged down by lower heavy maintenance revenue. The weaker capacity utilisation resulted in poor operating margin of 5.6% (vs. 7.0% in 1QFY15 and an average of 9.8% achieved in FY14). Growth in fleet management revenue resulted in high subcontract costs as well. Share of profits from associates and JVs also dropped sharply to S$29m (- 36% y-o-y) as the engine MRO centres underperformed. We had highlighted the weakness at SIE’s engine centres earlier as older engine models are being retired on an accelerated
basis and newer models require less engine shop visits, thus lowering utilisation rates and profitability.
Challenges expected to persist in near term. Management indicated that operating environment continues to be challenging in the near term as airlines may continue to extend maintenance cycles for airframes and engines in consultation with OEMs and relevant regulatory authorities. While pent up demand will come back eventually and longer term fundamentals remain intact for the MRO industry, timing of recovery remains uncertain. Meanwhile, pressure on margins continues, with rising business costs and intense competition. SIE has recently entered into a proposed JV with Boeing (49:51) to provide fleet management services to Boeing customers in South Asia Pacific region. This and other collaborations with strategic OEM partners should drive long term growth prospects for SIE.
Lower yield prospects. We cut our FY14/15F earnings by 23%/11% to factor in the challenges described above. Likewise, we lower FY15 dividend expectation to 16Scts (vs. 25Scts in FY14), including the 6Scts interim dividend already announced. Hence, current valuations are unattractive with SIE trading at 26x PE and 3.6% yield. Hence, we downgrade the stock to Fully Valued with a lower TP of S$3.80 (details inside).
Singpost – CIMB
Take profit
1HFY3/15 core net profit of S$73.7m formed 46% of our and 47% of consensus full-year forecasts. We view the results as largely in line as we expect a stronger 2H to be driven by the postage rate hike (effective Oct) and full contributions from its recent M&As. However, we cut our FY15-17 EPS by 4-9% to take into account the enlarged share base, and also in anticipation of higher costs as SPOST continues to expand its regional footprint. Our DCF-based target price is unchanged after taking into account a higher net cash position from the proceeds of the issuance of shares to Alibaba. While we like the stock fundamentally, we believe valuations are rich at this point, and would advise investors to take profit. Thus, we downgrade to Hold from Add.
Mail disappointed, logistics impressed
The mail segment disappointed, as domestic mail saw an unexpectedly sharp decline in revenue of 5% yoy (1Q: -2% yoy excluding one-off gains). Due to the lower proportion of higher-margin traditional mail revenue, mail operating margin fell to 27.6% (1Q: 28.4%) and operating profit fell 3% qoq. Meanwhile, logistics surprised us with a higher operating margin of 5.4% (1Q: 3.9%) despite larger contributions from the lower-margin freight forwarding businesses, including the recent acquisitions of Tras-Inter Co. and F.S. Mackenzie. The warehousing unit, Quantium Solutions, saw impressive revenue growth of 9% qoq, driven by an increase in ecommerce logistics activities.
Gaining traction in ecommerce but costs may escalate
In 1HFY15, SPOST had 1,000 ecommerce customers, up from 600 in FY14. Ecommerce accounted for 26.9% of 1HFY15 revenue, up from 23.8% in 1HFY14 (+20% yoy growth in ecommerce revenue). Management explained that in addition to regional customers, it was also targeting smaller brands looking to expand in a particular country. To address this market, SPOST plans to invest in its own delivery channel in ASEAN, which we believe will be capital intensive and is likely to put pressure on margins. We believe that volumes will have to come in more aggressively to match the costs from these ongoing investments.
We downgrade to Hold
SPOST’s share price has risen by 25% since Alibaba announced that it was taking a 10.3% stake in SPOST. At 24x FY16 P/E, SPOST’s valuations are already the highest among peers, while its earnings growth profile remains moderate as SPOST is still in the investment phase. We advise investors to take profit at the current levels, and would look for a better re-entry point.
Starhub – OCBC
Keeps FY14 guidance as expected
- No change to FY14 estimates
- Still intense broadband competition
- Expects EBITDA margin pressure
3Q14 earnings slightly ahead of forecast
StarHub Ltd reported its 3Q14 results last evening, which saw the telco posting a net profit of S$97.7m, up 2.6% YoY and 3.6% QoQ, which was also about 10% ahead of our forecast; this as EBITDA service margin remained relatively firm at 34.5% (versus 33.6% in 3Q13 and 34.0% in 2Q14). We note that this was mainly due to the 56.8% YoY jump (+228% QoQ) in other income to S$17.4m. Otherwise, revenue was just 2.3% higher YoY (+2.7% QoQ) at S$592.0m, or about 2% above our forecast. 9M14 revenue though slipped 0.3% to S$1739.9m, meeting about 74% of our full-year forecast, while net profit slipped 3.8% to S$276.2m, or about 76% of our FY14 estimate. Quarterly dividend was S$0.05/share as guided.
Intense broadband competition
As expected, StarHub experienced intense competition in its Broadband business, which saw revenue tumbling another 17.4% YoY and 3.5% QoQ (was down 17.3% YoY and 5.4% QoQ in 2Q14). Monthly ARPU also slipped to just S$35, despite adding another 6k subscribers in the quarter, as more existing customers renew their contracts with
lower price plans. Meanwhile, StarHub also saw a large 120k fall in pre-paid subscribers, although it did add 11k post-paid customers, keeping the post-paid churn at 0.9%. Pay TV business was fairly stable, with 4k new subscribers added, although ARPU was flat at S$51/month.
No change to FY14 guidance
StarHub has kept its FY14 guidance unchanged, with revenue likely coming in comparable to FY13 levels; EBITDA service margin at 32%; total capex spend at 13% of total revenue; also to pay out S$0.20/share dividend, or S$0.05 per quarter. By segment, StarHub expects revenue growth to come from its mobile and fixed network, but this will be mitigated by the still-competitive broadband business. The strong demand for the new iPhone 6/6+ will also put pressure on EBITDA margin in 4Q14.
Maintain HOLD with S$3.81 fair value
Given the affirmation in guidance, we see no reason to change our FY14 estimates. As such, our DCF-based fair value will also stay at S$3.81 for now. We also maintain our HOLD call.