Author: kktan
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.
SIAEC – OCBC
2QFY15 results below expectations
- 2QFY15 PATMI plunged 40.7% YoY
- More aircraft checks deferred
- Downgrade to SELL
Disappointing 2QFY15 results
SIA Engineering Company’s (SIAEC) reported a 3.0% YoY decline in its 2QFY15 revenue to S$285.2m and a 40.7% drop in PATMI to S$42.1m. Its 1HFY15 results were below expectation as its revenue and PATMI formed 47.8% and 34.5% of our FY15 forecasts. SIAEC’s 1HFY15 revenue decreased 0.7% to S$579.3m, due to lower airframe and component overhaul services (ACS) revenue from fewer aircraft checks, partly offset by the higher fleet management programme (FMP) revenue. Its 1HFY15 PATMI declined 31.7% to S$95.6m, on higher subcontract costs and a 36.2% YoY drop in share of profits from associated and JV companies to S$29.1m. SIAEC’s key JV, SAESL (services Rolls-Royce engines) experienced a 30% reduction in works on engine cowls due to improvement modifications that reduced engine shop visits. Its main associate, Eagle Services Asia, also saw reduction in earnings as Pratt & Whitney engines are near the end of life-cycle.
Longer interval between checks
We think SIAEC is going through the cyclical period where customers deferring aircraft checks (i.e. increase interval between checks). The number of ‘C’ checks declined from 37 in 1HFY14 to 34 in 1HFY15 and more significantly for ‘D’ checks, the number dropped from 23 in 1HFY14 to 10 in 1HFY15. The number of ‘A’ checks remained resilient at 192 in 1HFY15 compared to 193 in 1HFY14. Note that ‘D’ checks has the most impact with an estimated revenue of S$3m-S$6m per check. With lower revenue from ACS and high staff costs, SIAEC reported an S$7.4m operating loss for its ACS segment. We expect SIAEC to face this situation for at least the next 12 months, until which, the demand for checks from customers should pick up gradually as their extended interval runs out.
Lower FV; Downgrade to SELL
With disappointing results, expected depressed earnings for the next 12 months, and change in analyst coverage, we cut our FY15 and FY16 PATMI by 28.7% and 18.1% respectively. Hence, we lower our FV from S$4.71 to S$3.80 based on 19.0x blended FY15/16F PER, and downgrade to it SELL.
SIAEC – OCBC
2QFY15 results below expectations
- 2QFY15 PATMI plunged 40.7% YoY
- More aircraft checks deferred
- Downgrade to SELL
Disappointing 2QFY15 results
SIA Engineering Company’s (SIAEC) reported a 3.0% YoY decline in its 2QFY15 revenue to S$285.2m and a 40.7% drop in PATMI to S$42.1m. Its 1HFY15 results were below expectation as its revenue and PATMI formed 47.8% and 34.5% of our FY15 forecasts. SIAEC’s 1HFY15 revenue decreased 0.7% to S$579.3m, due to lower airframe and component overhaul services (ACS) revenue from fewer aircraft checks, partly offset by the higher fleet management programme (FMP) revenue. Its 1HFY15 PATMI declined 31.7% to S$95.6m, on higher subcontract costs and a 36.2% YoY drop in share of profits from associated and JV companies to S$29.1m. SIAEC’s key JV, SAESL (services Rolls-Royce engines) experienced a 30% reduction in works on engine cowls due to improvement modifications that reduced engine shop visits. Its main associate, Eagle Services Asia, also saw reduction in earnings as Pratt & Whitney engines are near the end of life-cycle.
Longer interval between checks
We think SIAEC is going through the cyclical period where customers deferring aircraft checks (i.e. increase interval between checks). The number of ‘C’ checks declined from 37 in 1HFY14 to 34 in 1HFY15 and more significantly for ‘D’ checks, the number dropped from 23 in 1HFY14 to 10 in 1HFY15. The number of ‘A’ checks remained resilient at 192 in 1HFY15 compared to 193 in 1HFY14. Note that ‘D’ checks has the most impact with an estimated revenue of S$3m-S$6m per check. With lower revenue from ACS and high staff costs, SIAEC reported an S$7.4m operating loss for its ACS segment. We expect SIAEC to face this situation for at least the next 12 months, until which, the demand for checks from customers should pick up gradually as their extended interval runs out.
Lower FV; Downgrade to SELL
With disappointing results, expected depressed earnings for the next 12 months, and change in analyst coverage, we cut our FY15 and FY16 PATMI by 28.7% and 18.1% respectively. Hence, we lower our FV from S$4.71 to S$3.80 based on 19.0x blended FY15/16F PER, and downgrade to it SELL.
Stahub – CIMB
No real change in course
StarHub’s 9M14 core net profit largely met expectations, forming 75% of our and consensus full-year forecasts. Service revenue was flat qoq, held back by another quarter of declines for broadband, while EBITDA margin improved due to a higher recognition of NBN grants in the quarter. As expected, a quarterly DPS of S$0.05 was declared. We maintain our Hold rating with an unchanged DCF-based target price of S$4.25 (WACC: 7.1%). Despite a brighter outlook for its mobile business, its broadband business could remain under pressure while the pay TV business lacks growth prospects. We also do not expect StarHub to raise its annual DPS of S$0.20 or pay any special dividends over the next three years due to high capex and spectrum payments.
Broadband ARPU slides further
Broadband revenues fell by 3.5% qoq (-17.4% yoy) in 3Q14, its fifth consecutive quarter of decline. This was driven by a 5.4% drop in ARPU to S$35, its lowest level so far, on the back of intense competition. While management noted that recent competition has centred around higher-speed packages (e.g. 1Gbps for S$49/month), we believe that StarHub’s ARPU could remain under pressure as it defends its higher-end broadband customer base. We forecast ARPU to decline to S$37/32/30 in FY14/15/16.
Weak prepaid offsetting positive postpaid trend
Mobile revenues were largely flat qoq as growth in postpaid was offset by the continued weakness in prepaid, where data usage growth has been insufficient in offsetting the reduced International Direct Dial (IDD) calls and SMS volumes. For postpaid, subscribers grew by 0.9% qoq, while ARPU rose by 1.5% qoq. Subscribers on tiered pricing plans rose by 2% pts qoq to 59%, while users that exceeded their data bundles jumped 4% pts qoq to 22%.
Margins to take a dip in 4Q14 due to higher handset sales
Despite higher handset subsidies in 3Q14, EBITDA margin (on service revenue) rose by 0.6% pts qoq (+0.9% pts yoy). This was only because StarHub recognised higher NBN adoption grants of S$12m in the quarter (2Q14: zero) after receiving regulatory approval. We expect margins to take a dip in 4Q14 on substantially higher handset subsidies due to the full quarter impact of iPhone 6 sales (vs. two weeks in 3Q14). This should bring full-year EBITDA margins (on service revenue) down to our projected 33.1% (9M14: 33.7%).
SIAEC – CIMB
A year of famine
SIE’s 2Q15 net profit of S$42m was below our expectations (S$60m) and consensus (S$68m) due to the weak contribution from JVs and associates that formed 62% of pretax profit. 1H15 net formed 40% of our FY15 forecast. Better engine reliability caused a reduction in engine visits required by its JVs and associates. The maintenance programme is likely to be delayed until CY16, when we expect it to restart with a vengeance. Airframe heavy checks plunged because of similar reasons and cancellations. The only positive is the interim DPS of 6 Scts. We cut FY15-17 EPS by 11-14% for lower contribution from JVs/associates. Accordingly, our target price is lowered to S$4.00, still based on blended P/E and DCF. Maintain Reduce. Weak qoq earnings and margin pressure could be the key de-rating catalyst.
If it ain’t broke, don’t fix it
We believe that SIE is being squeezed by struggling original equipment manufacturers (OEMs). 2Q15 JV contribution was down 30% yoy to S$18.5m, while associates’ contribution fell 52% yoy to S$10.6m. Its main JV, SAEL, which services Rolls-Royce Trent engines saw a 30% reduction in engine repairs, as the newer engines are more reliable. This translates into longer intervals between overhauls, with certain modules being delayed by up to two years. SIE’s associate, Eagle Services, was also negatively affected by lower repairs for the long-suffering Pratt & Whitney, which has been struggling to defend its engine market share.
Airframe division incurred operating loss for the first time
Airframe maintenance revenue dipped 9% yoy from S288m in 1H14 to S$262m in 1H15. Similar to the engine segment, several customers delayed their heavy check maintenance. Only 10 “D” checks were performed in 1H15 versus 24 checks in 1H14. Certain contracts were also cancelled without penalty (for goodwill). High fixed labour costs (50% of airframe costs) resulted in the division posting its first operating loss of S$7.4m in 1H15. Despite the unimpressive Changi airport data, Line Maintenance revenue was stable at S$221m in 1H15, thanks to more light checks during line maintenance.
One-year famine, at the very least
SIE is facing structural issues, with internal pressure (high labour costs) and external (customers delaying maintenance to cut costs). We believe that the stock is unlikely to outperform the market in the next 12 months.