Author: kktan
M1 – DBSV
Declining handset subsidies
- 2Q14 net profit of S$43.9m (+12.1% y-o-y, +2.5% q-o-q) was 4-5% ahead our estimates. Declared interim DPS of 7Scts (+2.9% y-o-y) or 75% payout ratio
- Postpaid acquisition costs declined sharply, partly offset by a drop in International Call Service (IDD) revenue.
- BUY with TP of S$3.85 for mid single-digit growth and 4.6% yield
Highlights
Cost reduction offset weak IDD revenue. Postpaid acquisition cost per subscriber declined sharply to S$268 (-19% y-o-y, -13% q-o-q). It was partly offset by a drop in IDD revenue to S$23.7m (-20% y-o-y, -1% q-o-q).
Tiered data plan seeing fast adoption. About 58%of postpaid subscribers (54% in 1Q14) adopted the tiered data plan, with 20% (16%) exceeding their caps. M1 expects adoption of tiered plans to stabilise at around 65%.
SATS – OCBC
Uninspiring 1QFY15 results
- 1QFY15 results below forecasts
- Focus on creating operating leverage
- Maintain HOLD
1QFY15 results below expectations
SATS’s 1QFY15 results came in below our expectations. Revenue increased 0.2% YoY to S$434.5m, or 6.4% below our forecast. Food Solutions revenue dropped by 0.9% to S$262.7m due to weaker performance from subsidiary TFK. The drop is smaller compared to the previous quarter’s 5.7% as the effect of Quantas’ move to Dubai from Changi Airport is absent in the current quarter’s YoY comparison. Gateway Services revenue increased by 2.0% to S$171.2m, which we deem to be largely in line with the 2.5% growth in flights handled in Singapore. Despite top line growth, PATMI dropped 6.3% YoY to S$43.3m, which is 4.6% below our estimate. This is due to: 1) lower operating margin (-0.3ppt to 9.1% in 1QFY15) mainly caused by higher staff costs, and 2) lower contributions from associates and JVs (-16.8% YoY to S$10.4m in 1QFY15) on the back of muted Asian cargo volumes.
Creating operating leverage is multi-year process
Management guided that headcount reduction will continue as processes are made more efficient. Capex spending is rising (S$14.2m in 1QFY15 vs. S$12.8m in 1QFY14) and will stay elevated. Additionally, airlines at existing Changi Airport terminals are still switching to self-check-in processes, eventually reducing the need for staff. With regional airlines struggling, we think the cost-saving switch will come in the foreseeable future. We note that initiatives to create operating leverage are multi-year processes which involve clients as well. Thus, we are not too worried about the current fall in operating margin.
M&A to tap on regional air traffic growth
Management said they are on the lookout for M&A opportunities to grow inorganically. SATS is well-poised to do so with a healthy net cash balance of S$270m and interest coverage ratio of 99x as of Jun-14. This is likely a key source of overseas growth going forward, to enjoy economies of scale in a capital intensive business. Incorporating the latest results and retaining a 20x FY15F PER, we derive a lower TP of S$3.20 (previous: S$3.23). Maintain HOLD.
SATS – OCBC
Uninspiring 1QFY15 results
- 1QFY15 results below forecasts
- Focus on creating operating leverage
- Maintain HOLD
1QFY15 results below expectations
SATS’s 1QFY15 results came in below our expectations. Revenue increased 0.2% YoY to S$434.5m, or 6.4% below our forecast. Food Solutions revenue dropped by 0.9% to S$262.7m due to weaker performance from subsidiary TFK. The drop is smaller compared to the previous quarter’s 5.7% as the effect of Quantas’ move to Dubai from Changi Airport is absent in the current quarter’s YoY comparison. Gateway Services revenue increased by 2.0% to S$171.2m, which we deem to be largely in line with the 2.5% growth in flights handled in Singapore. Despite top line growth, PATMI dropped 6.3% YoY to S$43.3m, which is 4.6% below our estimate. This is due to: 1) lower operating margin (-0.3ppt to 9.1% in 1QFY15) mainly caused by higher staff costs, and 2) lower contributions from associates and JVs (-16.8% YoY to S$10.4m in 1QFY15) on the back of muted Asian cargo volumes.
Creating operating leverage is multi-year process
Management guided that headcount reduction will continue as processes are made more efficient. Capex spending is rising (S$14.2m in 1QFY15 vs. S$12.8m in 1QFY14) and will stay elevated. Additionally, airlines at existing Changi Airport terminals are still switching to self-check-in processes, eventually reducing the need for staff. With regional airlines struggling, we think the cost-saving switch will come in the foreseeable future. We note that initiatives to create operating leverage are multi-year processes which involve clients as well. Thus, we are not too worried about the current fall in operating margin.
M&A to tap on regional air traffic growth
Management said they are on the lookout for M&A opportunities to grow inorganically. SATS is well-poised to do so with a healthy net cash balance of S$270m and interest coverage ratio of 99x as of Jun-14. This is likely a key source of overseas growth going forward, to enjoy economies of scale in a capital intensive business. Incorporating the latest results and retaining a 20x FY15F PER, we derive a lower TP of S$3.20 (previous: S$3.23). Maintain HOLD.
SGX – CIMB
Disappointing derivatives
SGX's 4QFY14 net profit is expected to be down slightly qoq on seasonally higher staff costs. We believe that its bright spot will be securities clearing fees, as securities ADVT picked up marginally in the last two quarters, while its removal of the cap on institutional clearing fees should increase SGX's effective securities clearing rate starting Jun. The disappointment this quarter is likely to show up in derivatives, as growth in traded volumes has come off with lower interest in SGX's two key products: Nikkei 225 and China A50 index futures. In view of its subdued trading volumes, we maintain our Hold rating and cut our FY14-16 EPS by 3-6% for lower derivatives volumes. Our DDM-based target price falls to S$7.43 accordingly (discount rate 9.5%).
What Happened
We expect SGX to report 4Q net profit of S$73.1m (-3.6% qoq, -21.6% yoy) on 31 Aug. We expect the qoq fall to be driven by lower derivatives clearing fees (S$50.3m, -3.7% qoq) and seasonally higher staff costs (S$36.7m, +19.1% qoq), partially countered by higher securities clearing fees (S$42.6m, +3.1% qoq).
What We Think
Higher effective securities clearing rate. Securities average daily value traded (ADVT) rose 3.6% qoq to S$1.1bn, as trading picked up in Apr-May but died down in Jun during the World Cup season (Figures 2-3). SGX also rolled out a new securities clearing fee structure on 1 Jun, which lowers its clearing rate from 4bp to 3.25bp of contract values. At the same time, it removed its cap of S$600 on trades above S$1.5m. We believe that this will raise its effective clearing rate from 5.9bp in FY13 to 6.5bp, starting Jun.
Derivatives disappoint. Derivatives traded volume fell 4.2% qoq to 25m contracts, as interest in equity index futures fell. The main culprits were the Nikkei 225 (-26.5% qoq) and China A50 (-6.0% qoq) index futures. New products added (MSCI India, Indonesia, Philippines and Thailand) are gaining traction but only make up 0.2% of its total equity index futures traded volume.
What You Should Do
Hold for now. We believe that trading volumes will remain subdued in the short term. It remains to be seen if its lower securities clearing fees can encourage more retail participation. We estimate that a 10% rise in securities ADVT from our current estimate of S$1.26bn would result in 7% upside to our FY15 earnings forecast.
SATS – CIMB
Subdued operations
At 22% of our FY15 numbers, 1QFY3/15 core profit of S$43m (-9% yoy) was broadly in line with our expectations and consensus. Management blamed the tragedies of MH370 and the political unrest in Thailand for the weak Changi operating data. Margin strain continued despite SATS’s efforts to reduce its headcount. Overall profits were lifted by lower-than-expected taxes. We keep Reduce as we think that valuation is stretched at 17x CY15, against muted 8% growth and downside risks from potential for further margin contraction. We maintain our target price, still based on 16x CY15 P/E (5-year mean).
Operating data nothing to shout about
TKF contribution was weaker-than-expected as revenue dropped 7% qoq and 9% yoy to S$59m. The lower revenue was mainly due to weaker utilisation in Narita kitchen slots (Yen/S$ was relatively stable from Mar 14 to Jun 14). Flights handled rose 2.5% yoy to 33,170 units in 1Q15 due to the increase in LCCs volume, but the number of passengers handled was muted at 10.7m as airlines’ load factors remained weak. Unit meals volume was stagnant at 5.1m – a sustained weakness due to Qantas flight withdrawals.
Margin pressure is here to stay
EBITDA margin shrank to 12.8% from 14% in 4Q14 and 1Q14 despite SATS’s efforts to reduce its headcount during the quarter. Actual quantum was undisclosed but SATS had 14,611 staff as of end-FY14. 1Q15 staff costs rose 2% yoy to S$204m, accounting for about 51% of its operating costs (50% in 1Q14). Margin improvement could take multiple years, according to the management. Associates’ contribution was lower-than-expected due to weaker cargo volumes in 1) greater China on slower growth and 2) Indonesia due to the elections.
Benefits from the growing Asian aviation theme? Not soon
While we believe that SATS would benefit from the growth in Asian travellers, we think that this could be a long-term (5-10 year) story. Contributions from non-aviation themes such as the Singapore Sports Hub and Marina Bay Cruise Centres are likely to be relatively immaterial in the medium term. We would look for buying opportunity if 1) the margin pressure eases or 2) the share price weakens or 3) Changi Airport reports more positive operating data.