Author: kktan
SATS – MayBank Kim Eng
Raises exposure to Indonesia
- Acquires 42% stake in Indonesia’s leading aviation service provider CAS.
- Positive move as it raises exposure to fast-growing Indonesia.
- Purchase adds 3% to our FY3/15E-16E EPS. Maintain BUY.
Acquires 42% stake in PT CAS
SATS announced yesterday the acquisition of a 41.65% stake in PT Cardig Aero Services TBK (CAS) for IDR1,108b (approximately SGD118.3m). CAS is a food solutions and gateway services provider in Indonesia that is listed on the Indonesia Stock Exchange. It derives 73% of its sales from SATS’ 49.8%-owned associate PT Jasa Angkasa Semesta(JAS), which offers ground & cargo services across 11 airports in Indonesia. According to SATS, CAS is the leading player in the Indonesian aviation market with major international airlines, including Singapore Airlines, as its customers. Through its relationship with JAS, SATS has over 10 years of working relations with the CAS management. This acquisition will not trigger a General Offer for the rest of CAS’s listed shares and SATS will continue to equity account for both CAS and JAS post acquisition.
Positive on larger exposure to fast-growing Indonesia
Many airlines have been increasing their capacity between Singapore and Indonesia ever since the two countries inked a bilateral air service agreement last year. With its international clientele, we expect CAS to benefit from the traffic growth between the two countries. While the acquisition price implies a significant 50% premium to CAS’s market price, we argue that an estimated valuation multiple of 21.5x CY14E P/E is reasonable, given the positive growth outlook for the business. Furthermore, SATS can comfortably fund this acquisition with its war chest of SGD355m (Dec 2013). We estimate that this acquisition will add 3% to our FY3/15E-16E earnings forecasts and raise our estimates accordingly. Reiterate BUY with unchanged DCF-based TP of SGD3.47 (WACC = 7.6%, tg= 1.0%).
Land Transport – MayBank Kim Eng
Convergence of negative events
- Downgrade sector rating to Underweight from Neutral in view of recent negative developments.
- Maintain SELL on SMRT (TP SGD0.60).
- Reiterate BUY on ComfortDelGro (TP SGD2.40) for its low exposure to fare-based business in Singapore.
Recent Developments Lead Us To Turn Negative
- Heightened regulatory pressure. Parliament passed a Bill on 17 Feb 2014 that will increase the maximum fine for every rail disruption to 10% of the train operators’ annual fare revenue. This is up from SGD1m previously. The amended Rapid Transit Systems Bill implies that a network-wide rail incident would subject SMRT and SBS Transit (SBST) to a maximum fine of SGD63.2m and SGD14.8m respectively, based on our estimates. In our view, the implementation of the revised financial penalty would easily tip the operators into the red, considering their depressed profit bases.
- Risk of higher repair and maintenance expenses. Transport Minister Lui Tuck Yew highlighted an impending change in the maintenance regime for the rail network from the current “find and fix” approach to a new “predict and prevent” approach. He said this in reply to questions from Members of Parliament on the recent train service disruptions. Given the increased scrutiny on system reliability, we expect regulators and operators to adopt a conservative approach, which could lead to higher spending on maintenance work.
- Quantum of fare hike lower than expected. The 3.2% increase in bus and train fares that would be implemented from April 2014 fell short of our expectations for a 5% hike. While the fare revision will provide some relief, it will not be sufficient to offset losses at the operators’ fare-based business.
What’s Our View
We downgrade our rating for the Land Transport sector to Underweight from Neutral to reflect the abovementioned negative events. Our SELL call on SMRT (TP SGD0.60) remains unchanged, so is our BUY rating on ComfortDelGro (CDG). We are less worried about CDG than SMRT because: 1) CDG’s Singapore fare-based business accounts for just 7% of its market value, 2) losses at its rail segment is mainly due to start-up costs for the Downtown Line, and 3) there may be upside to rental and advertising beyond 2017.
Land Transport – MayBank Kim Eng
Convergence of negative events
- Downgrade sector rating to Underweight from Neutral in view of recent negative developments.
- Maintain SELL on SMRT (TP SGD0.60).
- Reiterate BUY on ComfortDelGro (TP SGD2.40) for its low exposure to fare-based business in Singapore.
Recent Developments Lead Us To Turn Negative
- Heightened regulatory pressure. Parliament passed a Bill on 17 Feb 2014 that will increase the maximum fine for every rail disruption to 10% of the train operators’ annual fare revenue. This is up from SGD1m previously. The amended Rapid Transit Systems Bill implies that a network-wide rail incident would subject SMRT and SBS Transit (SBST) to a maximum fine of SGD63.2m and SGD14.8m respectively, based on our estimates. In our view, the implementation of the revised financial penalty would easily tip the operators into the red, considering their depressed profit bases.
- Risk of higher repair and maintenance expenses. Transport Minister Lui Tuck Yew highlighted an impending change in the maintenance regime for the rail network from the current “find and fix” approach to a new “predict and prevent” approach. He said this in reply to questions from Members of Parliament on the recent train service disruptions. Given the increased scrutiny on system reliability, we expect regulators and operators to adopt a conservative approach, which could lead to higher spending on maintenance work.
- Quantum of fare hike lower than expected. The 3.2% increase in bus and train fares that would be implemented from April 2014 fell short of our expectations for a 5% hike. While the fare revision will provide some relief, it will not be sufficient to offset losses at the operators’ fare-based business.
What’s Our View
We downgrade our rating for the Land Transport sector to Underweight from Neutral to reflect the abovementioned negative events. Our SELL call on SMRT (TP SGD0.60) remains unchanged, so is our BUY rating on ComfortDelGro (CDG). We are less worried about CDG than SMRT because: 1) CDG’s Singapore fare-based business accounts for just 7% of its market value, 2) losses at its rail segment is mainly due to start-up costs for the Downtown Line, and 3) there may be upside to rental and advertising beyond 2017.
SingTel – MayBank Kim Eng
A Shin deal has to make sense
- That SingTel would want to buy a stake in Shin Corp from Temasek does not make any sense that we can see.
- The telco already has all it needs; more exposure to Thailand would raise political risk and strain its balance sheet.
- But if the deal happens at the reported price, it would be a negative for SingTel. Maintain HOLD.
What’s New
Reuters reported yesterday that Temasek Holdings may sell its 41.6% stake in Thailand’s Shin Corporation (renamed Intouch PLC), with SingTel named as a potential bidder. The value of the stake, at the current market price, is SGD3.9b or USD3.1b.
What’s Our View
Our initial reaction is that it does not make sense, or at least none that we can visibly see, for SingTel to buy Shin. But should it happen at the reported price, this may be negative for SingTel.
First, SingTel already has a sizeable stake in AIS. SingTel already has a direct exposure to Thailand via a 23.3% stake in the country’s largest mobile telco, Advanced Information Services (AIS). We believe SingTel is primarily interested in AIS’s mobile telecom business. AIS, which has a market share of 44% in Thailand, is Shin’s crown jewel that contributes almost all of its profits.
Second, it raises the political risk too much. Taking a substantial stake in Shin will mean SingTel’s exposure to Thailand’s political risks may be too much for our liking. If SingTel were to pay SGD3.9b (USD3.1b) for Temasek’s stake, its investment in Thailand will exceed SGD5b, making the country its biggest exposure to any associate market, bigger than India and Indonesia.
Third, gearing would explode. SingTel’s net debt/EBITDA is already 1.0x. Adding another SGD3.9b in debt would raise it to 1.5x (or 2.2x if associates’ contribution is removed from the calculation to be consistent with StarHub and M1).
SingTel – MayBank Kim Eng
A Shin deal has to make sense
- That SingTel would want to buy a stake in Shin Corp from Temasek does not make any sense that we can see.
- The telco already has all it needs; more exposure to Thailand would raise political risk and strain its balance sheet.
- But if the deal happens at the reported price, it would be a negative for SingTel. Maintain HOLD.
What’s New
Reuters reported yesterday that Temasek Holdings may sell its 41.6% stake in Thailand’s Shin Corporation (renamed Intouch PLC), with SingTel named as a potential bidder. The value of the stake, at the current market price, is SGD3.9b or USD3.1b.
What’s Our View
Our initial reaction is that it does not make sense, or at least none that we can visibly see, for SingTel to buy Shin. But should it happen at the reported price, this may be negative for SingTel.
First, SingTel already has a sizeable stake in AIS. SingTel already has a direct exposure to Thailand via a 23.3% stake in the country’s largest mobile telco, Advanced Information Services (AIS). We believe SingTel is primarily interested in AIS’s mobile telecom business. AIS, which has a market share of 44% in Thailand, is Shin’s crown jewel that contributes almost all of its profits.
Second, it raises the political risk too much. Taking a substantial stake in Shin will mean SingTel’s exposure to Thailand’s political risks may be too much for our liking. If SingTel were to pay SGD3.9b (USD3.1b) for Temasek’s stake, its investment in Thailand will exceed SGD5b, making the country its biggest exposure to any associate market, bigger than India and Indonesia.
Third, gearing would explode. SingTel’s net debt/EBITDA is already 1.0x. Adding another SGD3.9b in debt would raise it to 1.5x (or 2.2x if associates’ contribution is removed from the calculation to be consistent with StarHub and M1).