Author: kktan
SATS – OSK DMG
Staff Costs Drag 3Q14 Profit
SATS recorded lower food revenue y-o-y, largely due to the Qantas and JPY impact, which was somewhat offset by higher gateway revenue as passenger traffic at Changi Airport continued to grow. Proportionately higher operating expenses dragged down PATAMI growth. While SATS’ long-term outlook is encouraging, we expect near-term headwinds with regards to staff costs. Maintain NEUTRAL and a SGD3.43 TP.
Revenue growth impacted by forex. SATS’ 3Q14 PATAMI slid 8.7% to SGD42.9m, on the back of a 1.1% decline in revenue. The revenue decline was largely due to a dip in food revenue, after Qantas pulled out its longhaul flights from Changi Airport in 1H CY13. On a q-o-q basis, the impact of Qantas’ departure is stabilising, but food revenue is likely to remain under pressure from the depreciating JPY. Gateway revenue is likely to see moderate growth, backed by increasing passenger traffic at Changi Airport.
More efforts to lower operating costs. In order to mitigate the expected rise in manpower costs, SATS is actively looking to raise productivity, through automation and the use of technology. While no further details were given, management highlighted that it will put more efforts into improving productivity, such as building more passenger self-check-in booths at the terminals.
Positive on long-term prospects. SATS’ proposed acquisition of the Singapore Cruise Centre (SCC) is currently under the second review by the Competition Commission. Passenger traffic at the Marina Bay Cruise Centre Singapore (MBCCS) has been growing, although the volume is still small at the moment. Should it become the owner of both cruise centres, SATS would stand to benefit from the growing cruise industry in Singapore. The company, which is also the largest caterer in Singapore, is poised to benefit once the Sports Hub starts operations, likely in 2H CY14. In the near term, higher staff costs could slow profit growth.
Lowering PATAMI estimates. We lower our FY14 PATAMI estimate to SGD194m, from SGD217m. Consequently, we trim our DCF-based TP to SGD3.43 (from SGD3.49). Maintain NEUTRAL.
SATS – OCBC
Sluggish 3Q results and 4Q outlook
- 9M earnings met 76% of FY estimate
- Challenging near-term outlook
- Hold and FV under review
Lethargic 3QFY14 results
SATS Ltd posted a pretty lethargic set of 3QFY14 results. Revenue was flat at S$465.5m, or just shy of the street’s S$472.5m forecast (based on Bloomberg consensus), mainly due to lower food revenue (down 3.9% YoY) arising from the weaker Yen. But earnings slipped 8.7% to S$42.9m, dragged down by the 10.3% fall in operating income, despite seeing 7.4% increase in share of results from Associates/JVs (due to better showing in China and Indonesia). Earnings also missed consensus forecast of S$52.2m by 18%. For 9MFY14, revenue fell 1.3% to S$1352.1m, meeting 76% of our FY14 forecast (72% of consensus), while reported net profit edged 0.6% lower to S$137.8m. Excluding one-off items, core earnings would have been S$139.5m (+0.4%), or about 73% of our full-year estimate (67% of consensus).
Near-term outlook remains challenging
Going forward, SATS notes that the operating landscape remains challenging, given the on-going pressure on airlines’ profitability and rising labour costs. And in the near term, management adds that it only expects modest growth in passenger traffic at Changi Airport and only marginal growth in air freight at best. Nevertheless, it will continue to focus on scaling up its food business and improving connectivity in its gateway business, where it is already the largest food solutions and gateway services company in Asia. SATS also intends to use automation and technology to counter rising manpower costs, which we had already flagged as a longer-term concern and continue to await further clarity on potential cost savings.
Hold rating and FV under review
Given the still-muted outlook, as well as the below-forecast earnings, there is likely to be a negative knee-jerk reaction in SATS’ share price, especially after the 3.2% rebound from the recent S$3.08 low. Due to a change in analyst coverage, we put our Hold rating and S$3.35 fair value under review.
SingPost – OCBC
Steady yield play
- 3QFY14 results in line
- 1.25 S-cents interim dividend
- Unchanged FV estimate
3QFY14 results in line
Singapore Post (SingPost) reported 3QFY14 PATMI of S$39.4m which was flat YoY (-0.2%). 9MFY14 PATMI now cumulates to S$112.3m, constituting 76.0% of our full year forecast and we judge this to be mostly in line with expectations. In terms of the topline, 3QFY14 revenue grew 30.2% YoY to S$222.6m, up from S$171.0m in 3QFY13, mainly due to contributions from acquisitions and an increase in e-Commerce activities. Net flow generated by operating activities remained healthy at S$40.2m in 3QFY14 versus S$39.8m generated in 3QFY13. We note that total expense growth in 3QFY14 rose at a rate (up 34.4%) marginally above that of revenue (30.2%) due to increased exposure to lower net margins businesses.
Domestic mail volume decline for the 8th consecutive quarter
Domestic mail volume declined for the eighth consecutive quarter but including e-commerce packages overall mail revenue for 3QFY14 grew 12.8% YoY to S$133.2m. Revenue from the logistics business was boosted by contributions from two acquisitions, General Storage Company and Famous Holdings (acquired Jan-13 and Feb-13, respectively), and grew 64.5% YoY to S$101.2m. Excluding contributions from these two acquisitions, however, logistics revenues grew 4.3% YoY. For the Retail and e-commerce segment, 3QFY14 revenue dipped 6.1% YoY to S$22.6m as contributions from agency services declined. Rental and property-related income for the quarter held steady and increased 1.9% YoY to S$11.4m.
Steady yield play
In line with its usual practice, the group has proposed an interim quarterly dividend of 1.25 S-cents/share. We continue to like SingPost’s consistent dividend policy which is backed by stable operating cash flows, but see few re-rating catalysts for now. Maintain HOLD with an unchanged S$1.32 fair value estimate.
SIAEC – DBSV
Rising labour costs a worry
- 3Q FY14 net profit down 10% y-o-y, misses estimates • Rising labour costs a drag on core operating profits, mitigated partly by higher JV/ assoc contributions
- Cut FY14/15 earnings estimates by 4-5%
- Dividend potential is key silver lining; maintain HOLD rating with lower TP of S$4.80
Highlights
Core operating profit weaker y-o-y. 3Q FY14 net profit fell 10% y-o-y to S$60.5m, dragged down by high operating costs at SIAEC level, largely staff costs and overheads. Operating margin was the weakest in over four years at 8.9%, and significantly below FY13 margin (11.2%). Given that 1H FY14 operating margin was not much stronger either at 9.6%, 9M FY14 net profit edged down 2% to S$200.5m despite flattish revenues.
Higher JV/ associates’ contributions offset weak core profit. Contribution from JV/ associates grew 2.5% y-o-y to S$41m in 3Q FY14, and is up almost 14% in 9M FY14 to account for 59% of Group PBT. The engine MRO centers and other JV/ associates have been posting rising contributions due to the cluster of strategic partnerships that SIE has established in various pockets of the MRO value chain in recent years.
Our View
Rising costs a challenge. Although demand for the Group’s core MRO services should be stable in the near term, margins may be pressured by rising labour costs and inflation at its home base in Singapore. As a result, we cut FY14/15 earnings estimates by 4-5%. Earnings are now forecast to be flat in FY14 and see tepid growth at best in FY15/16.
Recommendation
Special dividend may be only catalyst. SIE should end FY14 with over S$500m cash holding, and there remains the small possibility of a special dividend in addition to our forecast 15Scts final dividend for FY14 (interim: 7 Scts already paid out). But chances are slim given the weak operating performance. Hence, we maintain our HOLD call for SIE and revise down our TP to S$4.80 after adjustments to bring the stock in line with current peer valuation metrics.
SIAEC – OCBC
3Q14 results a miss
- 3Q14 basic EPS down 11% YoY
- Rising costs
- Maintain HOLD
3Q14 disappointment
SIA Engineering Company’s (SIAEC) 3Q14 results missed ours and the street’s expectations. 9M14 basic EPS of 18.0 S cents formed 70% of ours and the street’s prior FY14 estimates. 3Q14 revenue climbed 2.0% YoY to S$283.8m but operating profit fell 19.2% to S$25.2m due to staff, subcontract and material costs. Share of profits from associated and JV companies expanded by only 2.5% to S$41.0m, representing a contribution of 58.7% of the group’s pre-tax profits. 3Q14 PATMI thus contracted 9.7% to S$60.5m. 3Q14 basic EPS of 5.43 S cents is down 10.7%. 9M14 PATMI and basic EPS are down 1.8% and 2.8% respectively. Foreign exchange movement was less favourable in 3Q14 for SIAEC, with an FX gain of S$0.1m clocked (versus S$1.6m a year ago).
Compressed operating margin 3Q14 salary costs increased 1.5% YoY to S$126.7m. Overheads (depreciation, amortization of intangibles, company accommodation and other operating expenses) jumped 8.1% to S$45.6m Subcontract services rose 6.9% to S$35.7m and material cost expanded by 8.6% to S$50.6m. In sum, expenditure rose 4.7% to S$258.6m. Operating profit margin at 8.9% was significantly lower than the 11.2% a year ago.
Cost pressures
Management sees rising business costs, especially labour costs, as a continuing operational challenge. Management also expects that the group’s business will remain stable despite the uncertainties in the world economy. The company will continue focusing on improving productivity and minimizing costs.
Maintain HOLD
We lower our FY14F basic EPS forecast to 24.2 S cents, 6% lower than our previous estimate of 25.7 S cents. Rolling forward our model to FY15F figures, we reduce our FV from S$5.14 to S$4.77 (based on EPS forecast of 25.1 S cents and a lower peg of 19.0x, versus 20.0x previously). We maintain a HOLD rating on SIAEC and forecast a FY15F dividend yield of 4.6%.