Author: kktan
SIAEC – MayBank Kim Eng
Strong Quarter, Associates Outperformed
Maintain BUY, TP: SGD6.34. We remain positive on SIAEC and raised our estimates by 2%-4% over FY14-16, mainly to account for better-than-expected performance from its associates. SIAEC is a key beneficiary of plans to double Changi Airport’s capacity over the next decade and is our top pick in the Singapore Transportation space. We maintain our BUY rating and raised our TP to SGD6.34.
SAESL & IECO continue to shine. The combined earnings from SAESL & IECO increased by 13% YoY for 1HFY03/14 (34% of PBT) due to growing demand for maintenance work with the influx of Trent engines into the region. The outlook for these units is highly visible given the huge aircraft orders for Trent engines (Fleet: 324, Order: 416). These two units will continue to be a key profit driver and account for half of our valuation for the stock.
Contributions from associates beat expectations. We are positively surprised by the strong associate contributions for 1HFY03/14 (+30% YoY, 25% of PBT), lifted by the Line & Component cluster. The Pratt & Whitney related companies, which provides the engine & engine part repair & overhaul services, reversed the decline in earnings over the past year to report higher contributions for 1HFY03/14 (+21% YoY).
Offset soft performance at core Line, Repair & Overhaul business. Performance for the core Line Maintenance, Repair and Overhaul business of the company was fairly soft with operating profits declining 14% YoY for 1HFY03/14, largely due to a 5.5% YoY increase in staff cost. While labour-induced margin pressure persisted, the long-term outlook for this business remains bright, in our view. The plan to double Changi Airport’s capacity over the next decade will increase workloads for MRO companies based in Singapore. As a dominant player in the Line Maintenance market, SIAEC is a direct proxy to this trend. The expansion into the Philippines will increase SIAEC’s competitiveness by tapping into cheaper source of labour.
SIAEC – CIMB
Positives priced in
SIE still offers steady earnings growth and yields of 4.5%, backed by net cash of S$495m. However, we believe its near-term positives have been priced in, as its share price has nicely recovered since our upgrade in Sep, now at 19x CY14P/E,+1.5 s.d. above its 5-year mean.
1H14 core EPS was in line, at 49% of our FY14 forecast. A 7 Sct interim dividend has been declared, similar to 1H13 levels. We keep our target price, still based on blended valuations (19x P/E and DCF). However, we downgrade the stock to Neutral from Outperform in view of limited catalysts for a further re-rating in the near term.
Stable performance
1H14 revenue was stable at S$583m. Hangars have been booked out for the next six months, mainly for more-intensive C checks, especially of A380 aircraft. In 1H14, SIE‟s line-maintenance unit handled 65.5k flights (+17% yoy), thanks to the aggressive growth of LCC volume at Changi Airport. Operating costs were up 1.5% yoy, mainly due to a 5.5% yoy increase in staff costs on higher foreign-worker levies and annual increments, which is not alarming. Only 10% of SIE‟s workforce of 5,500 comprises foreigners. Management expects a “stable” performance ahead as the group leverages its diversified MRO services and presence in key markets.
Associates and JVs rebounded
Associate and JV profit rose 19% yoy in 1H14, led by the engine segment. SAESL continued to benefit from strong growth of Rolls-Royce engine volume. Eagle Services also received more jobs transferred from Pratt & Whitney‟s ceased US operations in Cheshire. Smaller associates/JVs are also past their gestation periods and have started to contribute.
Limited near-term upside
SIE is now trading at 19x CY14 P/E, +1.5 s.d. above its 5-year mean. We see limited catalysts for a further re-rating in the near term. Upside risk could come from a major accretive M&A, which we do not foresee in the near future.
SATS – CIMB
Inching up
We continue to like SATS for its 4.9% yield, strong balance sheet with net cash of S$270m and encouraging volume growth in Changi Airport. Maintain Outperform.
2Q14’s core net profit was broadly in line with our expectations and consensus’s. 1H14 formed about 45% of our full-year forecast. SATS declared a 5 Scts interim dividend, similar to 1H13. We have raised our target price to S$3.88, after rolling forward to CY15, still based on 17.7x P/E, or +1 s.d. of its five-year mean. Catalysts could come from a rebound of earnings in TFK and stronger dividend payout.
TFK rebound qoq
The yoy weakness in revenue (-2%), already felt in 1Q14 was mainly due to the impact of the weak JPY currency and diversion of Qantas long-haul flights to Dubai from Singapore. Hence, we think it is more relevant to analyse SATS’s qoq performance. Revenue grew 4% qoq in 2Q14, thanks to broad-based growth across gateway and food solutions. TFK’s revenue (contributing about 16% of SATS’s revenue) rose 9% qoq due to 1) stronger outbound traffic and the range-bound SGD/JPY movement. In 1Q14, the SGD/JPY averaged 78.4, but improved slightly to 78.0 in 2Q14
Costs well controlled, margin inched up qoq
EBIT margin improved qoq to 10.3% from to 9.4% in 1Q14, but was weaker yoy (2Q13: 11.2%). Staff cost (about 49% of total expenditure), up 1% yoy, seemed well controlled, although management highlighted that it could weigh on margins given higher foreign manpower levies (SATS’s current foreign/local staff ratio is 1:3). We keep our FY14 EBIT margin of 10.7% (FY13: 10.5%).
Strong operating statistics
Operating statistics in 2Q14 improved for all sectors. Passengers handled grew 4.5% qoq to 11.1m while flights handled grew 2.8% qoq to 33.3k, in line with the high volume at Changi Airport. Unit meals and gross meals produced were up 3% qoq to 5.2m and 6.7m respectively, thanks to new routes introduced by airlines and additional Qantas flights between Singapore and Australia.
SATS – OSK DMG
Lower Revenue In 2Q14
SATS’ 2Q14 revenue dipped 2% y-o-y to SGD452.1m, largely due to lower food revenue. Operating margins remained under pressure, leading to a 3% y-o-y decline in PATAMI. The expected y-o-y weakness in the JPY would mean lower revenue contribution from TFK. SATS’ share price has risen 9% over the past month and our DCF-based TP of SGD3.49 now presents a 3% upside. Downgrade to NEUTRAL.
Lower food revenue due to TFK and Qantas. The lower load factor for the Japan-China route due to strained Sino-Japanese relationships led to lower business volume at TFK. Nevertheless, the latter remained profitable during the quarter. Going forward, the JPY is likely to remain weak y-o-y. While the diversion of Qantas’ European flights from Singapore to Dubai continued to pressure 2Q14 revenue, management does not expect further negative impact on a q-o-q basis moving forward.
Aviation business likely to be challenging. Passenger traffic at Changi is expected to record moderate growth, while airfreight demand will likely remain weak. The silver lining is the addition of new flight destinations by airlines while the growth in the low-cost carrier (LCC) segment could boost business volume. Higher staff costs will continue to weigh on margins, given a rise in foreign worker levies. Meanwhile, its acquisition of Singapore Cruise Centre is on track. Once completed, it would boost revenue growth and reduce SATS’ reliance on the aviation industry.
Lower estimates; TP unchanged. With JPY expected to remain weak going forward, we lower our assumptions on TFK’s revenue contribution. Hence, we arrive at a slightly lower PATAMI estimate of SGD215m (previously SGD222m) and keep our DCF-based TP of SGD3.49, pegged to a P/E of 18x FY14F earnings. SATS’ share price has risen 9% over the past one month following its acquisition announcement, thus leaving little upside to our TP. Downgrade to NEUTRAL.
SATS – OCBC
Same story as 1QFY14
- Fewer meals served affect results
- 2HFY14 to show revenue decline
- Counter fairly valued at this juncture
2QFY14 results fall short
SATS’s 2QFY14 results were similar to the previous quarter. Revenue came in below our expectations (-2.0% YoY to S$452.1m) following declines in the food solutions segment, and EBITDA fell 11.6% YoY to S$65.7m as a result of higher staff costs. Fortunately, a better performance from its Indian and Indonesian associates managed to offset a weaker contribution from TFK and helped to arrest its PATMI decline to only 3.2% YoY to S$48.7m. Management declared an interim dividend of 5 S cents, similar to last year’s amount.
Weaker 2HFY14 outlook
Qantas’ relocation to Dubai was the main factor for SATS’s revenue decline in 1HFY14. As SATS experiences the full impact on a YoY basis, we are likely to see revenue fall further for 2HFY14. In addition, EBITDA margins (1QFY14: -0.3ppt oya to 13.9%; 2QFY14: -1.6ppt oya to 14.5%) have also fallen due to higher staff costs (wage increments from 1QFY14) and an increase in services to LCCs vis-à-vis premium carriers. This trend is likely to extend into 2HFY14.
Rising staff costs a longer-term concern
An area of longer-term concern is staff costs. With foreigners accounting for one in three workers, SATS qualifies under the Tier 3 dependency ceiling i.e. incurs the highest tier in foreign worker levies and faces further levy increases in Jul 2014/15. Although SATS has the ability to subsidise a portion of that increase due to cost escalation clauses, margins will still be depressed if foreign worker dependency is not reduced. To management’s credit, SATS has embarked on automation initiatives and we await further clarity on cost savings.
Counter fairly valued; maintain HOLD
Due to the weakened 2HFY14 outlook, we leave our fair value estimate unchanged at S$3.35 and maintain our HOLD rating. We foresee limited upside at this juncture and on-going tapering expectations may have a negative impact on dividend-yielding counters such as SATS.