Author: kktan
SIAEC – MayBank Kim Eng
Customers’ Fleet Development a Positive For JV
60% more aircraft on order to use Trent engines at SIA group. SIA recently announced new aircraft orders and engine selections. Our analysis of the updated fleet and orders for the SIA group shows that there are 60% more aircraft on order that would be utilising the Trent series of engines, implying a huge amount of maintenance work in future for SAESL, a key JV of SIAEC.
Not just about SIA. We would like to debunk a common misconception that SIAEC only benefits from maintenance work for SIA. While SIAEC still derives more than 60% of sales from SIA, non-SIA customers drive more than 70% of sales at its associates and JVs.
Customers’ fleet development bodes well for SAESL. The company in focus for this report, SAESL, services 13 other airline customers outside of the SIA group. Our review of the fleet development for SAESL’s customers points to an increasingly positive outlook. In addition to an existing fleet of 238 Trent-powered aircraft, we estimate that these non-SIA clients have a combined order of 277 aircraft that would be utilising Trent engines in future. In the near term, we expect SAESL to benefit from the fleet development at Air Asia X, MAS, Thai, Garuda, Air NZ and Virgin Atlantic. Aircraft orders at Qatar, Emirates, Etihad and Yemenia would provide longer-term upside.
We expect capacity expansion to keep pace with growing demand. With the positive demand outlook, we believe that SAESL would need to increase its capacity beyond the current 250 engine repairs a year, to meet the growing volume of maintenance work.
Maintain BUY, TP: SGD6.16. We reiterate our positive view on SIA Engineering (SIAEC) and believe that it is time for the market to look deeper and appreciate the hidden value within SAESL, a top-notch franchise in the group. While the market tends to value SIAEC on a PER basis, we argue that SIAEC is not a stock that trades on earnings, but rather, on cashflow. We forecast FCF of SGD224-270m for FY14-16E, which translates to an FCF yield of 4.5-5.4%.
ComfortDelgro – OCBC
GOOD ENTRY POINT
- Share price stabilising
- Fundamentals unchanged
- Time to pickup a high-quality counter on the cheap
Share price stabilising since stake sale
ComfortDelgro’s (CDG) is showing signs of stabilising after the partial stake sale by the Singapore Labour Foundation about a month ago (at its lowest, CDG fell by more than 20% from when the sale was completed). At this juncture, we believe that it is a good opportunity to pick-up a high-quality counter on the cheap and, potentially, on the rebound.
Fundamentals unchanged
Domestic challenges aside, the group’s overseas growth prospects, which have been its key growth driver, remain unchanged. As a recap, CDG recently made an acquisition for its UK operations that expanded its fleet size by 41% – along with additional service routes – and increased its market share to joint-second in the city. (This deal should become income accretive beyond FY13). In addition, CDG is in the process of tendering for additional bus routes in New South Wales (Australia) – as well as re-submitting its bid for its existing routes – and we are hopeful for positive results come Jul this year. More importantly, its UK and Australian bus segments are operated on a cost-plus model, which significantly limits its downside risks.
Positives from fare review delay
Although the Fare Review Mechanism Committee (FRMC) announced earlier in the month that it has delayed the submission of its findings by a few months, the likely outcome of a fare increase remains on track, in our view. Furthermore, the delay should be viewed as a strong political will to devise a fare review structure that will be sustainable and more beneficial to the public transport operators in the long-run, rather than a one-off fare increase to paper current deficiencies.
Time to accumulate
Given its recent share stability and unchanged fundamentals, we upgrade CDG to BUY with an unchanged fair value estimate of S$1.95.
STEng – DBSV
Defensive play with leverage to cyclical recovery in the US
- Recent sell-down is unjustified; stock offers upside from US recovery, backed by an attractive yield
- Visible growth drivers in place at Aerospace, Marine divisions; in Asia as well as in the US
- Strong balance sheet and net cash position drive M&A ambitions; beneficiary if interest rate rises
- Proxy to recovery in the US and appreciating US$. Maintain BUY,TP S$4.80
Enviable track record. We recently met up with 35 fund managers on a roadshow in the US with STE’s management team. Investors are generally impressed with the group’s track record over the past 10 years, chalking up revenue CAGR of 9.3%, net profit CAGR of 5.7% and EVA of 8.7%. Current shareholders have done well to enjoy the ride on ST Engineering’s sterling share price performance over the past 12 months, the stock generating total return of 32% (including dividend yield) notwithstanding the recent pullback.
Strategic growth drivers in place. Key discussion topics during the roadshow revolved around the group’s strategy for growth and possible changes in revenue mix in the next 5 years. Near term growth will come from acquisitions in Aerospace (PTF conversions in Europe), new hangar facilities in Guangzhou and engine workshop in Xiamen, and expansion into the shiprepair business in the US. Armed with a net cash chest of more than S$500m, the group is well positioned to source for M&A for longer term growth. Management’s key concern would be to negotiate an environment of rising cost pressure in Singapore due to the curbs on foreign labour, to ensure the group’s competitiveness in the global arena.
Maintain BUY, TP of $4.80. STE has no exposure to a potentially rising interest rate environment globally, and hence STE remains our preferred pick, offering strong earnings visibility from its record order book of S$13bn, steady earnings growth of 6% and dividend yield of 4.6%. The stock is a proxy to recovery in the US economy with 27% of sales from the US. Appreciation of the US$, if sustained, will provide earnings upside. Catalyst for stock performance will come from sustained order win momentum, going forward.
TELCOs – CIMB
Ringing up Mr Data
We upgrade Singapore’s telco sector to Neutral from Underweight following the 1Q13 results season on: 1) the surging adoption of tiered mobile plans; and 2) after upgrading SingTel to Neutral from Underperform on lower competition issues in Australia.
Nevertheless, competition in fixed broadband and pay TV remains a concern, especially for StarHub. We are also Neutral on the sector as valuations are still not compelling despite the recent de-rating. M1 (Outperform) is our top pick as it should be the biggest beneficiary of the adoption of tiered data plans and is also developing a new revenue stream in fixed broadband.
1Q13 results mainly in line
M1 and StarHub matched our estimates. As expected, StarHub declared a 5 Sct DPS while M1 did not. SingTel bucked the trend as its 4QFY3/13 earnings beat consensus and our expectations on the back of surprises from AIS, Globe, and Telkomsel. It also declared a 10 Sct DPS, above our expectation of 9 Scts.
Review of operations
Sector mobile revenue grew 2.5% yoy in 1Q13, up from 2.1% in 4Q12 as the shift to tiered data plans improved monetisation.
Pay-TV revenue remained flat from stiff competition. SingTel continued to take market share from StarHub. StarHub is preparing for BPL cross-carriage as ordered by the regulator despite SingTel’s appeal to reverse the order.
Fixed-broadband revenue remained muted, with growth down to 4.8% in 1Q13 from over 8% in the previous two quarters. This was despite rising fibre subscribers and could be blamed on intense competition.
2013 outlook still muted
Capex for the three telcos will be elevated for 2013 and should remain so in 2014, largely on LTE/4G spending. While M1 expects moderate earnings growth this year, SingTel and StarHub are more muted in their 2013 guidance. SingTel expects FY14 EBITDA to grow by low single digits and has raised its payouts to 60-75% from 55-70%. StarHub trimmed its revenue-growth guidance to low single digits from single digits and kept its EBITDA margins at 31%. Both M1 and StarHub have maintained their dividend guidance.
StarHub – OCBC
UPGRADE TO HOLD ON VALUATION GROUNDS
- 15% correction
- Yields back at 5%
- Upgrade to HOLD
Sharp fall after we downgraded our call
StarHub Ltd saw a sharp drop in its share price after we downgraded our call from Hold to Sell on 10 May following its 4Q12 results announcement; note that it had also lowered its revenue growth guidance from single-digit to low single-digit while maintaining its EBITDA margin on service revenue at 31% (versus 33% in 1Q13). Since then, the share price has fallen some 15% from S$4.72 to a recent low of S$4.01.
Rationale for our previous downgrade
However, we note the stock price has outperformed not only its peers but also the STI – and this outperformance was mainly driven by investors searching for yield. In our view, we do not see this as sustainable as this has made valuations pricey and the yield had also fallen to some 4.2%. And this made it “vulnerable” should the yield compression story falter. We were also concerned by the possibility of seeing a flight of out of the more defensive counters like telcos should investors take a more “risk on” approach. On hindsight, it appears that we were correct on both counts.
Revising fair value down to S$3.82
Going forward, the risk of rising bond yields could continue to sink the yield compression story. And since we are using a DCF-based valuation methodology, higher bond yields will result in our fair value easing from S$4.00 to S$3.82. Fortunately, as StarHub has maintained its S$0.20/share dividend payout this year (and is likely to continue to do so in our view), its dividend yield has risen back to around 5% (or 5.2% based on our fair value). From a valuation perspective, we upgrade our call from Sell to HOLD.