Author: kktan
SATS – MayBank Kim Eng
If Dividends Be The Food Of Investors, Then Pay On!
Structurally higher dividends. We see a multi-year re-rating of SATS as we believe that the company is likely to structurally increase their dividend distribution to shareholders. SATS announced special dividends in the last 3 years and we expect this to be the new normal. Management had previously highlighted their desire to optimize their capital structure (long run target: net debt to equity of 0.3X), which we view as a signal for structurally higher dividend distributions to shareholders.
Sufficient funding for M&A. Even after factoring in progressive increments in dividends over the next 3 years, we forecast a net cash position of more than SGD400mn by the end of FY16E. This implies that SATS would have a sizeable war chest of c.SGD900mn, should they achieve a capital structure with net debt to equity of 0.3X by the end of FY16E.
TFK Corp on the rebound. SATS offers an exposure to the aviation market in Japan through its inflight catering arm, TFK. The latest results from SATS suggest that TFK had turned a corner with FY13 EBIT contribution of SGD12.1mn (FY12: SGD0.3mn). While the weaker JPY would lead to lower contributions upon translation to SGD, we believe that the positive economic impact of a weaker JPY (eg. tourism, business travel) should result in a net positive effect on air travel demand and TFK. Either way, we expect TFK to continue leveraging on SATS’s existing business relationships with various airlines to clinch more contracts.
Our forecasts are above consensus. We are 8% above street view for our FY14-16E estimates, as we believe that consensus numbers may not have factored in incremental contributions from new contracts and our expectations of margin expansion as they scale up their operations.
Valuation. We believe that a DCF (WACC: 8.0%, terminal g: 1.0%) based valuation would best reflect the strong cash-generative nature of the company. Upgrade to BUY with TP of SGD3.90/shr.
TELCOs – OCBC
Downgrade to NEUTRAL
- All largely in line
- Outlook still muted
- Downgrade to NEUTRAL
Results were mostly in line
All three telcos reported 1QCY13 results that came in within our expectations. M1’s core earnings met 27% of our full-year forecast; SingTel met 27%; and StarHub met 25%. StarHub declared a quarterly dividend of S$0.05/share as guided, while SingTel declared a final dividend of S$0.10 (bringing its total dividend for FY13 to S$0.168).
Review of Singapore mobile operations
Core post-paid mobile subscribers grew by 1.2% QoQ to 4.3m at end-Mar, led by SingTel (+1.4%), M1 (+1.1%) and StarHub (+0.8%). While monthly ARPUs were fairly stable, the three telcos expect to see some uplifts this year, aided by the new tiered pricing plans with less generous data bundles; they also expect data usage to trend higher as more users migrate to the faster 4G networks.
Outlook still quite muted this year
While the exception of M1, which expects to see a moderate earnings growth this year and pay out at least 80% of earnings as dividends, both SingTel and StarHub are more muted in their outlook. SingTel expects stable group revenue for FY14 while overall EBITDA should show low single-digit growth. It did raise its dividend payout ratio to 60-75% of core earnings. On the other hand, StarHub has pared its revenue guidance down to low single-digit growth from singledigit growth and kept its EBITDA margin at 31%. It also kept its dividend at S$0.20/share, or S$0.05/quarter.
Downgrade to NEUTRAL – yields are not attractive
In the search for yield, telco stocks have done very well, rising some 14-26% YTD. However, we note that the share prices have run up too much, too quickly, and this has driven yields down to below 5%. In addition, a more “risk-on” approach could see investors switching out of defensive plays. As such, we downgrade our rating on the sector to NEUTRAL from Overweight.
TELCOs – OCBC
Downgrade to NEUTRAL
- All largely in line
- Outlook still muted
- Downgrade to NEUTRAL
Results were mostly in line
All three telcos reported 1QCY13 results that came in within our expectations. M1’s core earnings met 27% of our full-year forecast; SingTel met 27%; and StarHub met 25%. StarHub declared a quarterly dividend of S$0.05/share as guided, while SingTel declared a final dividend of S$0.10 (bringing its total dividend for FY13 to S$0.168).
Review of Singapore mobile operations
Core post-paid mobile subscribers grew by 1.2% QoQ to 4.3m at end-Mar, led by SingTel (+1.4%), M1 (+1.1%) and StarHub (+0.8%). While monthly ARPUs were fairly stable, the three telcos expect to see some uplifts this year, aided by the new tiered pricing plans with less generous data bundles; they also expect data usage to trend higher as more users migrate to the faster 4G networks.
Outlook still quite muted this year
While the exception of M1, which expects to see a moderate earnings growth this year and pay out at least 80% of earnings as dividends, both SingTel and StarHub are more muted in their outlook. SingTel expects stable group revenue for FY14 while overall EBITDA should show low single-digit growth. It did raise its dividend payout ratio to 60-75% of core earnings. On the other hand, StarHub has pared its revenue guidance down to low single-digit growth from singledigit growth and kept its EBITDA margin at 31%. It also kept its dividend at S$0.20/share, or S$0.05/quarter.
Downgrade to NEUTRAL – yields are not attractive
In the search for yield, telco stocks have done very well, rising some 14-26% YTD. However, we note that the share prices have run up too much, too quickly, and this has driven yields down to below 5%. In addition, a more “risk-on” approach could see investors switching out of defensive plays. As such, we downgrade our rating on the sector to NEUTRAL from Overweight.
SIAEC – MayBank Kim Eng
Worth More Than The SOTP Now
Beneficiary of SIA’s constant re-jig of business models. SIA had been trying out various means to restructure its business model over the years, which includes the introduction of Low Cost Carrier units (Scoot & Tiger Airways), aircraft reconfigurations to fit business conditions and orders for new aircraft. In order to cater to growing demand for regional air travel, SIA also recently placed a record aircraft order for SilkAir. Collectively, SIA, SilkAir and Scoot have 143 aircraft on order as compared to their current combined fleet of 127 aircraft, which is a reflection of the future growth in MRO work for SIAEC. On top of this, we believe that SIA Engineering Company (SIAEC) offers excellent exposure to the structural growth in air traffic in the Asia-Pacific region, which would account for 35% of global aircraft deliveries over the next 20yrs. 65% of the group’s pro-forma revenue comes from non-SIA customers.
New angle – unlocking latent value in the JVs. We believe that there is latent value in the JVs held by SIAEC, which could be unlocked with a separate listing. In particular, we are bullish on the outlook for one of its JVs with Rolls Royce, SAESL, which specializes in the repair and overhaul of Trent engines. Our bullish view on the prospects for the JV is backed by the 2,400 Trent engines on Rolls Royce’s order book (vs the 2,200 Trent engines currently in service). For the aircraft on SIA’s order book, 5 A380s (Trent 900), 40 A350s (Trent XWB) and 14 A330s (Trent 700) will be utilizing the Trent series of engines. We believe that SAESL’s future workload could increase even further, if Scoot decides on using the Trent 1000 engines for its new fleet of 20 B787s.
Upgrade to Buy, TP of SGD6.16 based on SOTP. Given the diversity of the underlying businesses, we believe that the stock is best valued using a sum-of-the-parts (SOTP) methodology. While P/E multiples appear rich relative to its historical trading range, we argue that there is hidden value within its business units that are not fully reflected with a P/E valuation method. Our SOTP does not take into account potential upside from a separate spin-off of its JVs. Furthermore, in the current low interest rate environment, we expect stock interest to remain high with its strong track record of dividend distributions. On our forecast, SIAEC offers potential 3yr yield of 4.6-5.0%.
ComfortDelgro – OSK DMG
Steady As She Goes
ComfortDelGro (CD) reported strong 1Q13 PATMI that grew 8% y-o-y to SGD58m. 1Q13 earnings accounted for 22.1% of our full year estimates, which were in-line with our expectations. We maintain our BUY rating and TP of SGD2.20 based on DCF (WACC: 9.0%; TGR: 2.5%). CD remains our pick within the land transport space for its 46% overseas operating profit exposure and more attractive valuations.
Another strong quarter of broad based growth. CD’s 1Q13 EBIT grew 3% to SGD96m due to growth across the board, which was partially offset by weakness from Singapore and UK bus, as well as Singapore rail operations. Singapore bus remained subdued with higher staff, repair and maintenance and depreciation costs, while Singapore rail was weak due to higher staff costs largely from the DTL start up. UK bus EBIT fell 17% y-o-y to SGD9.2m due to a declining GBP and lower Metroline revenue from a difference in billing cycle timing.
Ridership growth appears to be moderating. Bus average daily ridership grew 2.3% in 1Q13 while rail average daily ridership rose 6.4% for the same period. This compares to the 4.2-7.6% run rate for bus and 9-16.8% run rate for rail, for the same periods in the last two years. Though it may be too early to classify this as a trend, slower ridership growth is a negative for land transport operators. However, we are not overly concerned for CD given its large overseas exposure and its intention to target for overseas profit contribution to hit the 50% level (from current c.45%).
Share price has run up but stock still offers value. At FY13 P/E of 16.6x, CD remains more attractive than SMRT’s 25.0x FY14 P/E (FYE Mar). We like CD for its widespread overseas network which allows it better overseas growth prospects – something we view as a strong advantage given the challenging domestic land transport market.