Author: tfwee
STEng – DBS
Headwinds just gotten stronger
Story: Several major US airlines, including Delta, Northwest, United Airlines and Continental have recently announced that they would pare domestic seating by 10-18% by the end of the year to counter rising costs and cut unproductive routes. In the process, hundreds of planes would be grounded. According to the main industry trade association’s forecast, the US aviation industry may stand to lose over US$10bn this year, due to the skyrocketing costs of jet fuel.
Point: Third-party MRO operator, ST Aerospace may face the first line of cutbacks in workflow as major airlines seek to cut costs. In our earlier report, we had pointed out that we expect further headwinds in the aerospace segment from U.S. operations, which contributes about 12% of ST Engineering’s (STE) revenue and 15% of its PBT.
Relevance: Downturn in the airline industry usually has a lagged effect on MRO operators, as previous contracts tend to hold up earnings till about 6-9 months after a downturn. Thus, we take a fresh look at our estimates on FY09 earnings, keeping in perspective of the flat growth witnessed in FY02 post-9/11 downturn, and revised down our forecast on FY09 PBT for the aerospace segment by 8% on the back of lower growth and PBT margin assumptions. We have also tuned down our projection on FY09 earnings multiple for the Group to 15x,the lower end of its historical PE band during the SARS period, and arrived at a target price of S$2.80. Though dividend yield of 6% at current prices should provide some downside support, we downgrade the counter to FULLY VALUED.
Switch to SIA Engineering, which promises higher earnings visibility and stable growth, as 70% of its revenue is from the parent, the stock trading at more attractive valuation of 13.5x(FYMar 2010) and dividend yield of 5.3%
StarHub – DMG
Sparky’s Back for Another Challenge
In 2002, Sparky the Jack Russell Terrier created a splash and quickly became the most recognisable and well-loved telco mascot. Back then, the budding canine celebrity had a mission – to show Singapore that Starhubwas as good as its established rivals by roaming around the island (and later, overseas) to test the mobile coverage of the fledgling telco. Following the successful act, Sparky disappeared for 4 good years and is now making a timely comeback to tide StarHub through another challenging period, as the telcos slug it out with the advent of full mobile number portability (MNP).
Full MNP will leave some temporary scars. MNP was introduced on 13 Jun 08, but the effect has already been felt over the past few months. Market share among the 3 is unlikely to be shaken much, but the amount of marketing and promotional dollars thrown in will lead to pressured margins. In StarHub’s case, average acquisition cost surged 28% to S$124 per subscriber. We are, however, more sanguine on its long-term outlook. On the macro front, the telco players in Singapore have generally co-existed well over the years and have not succumbed to ‘destructive’ competition. At a company level, we believe that StarHub’s ‘hubbing’ strategy mitigates ARPU pressures and improves client loyaltyin the long run.
Promised payout. StarHub has committed to a minimum dividend payout of S$0.18 per share, which works out to a relatively attractive yield of 6.5%.The company is expected to raise the payout if its capex requirements remain low. However, it will unlikely confirm its capex plans till after the award of the NetCofor the Next Generation National Broadband Network, which is expected to be in 3Q08.
Dip creates buying opportunity. StarHub was covered by OSK butwill be transferred to DMG following this report. OSK previously downgraded the stock to NEUTRAL with a target price of S$3.30 on 8 May 08. The stock price has since fallen by 11% to S$2.78. While our revised target price of S$3.10is lower than OSK’s, the potential upside following the decline makes the stock attractive once again. Upgrade to BUY.
ComfortDelgro – UOBKH
Share-swap to result in S$26.5m exceptional gain. Maintain HOLD
Share-swap to result in one-time gains. ComfortDelgro Corporation (CD) announced that it will transfer 16% of its subsidiary, CityFleet (UK), to Cabcharge (CAB AU, Not Rated), in return of about 2.5% stake increase in the latter. This would result in a one-time gain of S$26.5m or an earning or NAV per share increase of 1.27 S cents in FY08.
The share-swap is to strengthen the relationship between CD and CAB for the future growth. CD conducted a similar share-swap exercise in Nov 2006, which also reported an exceptional gain at S$41.7m in FY06. These two companies set up a joint venture to acquire the Westbus group in 2005, which has strengthened CD’s presence in Australia. The Australia market contributed 7.6% of CD revenue in 1QFY08.
Maintain HOLD. We have incorporated the exceptional gain of S$26.5m into our FY08 earning forecasts, while still maintaining our core earning forecasts. Upside surprises could come from oil price corrections and CD’s overseas expansion.