Author: tfwee
StarHub – CIMB
Weak 3Q expected; shadow cast by BPL
3Q09 results preview
Maintain Underperform. StarHub will be releasing its 3Q09 results on 10 Nov. We are expecting a core net profit of S$75m-78m, flat to down 3.6% qoq on the back of a 0% to 2% decline in revenue. We expect margins to be flat qoq and a DPS of another 4.5cts, in line with guidance. We retain our earnings forecasts but raise our DCFbased target price to S$1.76 from S$1.58 (WACC 9.4%, LT growth 1%) following our rollover to CY10. Maintain UNDERPERFORM on potential de-rating catalysts from: 1) an expected spike in churns at its pay-TV division; 2) some unravelling of its hubbing model; and 3) prospects of losing more content to SingTel.
Revenue to be uninspiring. We are expecting revenue weakness at its mobile and fixed broadband divisions but stable pay-TV and fixed-network revenue on a qoq basis. As with M1, we believe StarHub’s mobile business (51.1% of revenue) came under pressure in the quarter from more competitive tariff plans, bundling discounts and lower roaming and IDD revenue. However, this could have been cushioned by wireless broadband growth as StarHub gained customers at the expense of M1. In fixed broadband (11.3% of revenue), downtrading had not fully played out during the quarter, which could continue to dampen ARPU and revenue. Pay-TV revenue (18.9% of revenue) is expected to be fairly stable as pay TV is one of the cheapest forms of entertainment in Singapore. Finally, in fixed network services (15% of revenue), we expect both the voice and data components to be stable.
Margins should be flattish. We expect flat margins in 3Q09 on the back of rising content costs due to step-up clauses in its content offerings and the addition of content. Cost of services, the bulk from content costs, made up about 15.9% of revenue in 2Q09. Moreover, with the growth in wireless broadband, we believe there would be more pressure on operating lease costs, which constitute about 7.7% of revenue, to cater for backhaul requirements.
SingTel unlikely to accept StarHub’s offer? StarHub has extended an olive branch to SingTel. It has offered to carry BPL matches over its cable platform for free. We regard this as an astute move to stanch potential customer defections come Aug 2010. However, we believe SingTel is unlikely to take up the offer because it:
• Could lose some control over the quality of its offering as programming is carried over StarHub’s network and through StarHub’s set-top boxes. This is probably why such a model has not been used anywhere else in the world.
• May introduce a more updated set-top box which offers greater functionality over StarHub’s to increase user appeal.
• Probably wants churners from StarHub to sever all relationships with StarHub. The continued use of StarHub’s set-top boxes would not achieve this.
Valuation and recommendation
Maintaining earnings forecasts and UNDERPERFORM rating but with a higher target price. We make no adjustments to our earnings forecasts but raise our DCFbased target price (WACC 9.4%, LT growth 1%) to S$1.76 from S$1.58 as we roll over to CY10. Maintain UNDERPERFORM on potential de-rating catalysts from: 1) a spike in churns at its pay-TV division; 2) an unravelling of its hubbing model; and 3) prospects of losing more content to SingTel. The rights to the football World Cup 2010 would be open for bidding at end-2009 and we believe SingTel will be aggressive.
STEng – CIMB
Earnings recovery priced in
• Results in line, maintain Underperform. 3Q09 net profit of S$120m (+8% yoy) was in line with our expectation and consensus. 9M09 net profit of S$314m (-15% yoy) forms 70% of our FY09 forecast. We raise our target price from S$2.78 to S$3.09, still based on blended valuations as a result of our earnings upgrade and lower WACC assumption. However, we maintain Underperform as we see limited catalysts to justify premium valuations (18x CY10 P/E) against a modest 3-year earnings CAGR of 4%.
• 3Q09 revenue dipped 2.2% yoy to S$1.3bn with weaker-than-expected revenue from Land Systems because of lower-than-expected project milestone completion, offset by stronger shipbuilding recognition for Marine. Qoq, revenue was down 4% from weaker sales in Electronics, offset by a surge in Marine.
• Aerospace margins improved but still far from historical levels. 3Q09 PBT margins for Aerospace improved 2.7% pts qoq to 14.9% but fell short of our expected 16%. 9M09 PBT margins of 12% were still much lower than their historical average of 20% due to a steep learning curve for the PTF conversion programme. While management sees a potential pick up in the aviation sector from 2010 as airlines resurrect their mothballed aircrafts, we see limited upside for FY10 Aerospace earnings as we have already assumed 20% growth in PBT from a stronger MRO baseload and higher margins.
• Marine stronger than expected. 3Q09 PBT of S$25m (+18% yoy) was above our expectations from a favourable sales mix due to higher shipbuilding at VT Halter Marine US. Shipbuilding margins also improved to 6% (from 3% in 3Q08).
• Earnings estimates raised by 2% for FY10-11 but lowered by 0.3% for FY09, to incorporate: 1) stronger revenue but lower margins for Aerospace; 2) higher margins for Land Systems and Marine; and 3) stronger revenue for Electronics.
• Strong order book. Order book was S$10.3bn, of which S$970m is expected to be recognised in 4Q09. Order-win momentum has accelerated with S$858m new orders secured in Oct 09.
• Earnings recovery priced in. STE is trading at 18x CY10 P/E, slightly above its 5-year average of 17x. We believe current valuations have priced in modest earnings growth (8-12%) expected for FY10 and FY11.
STEng – DBS
Promising set of results
• Net profit of S$120m(+11% qoq) is in line with expectations
• Strong rebound in aerospace margins q-o-q, as PTF conversions become profitable
• We expect MRO market recovery in FY10
• Maintain BUY; revised TP of S$3.30, attractive dividend yield of 4.8%.
Group PBT up 7% q-o-q. 3Q09 revenue of S$1.35b (down 2% y-o-y, 4% q-o-q) and net profit of S$120m (down 7% yo-y, up 11% q-o-q) were in line, and 9M09 net profit of S$314m equates to 74% of our full year projections. 3Q09 PBT of S$149m, though, was higher, driven by strong performances in the Aerospace and Land Systems segments.
Margin recovery in Aerospace to 3Q08 levels. Aerospace PBT climbed 15% q-o-q, as margins improved further to 15% vs.12% in 2Q09 – on the back of profitable PTF conversions. Land Systems PBT jumped 62% q-o-q on the back of a better product mix.
Order backlog still looking good. Orderbook at the end of 3Q09 stood at S$10.3b, down slightly from the end-2Q number of S$10.7b. About S$0.9b of this will be delivered in 4Q09. However, going by the S$865m of order wins already announced in Oct’09, the orderbook should be more than replenished at the end of 4Q09.
Maintain BUY. Our earnings estimates for FY09 remain unchanged, since 4Q09 may be impacted by a weaker USD. However, given our view that the MRO players could lead the recovery in the air travel industry, and given the better visibility of the profitability of the PTF conversions, we re-look our assumptions for the Aerospace segment and revise up our FY10 and FY11 EPS estimates by 6% and 3%, respectively. Our target price is correspondingly revised to S$3.30, still pegged to 20x FY10 earnings. While STE has outperformed the STI index since our recent upgrade, we believe it still has some way to run, given that it is still trading at valuation premiums much lower than the historical average of 40%.
STEng – BT
ST Engg Q3 profit drops 6.7% to $120.3m
It says it continued to get new orders, contracts despite a challenging market
ST Engineering yesterday reported net profit for the third quarter to Sept 30, 2009 fell 6.7 per cent to $120.3 million, from $128.9 million a year ago, largely due to substantially higher taxation and a lower share of results from associates.
Revenue was largely stable, falling 2.2 per cent to $1.35 billion from $1.38 billion in the same quarter last year. But cost of sales fell 4.8 per cent, helping to lift pre-tax earnings 3.3 per cent to $149.1 million.
Fully diluted earnings per share fell to four cents from 4.29 cents.
The company also recorded a 45 per cent increase in other income to $12.9 million, largely due to $9.9 million received in the quarter from the government’s Job Credits scheme.
As at end-September, the company’s cash and cash equivalents and short-term investments totalled $1.64 billion and advance payments from customers stood at $1.37 billion. Net cash from operating activities for the quarter doubled to $197 million from $100.5 million a year ago. This was due to lower income tax paid and favourable working capital movements, the company said.
The company said its land systems and marine sectors recorded higher before-tax profit, offset by profitability at its aerospace division, a major contributor. ST Engineering said this was due to lower turnover partially offset by profit from its ongoing 757 freighter conversion programme.
Quarter on quarter, aerospace profitability was higher by 15 per cent or $9.3 million, while land systems was higher than in Q2 by some 62 per cent, or $10.7 million. Overall, quarter-on-quarter profit before tax rose 7 per cent and commercial sales made up 62 per cent of group turnover.
The group’s order book remained strong at $10.3 billion, with about $970 million due for delivery in the last quarter of 2009.
President and chief executive officer Tan Pheng Hock said: ‘In Q3 2009, the group continued to secure new commercial orders and also won several new contracts from governments around the world despite a challenging market.’
The company said it expected, barring unforeseen circumstances, to achieve comparable turnover and before-tax profit in 2009, compared to 2008. Turnover for its aerospace segment is expected to be stable, but profitability could be lower, the company guided.
ST Engineering gained seven cents or 2.4 per cent to close at $2.95 yesterday, just one cent off its 12-month high of $2.96 reached on Oct 21.
SMRT – Phillip
2nd Quarter FY2010 Results
Marginal year-on-year topline with significant bottomline increase. SMRT Corp Ltd announced Group revenue for the second quarter of FY10 (“2QFY10”) of $229.4m. This represents a marginal increase of 1.1% from a year ago due mainly to higher revenue with the operation of Circle Line Stage 3, increased rental revenue and higher revenue from overseas projects, partially offset by fare reduction. Net profit for 2QFY10 came in at $52.8m, an increase of 24.1% compared to the same period last year. The significant increase was on the back of higher revenue and other operating income, Government Budget measure, lower energy costs and lower other operating expenses. The results are mainly within our expectations and we maintain our HOLD call with no changes in our fair value estimate of $1.89 as from the previous last done price of $1.73, this represents an upside of 9.25%.
Train Revenue Segment. Total Ridership for the quarter grew by 2.2%. Revenue increased marginally from $122.8m to $123.3m or 0.4% year on year. This was mainly due to higher average daily ridership and the commencement of the Circle Line Stage 3, partially offset by the fare reduction. EBIT increased from $36.1m to $38.7m or 7.0% due mainly to higher revenue and other operating income. Revenue from LRT operations fell by about 5% to $2.2m with EBIT declining approximately 28% to $0.1m.
Bus operations Revenue Segment. Bus operations posted a 4.6% decline to $51.0m in 2QFY10 due mainly to lower average fare and average daily ridership. Total ridership declined by 0.7% year on year. However, lower diesel costs improved bus operations EBIT, resulting in an operating profit of $1.8m compared to an operating loss of $1.1m a year ago.
Taxi Revenue Segment. Revenue in this segment saw a decline of 2.6% to $17.9m for 2QFY10 due mainly to a smaller average hired-out fleet. As a result of the smaller average holding fleet, operating expenses were lower and thus resulting in an operating profit of $0.8m compared to an operating loss of $0.5m in the same period last year.
Rental Revenue Segment. Rental revenue saw another quarter of good performance growing by 13.1% from $14.2m to $16.1m year on year. This was mainly due to increased rental space, a total of 29,225 sqm lettable space at the end of 2QFY10, and better yield. EBIT grew by 10.8% from $11.5m in 2Q09 to $12.7m this quarter.
Advertising Revenue Segment. The weak economic environment saw advertising revenue decline 9.8% to $5.4m with EBIT declining 10.8% to $3.4m.
Engineering and Other Services Segment. This segment saw an increase in revenue by 38.0% to $13.4m and EBIT grew almost five-fold to $5.5m on the back of increased consultancy revenue and higher fees from overseas projects.
The Group has fixed the rates for their electricity contract for the next 12 months from 1st October 2009 to 30th September 2010. The rates will be 11% higher than the previous six-month contract, which ended on 30th September 2009.
The $150m fixed rate notes issued recently in October 2009 should see Finance costs increasing. Total debt will return to current levels when the existing notes of $100m and $50m are repaid in December 2009 and January 2010 respectively.
The Group should be facing a challenging environment for the remainder of its financial year with the fare reduction package ending only in June 2010 as well as higher operating expenses due to increase in ramp-up costs for the remaining circle line stations, volatile diesel prices, higher electricity tariff rates, expected increase in headcount and therefore staff related costs and higher scheduled repairs and maintenance for Train. The Jobs Credit Scheme will also be at stepped down rates for six months from January to June 2010.
Our fair value estimate remains at $1.89 as most of the expected increase in operating expenses has already been factored in previously. With the last traded price of $1.73 representing a 9.25% upside from our target price, we reiterate a HOLD call based on our stock selection system.