Starhub – DBSV
Assured 5% yield with some growth
• 4Q12 earnings were 22% ahead of consensus due to lower than expected handset subsidies
• FY13F/14F earnings raised 8%/6% on lower subsidies and growth in digital voice home services revenue
• Maintain BUY with higher TP of S$4.30
Handset subsidies on a declining trend. 4Q12 earnings of S$87.9m (-5% y-o-y, -9% q-o-q) were 22% ahead of consensus estimates. Handset costs increased only 30% y-oy despite handset sales rising 70% reflecting higher mix of Android and Windows smartphones. Unfortunately, StarHub did not raise dividend guidance for FY13F despite net debt to EBITDA of only 0.5x versus 0.8x for M1 and 1.1x for SingTel, citing spectrum auction and future 4G capex.
Multiple growth drivers for FY13F. Besides lower subsidy burden, key drivers are (i) market share gains in the corporate data space where SingTel enjoys ~80% share (ii) full year impact of new revenue from digital home service as StarHub has started charging S$10.90 per month (prev. free) from Sep 2012 onwards (iii) significant rise in "other income" as StarHub (official OpCo) receives adoption grant from more people migrating to 100 Mbps broadband. These drivers should more than offset challenges in the pay TV segment in our view.
COO Mr. Tan Tong Hai to be new CEO by end Feb 2013. Mr. Tan had successfully turned around Singapore Computer Systems and Pacific Internet in his previous roles. Growing corporate data and defending pay TV business are the key challenges for him. We switched from DDM to DCF (WACC 6.5%, terminal growth 0%) valuation to capture FCF growth to derive a new TP of S$4.30.
ComfortDelgro – OCBC
COMFORTING RESULTS BUT RICH VALUATIONS
- FY12 within expectations
- Domestic fortunes turning
- But upside already mostly priced in
FY12 closes on a positive note
ComfortDelGro’s (CD) FY12 results came in within our expectations with revenue increasing 3.9% YoY to S$3.5b while operating profit improved 3.3% YoY to S$412.3m as the group managed to keep a lid on operating expenses during the period. With PATMI rising 5.6% YoY to S$248.9m, management declared a final dividend of 3.5 S cents (FY11: 3.3 S cents), taking the total dividend declared for the year to 6.4 S cents (FY11: 6.0 S cents). As a percentage of PATMI, the payout ratio rose marginally by 0.7ppt to 54%.
Look forward to fare increases
A long overdue fare increase will likely materialise by the middle of 2Q13, and this will help to alleviate pressures on operating margins for CD’s domestic segments. Coupled with the continued growth in bus and rail ridership – albeit at a slower pace – we expect the two segments to post more encouraging results in the coming quarters.
Has time to adapt to changes in overseas landscape
The loss of the two Australian bus routes will only take effect in Sep 2013 so the impact to CD will be more significant from FY14. In the absence of tender dates for its two remaining services, management has some lead time to adjust its approach although it has signalled its willingness to accept lower margins. That said, the relatively new tender process also opens up opportunities for the group to expand its footprint into other regions.
Allocation to defensive sectors has benefited CD
YTD, CD’s share price has appreciated by ~7%, benefiting largely from a combination of improving prospects and a greater emphasis on defensive qualities. Although our fair value increases to S$1.95 (from S$1.90) after we adjust our PATMI payout ratio to 52% (from 50%), much of the upside has already been priced in. Downgrade to HOLD on valuation grounds.
SIAEC – DBSV
High flyer could take a breather
- Results slightly below; 9MFY13 earnings growth of about 1% not exciting
- Secure and attractive dividend expectations fuelled strong share price performance
- Trading close to historic high valuations; further re-rating unlikely at this point
- Downgrade to HOLD; TP revised up to S$4.80
Results fail to excite. 3Q-FYMar13 net profit of S$67m (up 6% y-o-y) was slightly lower than our projections, as revenue of S$278m (8% lower y-o-y) fell short of our estimate. The decline in revenue came from lower fleet management and project revenue. Operating margin was stable at 11.2%, compared to 11.1% achieved in FY12. Profits from JV/ associates remained largely stable at S$40m, accounting for close to 53% of group PBT in 3Q-FY13. Given that 9M-FY13 revenue and margins are lagging our estimates, we revise down our earnings projections for FY13/14 by about 2% each.
Steady outlook. Management expects that business should remain stable in 4Q-FY13 but macro uncertainties will continue to impact the aviation industry. Nevertheless, earnings for SIE should remain resilient and benefit from the expansion in traffic in the high growth Asia-pacific region, including its home base at Changi Airport, but growth in flight movements may decelerate due to high base effect.
But further re-rating unlikely. SIE’s solid balance sheet, steady earnings and attractive dividend outlook has been well appreciated by investors, resulting in strong re-rating in recent months. Even accounting for the prevailing yield compression story, the stock has not only outperformed its peers but also other high dividend plays. It is currently trading at 20x FY13 PE and 4.4% yield, and we think upside is limited at this point, given that it is trading close to historic high valuations. We do not expect strong earnings growth or any special dividends this year to justify any further re-rating. Hence, while we revise up our TP to S$4.80 to account for stronger sentiment and market yield compression, we cut our recommendation to HOLD.
SIAEC – CIMB
Take a breather
This is the time to book some profits off SIA Engineering on unexciting3Q13 results and 33% share price outperformance since Jan2012. We believe capacity growth in Changi Airport and high hangar utilisation from airframe maintenance have been factored in.
3Q13 net profit is 10% below our expectations and 6% below consensus on lower-than-expected revenue. However, 9M13 is broadly in line, at 71% of our FY13 forecasts, thanks to a strong 1H13. We maintain our EPS forecasts and blended P/E and DCF-based target price. We think the valuation is stretched at 18x CY13 P/E, near its peak of 19x. However, we maintain our Neutral rating on decent dividend yield of 4.5%.
Lower fleet and project revenue
3Q13 revenue fell 8% yoy and 2% qoq from lower fleet management and project revenue (lumpier in nature). We believe line maintenance volumes could be higher (breakdown of revenue by business segment was not disclosed), helped by the 2% qoq annualised growth in aircraft movement in Changi Airport in Oct-Dec 2012. Airframe & component overhaul (typically contributes 48% of the group’s revenue) should remain stable.
Gradual margin improvement
EBITDA margin inched up to 14.3% (2Q13: 13.9%, 3Q12: 12.3%) due to lower subcontract services and material costs, a reflection of lower project revenue. The margin also improved due to an S$0.8m forex gain in 3Q13.
Associates and JVs benefit from stronger US$ qoq
Associates profit was up 8% qoq, but down 27% yoy to S$17.5m. JV profits remained stable qoq and rose 22% yoy to S$22.5m. We think this is due to higher market share of Rolls Royce engines (serviced by SIE’s associate Eagle Services) over Pratt & Whitney engines (serviced by SIE’s JV, SAESL) globally. Stronger US$/S$ from 2Q13 to 3Q13 (exchange rate of 1.22-1.25) could have helped in the translation of profits.
SIAEC – CIMB
Near peak, switch to SATS
SIA Eng’s share price has outperformed the index by 33% since Jan 12 and now trades close to its historical peak. We recommend switching to SATS to take advantage of the capacity growth in Changi Airport, with easing food inflation being an additional catalyst.
Downgrade to Neutral from Outperform with unchanged target price, on blended P/E and DCF valuations. Its 13% YTD surge leaves it vulnerable to profit taking as early year optimism dwindles. However, we still like its decent dividend yield of 4.3% and 7.8% 3-year CAGR in earnings. Our EPS remains intact. We will revisit this stock on margin expansion or stronger-than-expected volume from airframe maintenance.
Fully valued
At 18x CY13 P/E and 4.3x CY12 P/BV, SIE is trading above +1 s.d. of its 5-year mean, with an implied earnings growth of 12% from FY13-15. This suggests a much more bullish outlook of MRO spending vs. the global industry forecast of 4%. We note that SIE has only achieved an average growth of 3% since 2007. The upside risks to our argument could come from stronger-than-expected (85%) dividend payout in FY13.
Strong growth in Changi factored in
We believe the recent share price surge is partly due to optimism over Changi’s breakthrough, with an average of 920 flights handled per day, crossing the 900 mark for the first time. However we have factored in 9% yoy growth in FY13 for SIE’s line maintenance volume, which outpaced the expected growth in capacity expansion in Changi of about 4%.
Switch to SATS
SATS, with stronger earnings growth (3-year CAGR of 10%), could be a cheaper pick at 17x CY13 P/E vs. SIE’s 18x and lower earnings growth. Secondly, SATS has potential for margin expansion if food inflation is kept at bay (refer to Wen Ching Lee’s SATS report entitled “Ready for take-off” and dated 22 Jan 2013). Meanwhile, SIE’s margin is trending downwards on the back of higher subcontractor and materials costs. Finally, SATS offers higher share liquidity with a 57% free float vs. SIE’s 20%.