SIAEC – Kim Eng
Time to Fly, Time to BUY
Upgrade on relative valuations, attractive yields. We upgrade SIA Engineering (SIE) to a BUY based on undemanding valuations versus its peers like ST Engineering and HK Aircraft Engineering Co (HAECO) and attractive dividend yields of 5.1-5.6% p.a. Our target price of SGD4.95 implies 15% upside, backed by resilient earnings and strong cashflows. We continue to like the aviation engineering sector for its resilient growth prospects.
Under-appreciated within sector. Headlining our rationale for upgrading SIE is its relative value that has emerged within the aviation
maintenance, repair and overhaul (MRO) sector. SIE currently trades at a lower PER of 16x versus its peer average of 18.3x, while dividend yield of ~5.3% is a full percentage point higher than its peer average of 4.3%.
Sector outlook rosy, SIE well-poised to benefit. Industry forecasts for the aviation MRO sector are still showcasing steady growth especially in Asia. In addition, we favour SIE for its ability to continue growing its non-SIA customer base as an affirmation of its service quality. This allows SIE an enviable balance between a diversified customer base and a foundation to lean on: SIA’s MRO business.
Resilient business supports attractive yields. SIE’s record of profitability seems to corroborate the thesis of resilience within the aviation MRO sector. Even during times of global economic crises, SIE’s earnings remained stable and, together with strong cashflows, formed the basis of an increasing dividend payout trend.
Favoured play in aviation engineering: Upgrade to BUY. We now peg SIE’s valuation based on 18.3x FY3/14 PER, one standard deviation above its historical mean. Target price is accordingly raised to SGD4.95, implying 15% upside with an attractive 5.3% dividend yield adding to its investment case. SIE is now our pick in the aviation MRO sector based on its undemanding relative valuations. Upgrade to BUY.
TELCOs – DBSV
Three keys:4G, NBN & Spectrum
- No premium pricing for 4G, but lower data caps will drive moderate growth; Extra 1GB costs S$5-6 now (free before) Expect market shares to change in corporate data market as StarHub spends capex on top of Broadband Network (NBN) to extend its reach
- Spectrum sale could be a burden especially for smaller telcos with higher gearing
- Top pick: StarHub for higher dividend yield, superior growth and lower gearing than peers
Lower data caps to drive growth M1’s attempt to charge an extra S$10 for 4G service did not succeed as SingTel did not respond in kind. How can a Telco charge a premium when real 4G speeds are limited to few spots? We understand 4G speeds drop sharply as a user moves away from 4G base stations. However, Telcos are using 4G as an excuse to lower data-caps, which should benefit ARPU moderately. Currently, heavy data users (~10% of the total) have to pay S$5-6 to enjoy an extra 1GB or S$20 for additional 2GB bundled with more voice minutes and SMS.
StarHub may gain market share in corporate data space. SingTel leads in the corporate data market with ~ 80% share of a market that is worth over S$1.5bn. StarHub has less than 20% share as it did not have cables that reach commercial buildings. Progress has been slow on this front as NBN provides access to the buildings but not the individual floors due to operational issues. However, it is ready to spend some capex to wire up the buildings now. Recently, StarHub also started to offer data-mining services to small & medium size enterprises to strengthen its business relationships.
Telcos may have to spend S$80m-S$100m in spectrum auction in 2013. The regulator is expected to re-farm and auction the 1800MHz, 2.3GHz and 2.5GHz spectrum bands in 1H13. The cost is significant for smaller players with higher gearing.
BUY StarHub for 5.8% yield. StarHub’s net debt to EBITDA stands at 0.5x compared to 1.0x for peers. This implies it can afford to pay additional S$350m dividends (21 Scts DPS or 5.5% yield) to reach 1.0x net debt to EBITDA. With spectrum sale due in 1H13, it is even more important to have lower gearing.
TELCOs – Phillip
Results Season Takeaways
Sector Overview
The Telecommunications Sector under our coverage consists of SingTel, Starhub & M1. Starhub (STH) and M1 are pure plays to the Singapore market, while SingTel (ST) has exposure to the Asia-Pacific region through its regional mobile associates.
- Revenue remains stable q-q
- Telcos remain attractive due to high dividend yield
- Neutral on Starhub, SingTel, and M1. We prefer Starhub over SingTel and M1
Mobile
- Q-Q post-paid net adds similar across three Telcos
- Post-paid ARPU mostly flat q-q, Starhub marginally lower
- Data monetization key revenue growth driver
Pay TV
- SingTel continues to gain market share
- Revenue to remain stable and strong
- Cost of non-exclusive contents, previously signed on exclusive basis, unlikely to decrease significantly
Broadband
- Fibre broadband continues to grow rapidly
- SingTel continues to dominate, with market share higher than those in the post-paid mobile segment
Others
- Sep – Dec 2012 may see an increase in equipment revenue and cost, due to the launch of popular iPhone 5
- 320 MHz of spectrum may be up for auction in 2013
Recommendation
We are neutral on the sector, while maintaining that they remain attractive due to their high dividend yield and stable earnings. We prefer Starhub and SingTel over M1 due to their bundled packages, which include Pay TV, being better able to retain customer loyalty. With both having higher operating revenue than M1, while Capital expenditure as a ratio of Total Operating Revenue is similar across all three Telcos, Starhub and SingTel have a higher budget to spend on future enhancements.
We prefer Starhub to SingTel due to its single geographical exposure, compared to the multiple countries that SingTel has a stake in. Starhub is therefore less volatile. Starhub also creates shareholder value, while paying out a higher dividend yield based on current price. Based on current share price, we are Neutral on Starhub, SingTel and M1.
ComfortDelgro – OCBC
A BETTER YEAR IN 2013
- Operating environment turning favourable
- Growth prospects in the pipeline
- Deserves upgrade to BUY
CD deserves rating upgrade
Recent comments by the Transport Minister have compelled us to revisit our conservative growth assumptions for ComfortDelgro (CD). As a result, we increase our fair value from S$1.60 to S$1.90, which raises our rating to a BUY from HOLD previously.
Local pressures to dissipate
Previously, our main issue against raising our valuation for CD was the weakness in SG bus operations especially with declining average fares and rising operating expenses i.e. wages. However, the onset of the Bus Services Enhancement Programme (BSEP) and its associated subsidies – and the increased likelihood of a fare revision in 2013 – point to a gradual turnaround for this segment in FY13.
Favourable fuel outlook
Despite geopolitical tensions in the Middle East, a lack of supply concerns has kept fuel prices subdued at current levels, and this trend is likely to extend into 2013. With substantial hedges in place – 40% of its diesel requirements for Singapore and the UK as well as 60% of its electricity needs – CD is well-positioned to benefit further from any additional dips and its profitability should remain supported.
Greater growth potential locally & abroad
Beyond FY13, CD has better prospects in its pipeline that will aid growth down the line. For instance, stage-one of the Downtown Line (DTL) will be operational in FY14. Although it will encompass only six stations, it will service the high-traffic regions of the CBD, Bugis and Chinatown. Internationally, a series of acquisitions and strategic moves will allow CD to continue enjoying stable revenue and operating profit contributions.
Fair value raised to S$1.90
Rolling our valuations forward to include FY14, we raise our revenue growth projections to 8% from 4% previously. In addition, we lower our operating expenses estimates i.e. fuel and electricity costs correspondingly. Maintaining our 50% of PATMI dividend payout forecasts, our DDM-based valuation increases to S$1.90. Upgrade to BUY.
ComfortDelgro – OCBC
A BETTER YEAR IN 2013
- Operating environment turning favourable
- Growth prospects in the pipeline
- Deserves upgrade to BUY
CD deserves rating upgrade
Recent comments by the Transport Minister have compelled us to revisit our conservative growth assumptions for ComfortDelgro (CD). As a result, we increase our fair value from S$1.60 to S$1.90, which raises our rating to a BUY from HOLD previously.
Local pressures to dissipate
Previously, our main issue against raising our valuation for CD was the weakness in SG bus operations especially with declining average fares and rising operating expenses i.e. wages. However, the onset of the Bus Services Enhancement Programme (BSEP) and its associated subsidies – and the increased likelihood of a fare revision in 2013 – point to a gradual turnaround for this segment in FY13.
Favourable fuel outlook
Despite geopolitical tensions in the Middle East, a lack of supply concerns has kept fuel prices subdued at current levels, and this trend is likely to extend into 2013. With substantial hedges in place – 40% of its diesel requirements for Singapore and the UK as well as 60% of its electricity needs – CD is well-positioned to benefit further from any additional dips and its profitability should remain supported.
Greater growth potential locally & abroad
Beyond FY13, CD has better prospects in its pipeline that will aid growth down the line. For instance, stage-one of the Downtown Line (DTL) will be operational in FY14. Although it will encompass only six stations, it will service the high-traffic regions of the CBD, Bugis and Chinatown. Internationally, a series of acquisitions and strategic moves will allow CD to continue enjoying stable revenue and operating profit contributions.
Fair value raised to S$1.90
Rolling our valuations forward to include FY14, we raise our revenue growth projections to 8% from 4% previously. In addition, we lower our operating expenses estimates i.e. fuel and electricity costs correspondingly. Maintaining our 50% of PATMI dividend payout forecasts, our DDM-based valuation increases to S$1.90. Upgrade to BUY.