Sarin – Kim Eng
Focus on long-term structural growth
Softer 3Q12 than we expected. Although we were expecting weak 3Q12 numbers, the decline was greater than what we anticipated. Revenue came in at USD11.7m (-26% YoY, -35% QoQ) with corresponding net profit of USD2.5m (-41% YoY, -62% QoQ). 9M12 net profit made up 64% of previous FY12F forecasts. We have advocated looking beyond FY12 numbers previously so this set of weak results is not too much of a concern. Maintain Buy with TP reduced to SGD1.57.
What happened this quarter? Sales in 3Q12 were affected by weak demand from Indian manufacturers as they put off capex spending. This was mainly due to two key reasons: (1) High rough diamond prices, coupled with short-term weakness in polished diamond prices erode manufacturers’ margin and (2) Indian manufacturers face liquidity and credit line issues. Sales of GalaxyTM were also affected, as only 5 were sold this quarter (compared to 13-14 in the preceding 2 quarters). Sarin also warned that it may miss its target of 100 installed GalaxyTM machines by year end given that it has only 88 as at 3Q12.
Signs of easing. There are however positive signs emerging from (1) DeBeers’ 10% cut on rough diamond prices, and (2) holiday buying of polished diamonds, which should aid in the recovery of the Indian manufacturing sector as liquidity issues dissipate.
Structural growth story intact. We believe that inherent demand for GalaxyTM has not abated but is temporarily subdued by customers’ financial positions. We see potential for resumption of sales momentum towards end 4Q12. Progress of its polished diamond products could see some breakthrough in end 4Q12 if it manages to establish commercial agreements with major industry opinion leaders for its Sarin-Light product.
Maintain Buy. We cut FY12F net profit forecast by 16% on weaker 3Q12 numbers and trim FY13-14F figures by about 5-7%. Growing recurring revenue base (25% of total revenue for 9M12) from GalaxyTM has improved quality of earnings and helped reduce volatility. We remain positive as we believe that the adoption cycle of Galaxy is still in its early stage. Maintain Buy, TP reduced to SGD1.57 pegged at 13x
FY13F PER.
STEng – DBSV
On track to strong growth year
- 3Q12 net profit of S$146m (+9% y-o-y) ahead of our estimates; margin improvements across all segments
- Revised up FY12/13F earnings by 3-4%
- YTD order wins of S$3.5bn already past FY11 levels; underpins FY13/14 earnings visibility
- Maintain BUY with higher TP of S$3.80
Highlights
Delivering strong results again. 3Q12 net profit of S$146m (up 9% y-o-y and 2% q-o-q) came in above our estimates of about S$140m, driven by strong margins across all business segments. Revenue was up 11% y-o-y to S$1.54bn, driven by the Aerospace, Electronics and Land Systems sectors. 9M12 net profit of S$424m accounts for more than 75% of our existing full-year estimates for FY12.
Margin improvement across all sectors. Group PBT margin improved to 12% in 3Q12 from 11.5% in 1Q12. Aerospace core PBT margin remained steady at 15% (17% including write-back of provisions), while Electronics and Marine PBT margins of 12% and 13% came in at the higher end of the historical range. Adjusting for S$14m of provisions, Land Systems PBT margin was also strong at 8.7%.
Our View
Strong order wins momentum. STE closed the quarter with a S$12.5bn orderbook. YTD, STE has announced close to S$3.5bn worth of new contracts, which is already ahead of the S$3.2bn worth of contracts announced in FY11. In 3Q12, the Aerospace division led with S$690m worth of new orders, continuing the momentum from previous quarters. In what could potentially be a medium to long term positive development, STE, along with consortium partner SAIC, has recently been chosen by United States Marine Corps as 1 of 4 contenders for the ~US$3bn Marine Personnel Carrier programme. This potentially places STE’s defence capabilities at par with more established players, and could lead to more international recognition in future.
Recommendation
Maintain BUY. With this quarter in the bag, STE’s growth trajectory seems to be firmly on track, driven by healthy orderwin momentum and improvement in margins. We revise upwards our FY12/13F earnings estimates by about 2.6%/ 3.9% to account for the above. We now expect robust 9% earnings growth in FY12, and 6% growth in FY13/14. Given visible earnings growth, strong balance sheet and healthy dividend yield of 5%, we maintain our BUY call. Our TP, which is based on the blended valuation methodology, is revised up to S$3.80 as we roll over to FY13 numbers.
STEng – DBSV
On track to strong growth year
- 3Q12 net profit of S$146m (+9% y-o-y) ahead of our estimates; margin improvements across all segments
- Revised up FY12/13F earnings by 3-4%
- YTD order wins of S$3.5bn already past FY11 levels; underpins FY13/14 earnings visibility
- Maintain BUY with higher TP of S$3.80
Highlights
Delivering strong results again. 3Q12 net profit of S$146m (up 9% y-o-y and 2% q-o-q) came in above our estimates of about S$140m, driven by strong margins across all business segments. Revenue was up 11% y-o-y to S$1.54bn, driven by the Aerospace, Electronics and Land Systems sectors. 9M12 net profit of S$424m accounts for more than 75% of our existing full-year estimates for FY12.
Margin improvement across all sectors. Group PBT margin improved to 12% in 3Q12 from 11.5% in 1Q12. Aerospace core PBT margin remained steady at 15% (17% including write-back of provisions), while Electronics and Marine PBT margins of 12% and 13% came in at the higher end of the historical range. Adjusting for S$14m of provisions, Land Systems PBT margin was also strong at 8.7%.
Our View
Strong order wins momentum. STE closed the quarter with a S$12.5bn orderbook. YTD, STE has announced close to S$3.5bn worth of new contracts, which is already ahead of the S$3.2bn worth of contracts announced in FY11. In 3Q12, the Aerospace division led with S$690m worth of new orders, continuing the momentum from previous quarters. In what could potentially be a medium to long term positive development, STE, along with consortium partner SAIC, has recently been chosen by United States Marine Corps as 1 of 4 contenders for the ~US$3bn Marine Personnel Carrier programme. This potentially places STE’s defence capabilities at par with more established players, and could lead to more international recognition in future.
Recommendation
Maintain BUY. With this quarter in the bag, STE’s growth trajectory seems to be firmly on track, driven by healthy orderwin momentum and improvement in margins. We revise upwards our FY12/13F earnings estimates by about 2.6%/ 3.9% to account for the above. We now expect robust 9% earnings growth in FY12, and 6% growth in FY13/14. Given visible earnings growth, strong balance sheet and healthy dividend yield of 5%, we maintain our BUY call. Our TP, which is based on the blended valuation methodology, is revised up to S$3.80 as we roll over to FY13 numbers.
SingTel – CIMB
Bharti’s 2QFY13 letdown
2QFY13 core net profit for Bharti, SingTel’s associate, came in 37% below consensus estimates that form the basis of our forecast. This was due to an unexpected surge in depreciation and higher interest expense in Africa. Its operational performance was well within expectations.
We maintain our SOP-based target price and Underperform call on SingTel. Likely de-rating catalysts include additional negative regulatory developments in India and weaker regional currencies. SingTel will release its 2QFY13 results on 14 Nov. We prefer StarHub for its attractive dividends.
What Happened
Bharti Airtel, SingTel’s 30.8% associate, released its 2QFY13 results and held its conference call earlier today. 2QFY13 core net profit for Bharti came in 37% short of consensus estimates that form the basis of our forecast. This was mainly due to surge in depreciation costs and finance costs in Africa.
Despite a seasonally weak quarter, revenues rose 4.8% qoq, lifted by a 77% yoy jump in mobile data and a 24% yoy rise from Africa revenues. Africa’s subscriber base increased by 21% yoy and 5% qoq. India’s ARPUs slid 4.3% qoq due to competition. Opex rose sharply by 19% yoy as the group continued expanding its networks in India and Africa. EBITDA margin grew 1.1% pts qoq, with an improvement in Africa offset by lower margins in India.
Management is optimistic that voice pricing will improve sooner than later as it sees that most of the sector levies have been priced in and should rebound once the 2G auction is over. India’s 2G auction is slated to take place on 12 Nov.
What We Think
We think Bharti’s results were poor and would not contribute to any price catalyst for SingTel. We are surprised by Africa’s strong operational improvement. However, India continues to remain a key risk area, given the highly uncertain regulatory environment and weakening rupee.
What You Should Do
We advocate investors to switch into StarHub in light ofits potential for higher dividends. We believe that investors should demand a higher yield for SingTel, given its higher risk profile and more volatile earnings.
MIIF – AmFraser
A Superior Yield Play With Strong Potential Upside
A stronger showing than expected: Macquarie International Infrastructure Fund (MIIF)’s adjusted net income of S$60.2 mil has already surpassed our FY2012 estimate of S$52.3mil. The positive earnings surprises largely came from Hua Nan Expressway (HNE) and Taiwan Broadband Communications (TBC). We were more conservative on the growth rates in traffic for passenger vehicles, medium bus/trucks and large bus/trucks, and actual traffic came in about 6‐10% higher than our growth estimate across these segments. For TBC, its distributable income of NT$42.9mil exceeded our estimate of NT$41.2mil. While growth in the subscriber numbers for TBC runs largely parallel to our expectations, we were more aggressive on the cost front.
Impact of 20% toll reduction on HNE Phase 1 will be fully borne out in FY2013: Despite witnessing a double‐digit growth of 17.9% in overall traffic volumes for 9MFY2012, its distributable income plummeted by 22.7% on the back of the tolling revisions. Notably, this was partially cushioned by the impact of the opening of Guanghe Expressway, which is a complementary road to HNE, as well as the standardisation of toll rates in Guangdong Province. We believe these will continue to serve as positive contributing factors supporting our growth forecast of 12.3% in traffic volumes in FY2013. However, as FY2013 reflects the full impact of the toll reduction, we expect distributable income from HNE to decline by 16.2% in the following financial year.
TBC a crown jewel: TBC continues to deliver an impressive performance across all segments, which translated into a 47.9% growth in its distributable income. We are particularly bullish on the operational performance of the digital TV segment, as growth accelerates from a much lower base. TBC’s focus on establishing stronger penetration rates in the Digital TV market would certainly be a boon to the segment’s growth as well.
Changshu Xinghua Port (CXP) recorded 28.9% growth in distributable income for 9MFY2012, largely in line with our forecast. Growth was backed by higher log, paper and pulp volumes together with higher average tariffs on general cargo volumes.
A real head‐turner: As we roll over our estimates and lower our expenses forecast for FY2013, we raise our fair value to S$0.680. This means that MIIF provides capital appreciation potential of around 19.3%, not to mention its superior 10% dividend yield. We expect dividends to be fully covered by operational cash flows from FY2013 and raise our dividend forecast to 5.5c in FY2013. Furthermore, we see upside risks pending the outcome of MIIF’s strategic review. MIIF is currently trading at a massive discount of 21.5% to its NAV.