Sarin – Kim Eng
Early signs of easing
De Beers cut rough diamond prices. In the last DTC sight in August, De Beers reduced rough diamond prices by an average of 8%. As a result, all rough diamonds were taken up by sightholders, compared to more than 20% rejections in the previous two sights. Based on a Rapaport report, the cut in rough prices narrowed the gap between rough and polished price movements from about 15% to 5%. This is a positive move for the industry as it would ease liquidity challenges and profit margin pressures for manufacturers.
Polished prices more stable. Polished diamond prices were more stable in August, following steep declines in previous months. There should be gradual improvement in demand ahead of the fourth-quarter buying season. Demand for lower-quality and cheaper diamonds appears steady while that for high-quality stones is still relatively weak. All eyes are on the Hong Kong jewellery show in late September, which would give a clearer indication of polished buying demand.
Indian manufacturers still face liquidity problems. While there is an improvement in sentiments, given the added burden of a weak rupee, Indian manufacturers are still plagued with liquidity issues. We do not expect these manufacturers to resume capital equipment purchase until further signs of easing as they remain cautious. However current developments are moving in the right direction.
Look for growth beyond FY12. We maintain our view of looking for the next leap of growth for Sarin beyond FY12, which would come from the penetration of the polished diamond market. Meanwhile, we are not even midway through the adoption cycle of the Galaxy, which would drive recurring revenue to reach about 30% of total revenue by FY13F.
Current valuations a steal, reiterate BUY. Current depressed stock price offers a good opportunity for accumulation. While Fidelity trimmed its position from 6.2% to 4.8%, Sarin has bought back 0.3m of its own shares recently at SGD0.90-0.92, demonstrating its confidence in the company. We lower FY12F net profit by 4.4% as we incorporate more conservative 3Q12 numbers. We roll forward our valuation multiple onto FY13F earnings and our target price is marginally higher at SGD1.68, peg to 13x peer average forward PER.
Aviation Services
Qantas-Emirates tie-up
Sector Overview
The Transportation Sector under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT, ComfortDelGro) & Aviation Services (SIA Engineering, ST Engineering, SATS).
- Qantas is shifting its European hub from Singapore to Dubai
- A mix bag for SIA
- Mildly negative in the near term for SIAEC & SATS
- We caution against overreacting to the news
What is the news?
Qantas announced a strategic 10yrs partnership with Emirates that would see the Australian carrier shift its European hub from Singapore to Dubai. Consequently, Qantas would terminate their 17yrs long business alliance with British Airways. Qantas would also withdraw its Singapore to Frankfurt route that had been underperforming.
A mix bag for SIA
Strategically, this implies that competition for traffic between Europe and Australia would be stiffer with the new alliance between two of its major competitors. However, we opine that it also implies less competition for European customers travelling to Singapore. Hence, we see this development as a mix bag for SIA.
Minimal near term impact for SATS & SIAEC
This move by Qantas has tactical and strategic implications for the aviation service providers, SIAEC & SATS, under our coverage. We see this as mildly negative for the aviation service providers as the termination of flight services would result in lower work volume for both companies. However, we estimate that the shifting of flights to Dubai would account for less than 2% of flight traffic at Changi Airport and caution against overreacting to the news.
The Qantas Group is the 2nd largest user of Changi Airport, after the SIA Group, but only after including significant traffic from Jetstar Asia. We believe that Asia remains an important market for the Qantas Group and would continue to be an important part of their growth strategy. In fact, Alan Joyce, Qantas’s CEO, mentioned “Qantas will increase dedicated capacity to Singapore and re-time flights to Singapore and Hong Kong to enable many more ‘same day’ connections across Asia.” Bloomberg news subsequently reported this capacity growth to Changi Airport at 25%. Hence, this expected increase in traffic growth at Changi could actually be positive for the aviation service providers!
Strategic implications for SIAEC & SATS
There are also concerns over a potential loss of contracts with Qantas, as the second largest service provider at Changi Airport, dnata Singapore, is part of the Emirates Group. We acknowledge this as a longer term risk, but opine that near term effects are limited. In particular, we see little risk in the near term for SATS as the company had recently renewed their contract (inflight catering, laundry services, ground and cargo handling) with Qantas in 1QFY13. Contract information for SIAEC is not available.
M1 – CIMB
Matching SingTel’s 4G prices
M1 does not appear to be trying to claw back market share, judging from the pricing of its new 4G small screen data plans, which closely mirror that of SingTel. M1 priced its 4G plans 5-27% above its 3G plans and 2-3% below SingTel’s.
Not surprisingly, it reduced its data bundles, mirroring SingTel, to better monetise data. The pricier 4G plans and reduced data bundles will help bolster its ARPUs. We maintain Neutral on M1 with a DCF-based target price (WACC 7.6%) and advocate a switch to StarHub, which offers higher dividend yields and potential for capital management.
What Happened
M1 launched new small and large screen data plans and introduced nationwide 4G services. The key takeaways from the unveiling are:
1) M1’s 4G plans are S$10.70/month or 5-27% more expensive than its equivalent 3G plans and 2-3% below similar SingTel plans.
2) M1 reduced voice bundles, threw in more SMS and raised the price of its top-end plan marginally compared to its previous small screen data plans (Figures 1 and 2).
3) Not surprisingly, it divided data bundles from a flat 12GB to tiered amounts of 2GB, 3GB, 5GB and 12GB, mirroring SingTel.
4) M1 also launched 4G large screen data plans.
The key difference between the operators’ plans is recontracting M1 users will be given extra 1GB data on the new small and large screen plans.
What We Think
We view M1’s upward repricing and tiering of data bundles positively but they are unlikely to help the telco claw back market share (Figure 5) as they are very similar to that of SingTel. Throwing in 1GB extra for recontracting users will help it retain customers but, overall, will not appeal to non-M1 customers. SingTel’s offerings are still more attractive as it also offers bundling discounts for pay TV and broadband. That said, the pricier 4G plans and reduced data bundles will help M1 bolster its ARPUs will help bolster its ARPUs.
What You Should Do
Switch out to StarHub, our top telco pick for its potential to raise dividends or undertake a one-off capital repayment, especially following its plan to sell bonds. M1 lacks re-rating catalysts and the above developments do not change our view.
STEng – CIMB
MRO and defence myths busted
In our recent roadshow to Hong Kong, STE busted a few myths, includingthat of lower MRO demand fromnew aircraft joining the aviation industry and the adverse impact of cuts in global defence budgets on STE’s defence business.
Maintain Outperform with anupgradedtarget priceafter rollingforward our blended valuations (19x CY14 P/E, dividend yieldsand DCF). We like STE for its S$630m war chest, above-peers ROEsof 30% and generous payouts of 90%, sustaining yieldsat5%. Catalysts include M&As and stronger Aerospace margins.
What Happened
During our road show, management clarified that although newer planes could be equipped with higher composites that would require lessermaintenanceofairframes, the bulk of the global fleet is still built on older technologies,making MRO an integral expense foroperators. Secondly, STE is gaining MRO market share in the US,thanks to anexodusof competitorssuch asAir Canada’s in-house MRO, Aveos, PEMCO World Air Services, American Airlines’s internal MROand Aviation Technical Services.Finally,STE’s proven capabilities indifferentclassesof aircraft could allow the group to capture strong demand for freighters.Airbus forecasts that about 1,800 conversions would be needed by 2022.
STE derives itsdefence business mainly from itsLand Systems division, where Singapore accounts for about 60% of the revenue. Singapore’s defence budget has been growing steadily at a 4.1% 10-year CAGR, and should continue to provide a baseload to STE.
What We Think
Having expanded its order book by 30% to a record S$12.7bnsince the GFC, we think STE has emerged more defensive, withAerospace, Electronics and Marine nowbetter prepared for downturns. STE’s net cash bodes well for its search for M&As. We expect some successful earnings-accretive M&As byAerospace, Marine and Electronicssoon, going bySTE’s aggressive hunt for bargains.
What You Should Do
Stay invested.STE ranks among the top-15 dividend-yield companies in Singapore,ex-REITs. Its premium valuations are largely predicated on its dividend payouts, which we believe aresustainable.
STEng – CIMB
MRO and defence myths busted
In our recent roadshow to Hong Kong, STE busted a few myths, includingthat of lower MRO demand fromnew aircraft joining the aviation industry and the adverse impact of cuts in global defence budgets on STE’s defence business.
Maintain Outperform with anupgradedtarget priceafter rollingforward our blended valuations (19x CY14 P/E, dividend yieldsand DCF). We like STE for its S$630m war chest, above-peers ROEsof 30% and generous payouts of 90%, sustaining yieldsat5%. Catalysts include M&As and stronger Aerospace margins.
What Happened
During our road show, management clarified that although newer planes could be equipped with higher composites that would require lessermaintenanceofairframes, the bulk of the global fleet is still built on older technologies,making MRO an integral expense foroperators. Secondly, STE is gaining MRO market share in the US,thanks to anexodusof competitorssuch asAir Canada’s in-house MRO, Aveos, PEMCO World Air Services, American Airlines’s internal MROand Aviation Technical Services.Finally,STE’s proven capabilities indifferentclassesof aircraft could allow the group to capture strong demand for freighters.Airbus forecasts that about 1,800 conversions would be needed by 2022.
STE derives itsdefence business mainly from itsLand Systems division, where Singapore accounts for about 60% of the revenue. Singapore’s defence budget has been growing steadily at a 4.1% 10-year CAGR, and should continue to provide a baseload to STE.
What We Think
Having expanded its order book by 30% to a record S$12.7bnsince the GFC, we think STE has emerged more defensive, withAerospace, Electronics and Marine nowbetter prepared for downturns. STE’s net cash bodes well for its search for M&As. We expect some successful earnings-accretive M&As byAerospace, Marine and Electronicssoon, going bySTE’s aggressive hunt for bargains.
What You Should Do
Stay invested.STE ranks among the top-15 dividend-yield companies in Singapore,ex-REITs. Its premium valuations are largely predicated on its dividend payouts, which we believe aresustainable.