STEng – OCBC
Resilient Earnings
Management confident of a stronger 2H11. We recently caught up with the management of Singapore Technologies Engineering Ltd (STE) to get an update on the group. STE historically has a stronger second half of the year, compared to the first half. Barring unforeseen circumstances, management is confident this will also be the case in 2H11. With STE’s 1H11 net earnings meeting 47.4% of our FY11 estimates, STE looks on track to meet our FY11 expectations, despite a weakening US$.
Earnings model fine-tuned. Nevertheless, our earnings model has been fine-tuned to further segregate STE’s four main segments into their respective sub-segments for greater granularity. (See Exhibits 1 to 5 for a graphical representation of the revenue and pre-tax profit contribution of STE’s four main segments and the respective sub-segments.) Despite this fine-tuning exercise, we have maintained our FY11 earnings estimate of STE at S$510m.
Risks and downside protection. Equity markets around the world have seen higher volatility in recent weeks and talks of the global economy heading for a recession is gathering pace, as investors are more unsure about the near-term outlook. During the equity sell-off in early 2009 caused by the global financial crisis, STE’s implied forward P/E fell by more than two standard deviations below its historical average. However, STE’s earnings are resilient in nature. STE has 1) a large stable stream of revenue coming from government-related projects; 2) a strong order book and a sizeable chunk of its non-government business under long-term contracts; and 3) a profitable and extremely cash generative business model. Furthermore, STE’s 90% dividend payout policy gives it a high dividend yield of 5.1%. These four factors collectively provide good downside protection, making STE a good name to own if one wants to stay invested in equities. At the current price of S$2.95, STE is priced at 17.0x P/E based on our earnings estimates over the next four quarters. This means STE is already trading at more than one standard deviation below its historical average forward P/E of 19.4x. (See Exhibit 6 for STE’s historical average forward P/E.)
Maintain BUY. Given STE’s resilient earnings, we used its historical average forward P/E of 19.4x against its net earnings estimates over the next four quarters to arrive at a fair value of S$3.37 per share, down from S$3.58 previously. As the new fair value still represents 14.2% upside, we maintain our BUY call.
M1 – Phillip
Biggest beneficiary of developments in the industry
• Biggest beneficiary of developments in the industry
• Retail broadband could be the game changer for M1
• Excellent yield play for uncertain times
• Resume coverage with a Hold recommendation and target price of S$2.52.
Biggest beneficiary of developments in the industry
In our view, the biggest beneficiary of developments in the local Telco scene would be M1. Barriers to entry were lowered for the smallest player in Singapore and provides opportunities for the company to transit from a pure mobile player to a full fledge integrated service provider.
Growth in retail broadband to be a game changer for M1
Currently, the retail broadband market had been dominated by SingTel and Starhub. However, Next Generation National Broadband Network (NGNBN) eliminated the infrastructure constraints that deterred M1 from entering this market in the past. In Sep 2009, M1 prepared itself for this new opportunity by acquiring Qala, which allows M1 level up with an existing client base. We see this as a major development for the company as it ventures into the fixed line business.
Expect meaningful gains in retail broadband market
According to statistics published by IDA, Singapore currently has c.1.2mn residential fixed broadband customers. Assuming a typical contract length of 24months, we estimate that on average, 50k broadband customers could be up for renewal every month. Our estimate is higher than the guidance provided by M1 during its 2QFY11’s earnings conference call of 10-12k subscriptions due for renewal in the market.
With an average ARPU estimate of S$45/mth and assuming that M1 captures 20% of contracts up for renewal, the company could add S$1.3mn to its fixed line revenue per quarter. This would lead to retail broadband revenue market share ofS$85mn for M1 by end FY13E, as compared to the current S$400mn for SingTel and S$240mn for Starhub. Being a new entrant to the market, M1 would need to offer very competitive rates in order to quickly gain market share. We believe that the company’s recent promotional offer of S$39/mth for a retail 100Mbps fibre line is marginally profitable at best after deducting the S$21 interconnection charges paid to Nucleus Connect & OpenNet.
STEng – CIMB
Protect your portfolio!
• Protect your portfolio! This should be the best time to buy STE for its defensive quality in the face of volatile markets. Indeed, its share price has outperformed the market by 11% in the last three months. With little room for sharp depreciation in the US$, we are hanging on to hopes of earnings surprises, which we believe can offer re-rating catalysts. Consensus expects the US$/S$ to hover at S$1.18-1.20 into 2012, which would have a negligible (1% or S$6m) impact on STE’s PBT in the worst case. In fact, we believe current valuations of 15x CY12 P/E (below its average trading band of 16x during the previous crisis) have priced in fears of US$ deterioration and macro uncertainties. No change to our earnings estimates, target price of S$3.61 (still based on blended P/E, DCF and dividend yields).
• Zero order-book risk. Unlike its conglomerate peers with substantial exposure to the offshore & marine space, STE’s order book (S$10.8bn) is secure with almost zero risk of cancellations as 40-50% of its contracts are defence-related. Commercial contracts are mostly from long-term customers with strong financials including Fedex, American Airlines and Japanese airlines. STE has also been chalking up orders from all segments worth about S$1.5bn YTD.
• MRO recovery intact. More than 1,500 narrow-body aircraft (delivered in 2009-2010) could be scheduled for “C” checks (18-24-month cycle) starting 2H11, affirming our view that the MRO recovery is on track.
• High yields and cash-rich. STE offers a safe refuge with its fairly attractive dividend yields of about 6%, only slightly lower than the 7% from telcos and REITs. The yield is also backed by a solid balance sheet as it continues to generate net cash (S$220m as of 1H11). It is also one of two companies in Singapore with an AAA rating (the other being Temasek) from Moody’s.
SATS – OCBC
It gets bitter before it turns sweeter
The TFK earnings drag. SATS Ltd reiterated that the recently acquired TFK Corporation is not expected to have a material impact on FY12 earnings, but we are unconvinced. TFK’s output volumes have trended lower since early 2010 due to Japan Airlines International’s (JAL) restructuring efforts. In addition, the earthquake that hit Japan in Mar 2011 has further depressed TFK’s output volumes. In 1QFY12, excluding one-off accounting gain of S$10.1m arising from its pension obligations, TFK reported pre-tax loss of S$7m. Consensus numbers do not seem to have factored in the impact of loss-making TFK on the group. We have lowered our FY12 earnings forecast by 14.2% to reflect the drag of TFK on the group’s earnings. Our new FY12 net profit of S$171.3m is the second lowest on the street and 13.2% lower than consensus.
TFK restructuring and turnaround. Post-earthquake, management maintained its original target of turning TFK profitable by FY13. Management’s optimism comes from the end of JAL’s restructuring and route cuts and Japan’s new focus to increase air travel in Tokyo’s two main airports. Given SATS’ good execution track record, there is a good chance of management coming good on their target. We have correspondingly increased our FY13 earnings forecast by 1.4% to S$212.6m.
Challenging outlook. Management has warned of challenging times in the coming months as a result of the Eurozone debt crisis and the downgrading of USA’s credit rating. While Asia’s economies are comparatively better, SATS continues to face the pressure on rising wages and food costs. With more than 60% of its revenue being aviation-related, SATS’ earnings and share price will take a beating if the global economy and air travel suffer.
Downgrade to HOLD. SATS’ share price has fallen 23% from a recent high in Jan 2011. As a result, SAT’s implied forward P/E has fallen below one standard deviation lower than the average of the last two years. While consensus FY12 earnings of S$197m do not seem to have factored in the negative impact of loss-making subsidiary TFK in the near term, the market seems to be pricing in the expectation. With the headwinds facing the aviation sector and global economy, the street’s implied P/E of 15.3x on FY12 earnings also seems a little too optimistic. Instead, we assigned a 14.5x P/E, or one standard deviation below its two-year historical average, on our earnings forecast over the next four quarters to arrive at a fair value of $2.36 (versus $3.02 previously). Given an upside of 3.6%, we downgrade SATS to HOLD.
ComfortDelgro – DBSV
No surprise that SBS Transit won the DTL MRT tender
Award of the Downtown line
Award of DTL to SBS Transit. It was announced that ComfortDelGro’s subsidiary, SBSTransit, has been awarded the licence to operate the Downtown MRT line. The line is the 5th MRT line and will be 40km long.
Details of DTL. The DTL will be the 5th line of Singapore’s MRT network. This line will have a total of 34 stations, and will connect the north-western and eastern parts of Singapore to the central business district. The contract is on a 19 year lease, and it will also entail 14,000 sq m GFA of retail space. This line will be fully underground, driverless (as per North-East line, currently operated by SBST, and Circle Line operated by SMRT), and will be opened in 3 stages – 2013, 2015, and 2017.
According to the terms of licence, SBST will pay the LTA (Land Transport Authority) a licence fee amounting to S$1.6bn over the 19-year term of the operating lease. The licensing fee will entail a fixed and variable component. LTA will retain ownership of operating assets and infrastructure, while SBST will take care of operations, maintenance and insurance. Average daily ridership is expected to be in excess of 700,000 when it is fully operational.
No surprise to us, no change in forecasts for now. In our view, the award does not come as a surprise to us as we have earlier deduced that SBS Transit stood in good steed to clinch this contract. Given that DTL stage 1 is only expected to be operational in 2013, we do not envisage any major impact on our forecasts for now. However, we do note that there could be a gestation period, leading to initial start up losses, from the time DTL1 is operational till the other 2 later stages are operational, expected in 2015 and 2017.
CD still the preferred land transport counter. We continue to prefer CD over SMRT for it’s cheaper valuation and diversified geographical exposure of its business. With the award of this contract, this helps to increase its market share of the rail network, which we see as the key mode of public transport which will enjoy stronger growth vis-avis buses. The award will boost long term growth but could dampen earnings growth when the line is operational in 2013.
Bloomberg: CD SP | Reuters: CMDG.SI