STEng – BT
ST Marine gets letter of claim on Ropax contract
ST Marine intends to dispute Louis Dreyfus Armateurs’ $63.5m claim
ST ENGINEERING’s marine arm ST Marine has received a letter of claim from the lawyers of Louis Dreyfus Armateurs (LDA) for an alleged breach of contract.
In the letter dated June 10, LDA is claiming some $63.5 million – $4.8m for liquidated damages for alleged delivery delay and a sum indicated as about 33.03 million euros ($58.7 million) for unliquidated damages arising from ST Marine’s purported breach of a shipbuilding contract.
‘ST Marine is taking legal advice on the claim and intends to dispute the claim,’ ST Engineering said yesterday.
The bone of contention was a contract for a roll-on/ roll-off passenger ferry (Ropax) worth $179 million (inclusive of variable options) inked in July 2007.
LDA had terminated the contract in March this year, citing a delay in the delivery of the Ropax vessel. It further alleges that even if the vessel is tendered for delivery, there will be deficiency in the deadweight capacity of the Ropax vessel.
The first notice of termination was issued by LDA on March 17. In a second notice of termination on March 24, LDA called on the refund guarantees, which require the milestone payments paid to ST Marine amounting to $129 million plus interest to be refunded.
‘As stated in the previous announcement on 24 March 2011, ST Marine is of the view that LDA’s purported termination of the Ropax contract is a breach and ST Marine itself has terminated the Ropax contract on the basis of LDA’s breach and accordingly has reserved all its rights in the matter,’ ST Engineering said yesterday.
ST Marine also reiterated its position that if liable, its total liability under the terms of the Ropax contract is capped at 10 per cent of the contract price. Hence, no material impact is expected on the consolidated NTA per share and EPS of ST Engineering for the current financial year.
SATS – Phillip
Widely anticipated award of 3rd ground handling licence
•New entrant has extensive experience and presence in US and Europe
•Market size at Changi has room for growth
•Not material news as it is widely anticipated by the market
•Maintain Buy recommendation with target price of S$3.41.
CAG awards 3rd ground handling licence
Changi Airport Group (CAG) announced the award of a 3rd ground handling licence to Aircraft Services International Group (ASIG). The licence for ASIG will be for 10yrs, which is at the top end of the proposed tenure of 5-10yrs. ASIC would be licensed to provide the full suite of passenger handling, apron handling and cargo handling services that is similar to the services provided by incumbent SATS and CIAS. The award of this licence had been widely anticipated by the market, after the exit of Swissport in early 2009. However, the proposed commencement of operations for the successful bidder had been delayed for a couple of times, originally expected to be in mid-2010, but subsequently to 1Q2011. In the announcement by CAG, there was no indication of the expected commencement of operations for ASIG.
ASIG
ASIG, subsidiary of London listed BBA Aviation PLC, is a US-based aviation service provider with significant presence in US and Europe. In Asia, ASIG only provides fuelling services in Bangkok, Thailand. ASIG had been in the business of providing ground handling services since 1947 and handles more than 4mn flights/yr across its network
What is at stake for SATS?
The gateway services segment comprises of 32% of revenue and 28% of operating profits for SATS in FY11. SATS handled 103.7k flights, 35.4mn passengers and 1,495k tones of cargo/mail in FY11, which was a growth of 6.2-7.2% over FY10.
Market size at Changi Airport
Changi Airport handled 42mn passenger movement in 2010, a growth of 13% over 2009. There is certainly room for growth at the airport, particularly in the budget segment, which had seen strong demand in recent years. We estimate that the airport is currently operating at c.57% of its maximum capacity.
How does this change the scene?
We opine that the most important success factor for the new entrant would be to achieve sufficient scale of operation. Swissport’s attempt to undercut the competitors resulted in an average decline in ground handling rates of 15% since they commenced operations. However, continued losses was followed by the economic slowdown and resulted in the exit of Swissport in early 2009. We do not think that ASIG will pose an immediate threat to SATS for the following reasons:
• Long term contracts with key customer. SATS currently has a ground handling contract with SIA till Sep 2012, followed by an automatic extension till Sep 2014.
• Unlikely to compete solely on rates. From the experience of Swissport, it is unlikely that ASIG would pursue a strategy of aggressively cutting rates. However, we believe that the incumbents would likely keep their rates competitive in order to retain their airline customers. Furthermore, with the abrupt exit of Swissport, airlines could be wary of engaging services from a new entrant.
• Advantage with scale and scope. SATS currently has a market share of 80% at Changi Airport and would certainly enjoy better economies of scale than the new entrant. Furthermore, SATS also provides Inflight catering services and had been awarded the technical ramp handling licence last year. This would allow SATS to provide a more holistic range of services to its customers.
Conclusion & Valuation
We kept our estimates unchanged as we had already factored in flat ground handling rates into our forecasts for the next 5yrs. We believe that the award of this 3rd ground handling licence had been widely anticipated by the market and is not expected to have a material impact on SATS. In valuing the stock of SATS, we used a DCF model (WACC: 7.6%; terminal g: 1%) to arrive at our target price of S$3.41. After including forecasted dividends of 17.3¢ over the next 12months, we expect total return of 35.9%. Hence we keep our Buy call on SATS.
SATS – Phillip
Widely anticipated award of 3rd ground handling licence
•New entrant has extensive experience and presence in US and Europe
•Market size at Changi has room for growth
•Not material news as it is widely anticipated by the market
•Maintain Buy recommendation with target price of S$3.41.
CAG awards 3rd ground handling licence
Changi Airport Group (CAG) announced the award of a 3rd ground handling licence to Aircraft Services International Group (ASIG). The licence for ASIG will be for 10yrs, which is at the top end of the proposed tenure of 5-10yrs. ASIC would be licensed to provide the full suite of passenger handling, apron handling and cargo handling services that is similar to the services provided by incumbent SATS and CIAS. The award of this licence had been widely anticipated by the market, after the exit of Swissport in early 2009. However, the proposed commencement of operations for the successful bidder had been delayed for a couple of times, originally expected to be in mid-2010, but subsequently to 1Q2011. In the announcement by CAG, there was no indication of the expected commencement of operations for ASIG.
ASIG
ASIG, subsidiary of London listed BBA Aviation PLC, is a US-based aviation service provider with significant presence in US and Europe. In Asia, ASIG only provides fuelling services in Bangkok, Thailand. ASIG had been in the business of providing ground handling services since 1947 and handles more than 4mn flights/yr across its network
What is at stake for SATS?
The gateway services segment comprises of 32% of revenue and 28% of operating profits for SATS in FY11. SATS handled 103.7k flights, 35.4mn passengers and 1,495k tones of cargo/mail in FY11, which was a growth of 6.2-7.2% over FY10.
Market size at Changi Airport
Changi Airport handled 42mn passenger movement in 2010, a growth of 13% over 2009. There is certainly room for growth at the airport, particularly in the budget segment, which had seen strong demand in recent years. We estimate that the airport is currently operating at c.57% of its maximum capacity.
How does this change the scene?
We opine that the most important success factor for the new entrant would be to achieve sufficient scale of operation. Swissport’s attempt to undercut the competitors resulted in an average decline in ground handling rates of 15% since they commenced operations. However, continued losses was followed by the economic slowdown and resulted in the exit of Swissport in early 2009. We do not think that ASIG will pose an immediate threat to SATS for the following reasons:
• Long term contracts with key customer. SATS currently has a ground handling contract with SIA till Sep 2012, followed by an automatic extension till Sep 2014.
• Unlikely to compete solely on rates. From the experience of Swissport, it is unlikely that ASIG would pursue a strategy of aggressively cutting rates. However, we believe that the incumbents would likely keep their rates competitive in order to retain their airline customers. Furthermore, with the abrupt exit of Swissport, airlines could be wary of engaging services from a new entrant.
• Advantage with scale and scope. SATS currently has a market share of 80% at Changi Airport and would certainly enjoy better economies of scale than the new entrant. Furthermore, SATS also provides Inflight catering services and had been awarded the technical ramp handling licence last year. This would allow SATS to provide a more holistic range of services to its customers.
Conclusion & Valuation
We kept our estimates unchanged as we had already factored in flat ground handling rates into our forecasts for the next 5yrs. We believe that the award of this 3rd ground handling licence had been widely anticipated by the market and is not expected to have a material impact on SATS. In valuing the stock of SATS, we used a DCF model (WACC: 7.6%; terminal g: 1%) to arrive at our target price of S$3.41. After including forecasted dividends of 17.3¢ over the next 12months, we expect total return of 35.9%. Hence we keep our Buy call on SATS.
M1 – Kim Eng
Stay close to home
Event
• By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season saw no upgrades, whether in terms of forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a
highly attractive yield of 7%. BUY.
Our View
• For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, the company paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at its capex trends, we think there is the possibility of a similar payout this year. We upgrade our dividend forecast for FY11 from 14.5 cents a share to 18 cents a share, assuming a 100% payout ratio against the typical 80%.
• M1’s Long Term Evolution (LTE) network, which is Singapore’s first 4G highspeed (300Mbps) wireless network, will be fully deployed by 1Q12. While a major item, it has always been part of the company’s upgrading plans. Therefore, we do not expect this year’s capex to stray beyond management’s guidance of $100m. With just $12m capex in 1Q11, the trend for the rest of the year should stay similarly tame. This should
enhance M1’s ability to pay more dividends.
• Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of non‐Apple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBN‐related sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.
Action & Recommendation
Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.
M1 – Kim Eng
Stay close to home
Event
• By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season saw no upgrades, whether in terms of forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a
highly attractive yield of 7%. BUY.
Our View
• For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, the company paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at its capex trends, we think there is the possibility of a similar payout this year. We upgrade our dividend forecast for FY11 from 14.5 cents a share to 18 cents a share, assuming a 100% payout ratio against the typical 80%.
• M1’s Long Term Evolution (LTE) network, which is Singapore’s first 4G highspeed (300Mbps) wireless network, will be fully deployed by 1Q12. While a major item, it has always been part of the company’s upgrading plans. Therefore, we do not expect this year’s capex to stray beyond management’s guidance of $100m. With just $12m capex in 1Q11, the trend for the rest of the year should stay similarly tame. This should
enhance M1’s ability to pay more dividends.
• Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of non‐Apple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBN‐related sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.
Action & Recommendation
Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.