Thomson Medical – DMG
Valuations seem stretched
Downgrade to NEUTRAL. Thomson Medical’s share price soared 38% in the past 2 months, after having hovered around the S$0.69 – S$0.71 range since the start of 2010. It is currently trading at 19x FY10 P/E. Given that Thomson Medical is a niche O&G provider, and that growth is somewhat limited by capacity, we hold the opinion that it should trade at a discount to regional peers’ average (21x forward P/E). Based on 16x FY11 earnings, we arrive at a TP of S$0.94 (previously S$0.88). We are downgrading our recommendation to NEUTRAL.
Growth from hospital operations likely to be limited. We hold the view that Thomson Medical would be able to continue growing, supported by the improving economy and its ability to attract senior specialists from the public sector. As the economy picks up, people are more willing to turn to private healthcare. Thomson Medical is a leading private O&G provider with one of the lowest average bill size. The addition of new specialists would also contribute to growth in revenue and deliveries. However, currently running at almost full occupancy (~80%), there is only so much more that Thomson Medical can do (e.g. lowering average length of stay), in order to accommodate more patients and deliveries. Hence, we think that growth from hospital operations would be limited.
Growth to be driven by other specialised services. As a leader in women’s and children’s health, the other specialised services that Thomson Medical provides (~25% of revenue) (e.g. fertility, cancer and paediatric treatments) are also likely to continue growing. With an improving economy, patients may be more willing to spend at private hospitals. Its network of seven women’s clinics, as well as its Cancer Centre and Paediatric Centre, are expected to drive growth.
Earnings estimates raised. We have tweaked our revenue assumptions for FY10, taking into consideration higher utilisation of its facilities and services. Contribution from the new O&G specialists would boost FY11 revenue. Our margin assumptions are also adjusted, as higher utilization could help improve margins. Hence, our FY10 and FY11 earnings estimates are raised by 8% and 7%, to S$15.2m and S$17.1m respectively.
SingTel – BT
SingTel launches $200m venture fund for start-ups
IN a shot in the arm for the local IT start-up scene, SingTel has launched a $200 million incubation fund to invest in budding infocomm companies.
The telecom giant has set up a subsidiary called Innov8 to scout for start-ups with potential.
Innov8 CEO Yvonne Kwek told BT the venture company will focus on firms with technologies relevant to SingTel’s business. This covers applications on front-end to back-end networking technology.
Mrs Kwek acknowledged that the pool of back-end technology start-ups is small, and said SingTel is interested in technologies that will augment existing infrastructure. For example, technologies to help maximise coverage and spectral efficiency would be attractive, she said.
With Innov8, SingTel hopes to bring its parent company’s clout to the table. Mrs Kwek touted the company’s ability to rope in ‘subject matter experts’ from SingTel’s pool of engineers, as well as an eventual audience of SingTel’s 350 million customers globally for IT projects that get to see the light of day.
Innov8 will invest in start-ups for a stake in their business but won’t take controlling interest, she said.
Running on a team of eight, the venture fund intends to work with government agencies and tertiary institutions to harvest talent, but intends to look beyond our shores as well.
Its $200 million fund will be reviewed regularly, but has been set for a period of three years, Mrs Kwek said.
Jeffrey Paine, managing partner at local venture investment firm Battle Ventures, said the fund has a large sum, even spread out for a global search. ‘SingTel has to look globally for new innovations,’ he said, adding that its face as a Singaporean entity is likely to be perceived as attractive to the global market.
As for the pool of mentors SingTel will bring, Mr Paine said any mentorship, however slight, will help entrepreneurs get off the ground. He said Innov8 looks to be a strong force on the venture scene because it brings to start-ups SingTel’s large amount of capital plus the company’s brand name and industry connections in the mobile sector.
Gwendolyn Tan, a partner at venture company Thymos Capital, said the injection of more funding into the industry is exciting for start-ups, but it doesn’t necessarily mean more start-ups will win funding.
‘It’s a flawed argument to say more money means more people will get funded. A company must have a winning project, regardless,’ she said.
SingTel’s search for innovative projects may indicate Innov8 will focus on later-stage start-ups that have already produced something to show for their efforts, Ms Tan reckons.
Its large pool of funding could indicate it will participate in Series A funding, otherwise known as a company’s first significant round of venture funding, she said. In Singapore, this sum is usually between $300,000 and $1 million.
Alvin Yap, founder of Singapore games outfit Nexgen Studio, said the fund’s size is attractive, but start- ups should also consider the amount of equity SingTel intends to take in them. He pointed to existing ‘bite-size funds’ doled out by the Media Development Authority (MDA), saying the government agency doesn’t take a stake in recipient companies. ‘If I had a start-up, I’d explore the fund,’ he added.
Speaking at a SingTel forum yesterday, Deputy Prime Minister and Minister for Defence Teo Chee Hean said the infocomm industry is a key driver of economic growth through productivity improvements.
Using the government- initiated TradeXchange programme as an example, Mr Teo said the neutral electronic platform for the shipping industry has led to annual efficiency savings of some $1 million. By the end of 2012, 100 companies are expected to participate in B2B transactions over the platform, he said.
SingTel’s push to acquire applications and services talent via Innov8 underscores the telco’s cloud aspirations.
Business group executive VP Bill Chang says SingTel’s cloud services arm, while making up ‘a few percentage points’ of SingTel’s overall billion-dollar infocomm business, is growing fast and has amassed a base of 100,000 seats spread out over 1,000 companies. The aim is to grow its cloud business at a compound annual rate of about 50 per cent, he said.
STEng – OCBC
Continuing to perform
Continuing to replenish its orderbook. STE Engineering (STE) has continued to perform according to our expectations. Since its 2Q10 results, we note that the group has been replenishing its orderbook via new contracts. Specifically, its electronics arm, ST Electronics, had been awarded a contract worth ~S$10.9m to provide SMART vehicle and asset tracking devices for the recovery of stolen vehicles and goods. More recently, it also won a contract worth ~S$29m to supply Automatic Meter Reading (AMR) radio transceivers for Arad Technologies’ AMR solutions. We see these developments positively as these clearly illustrate STE’s strong market position and its ability to deliver reliable and innovative solutions.
May gain from passenger and freight capacity additions. In the aerospace segment, we believe STE may potentially benefit from the return of capacity to the passenger and freight markets. According to the International Air Transport Association (IATA), passenger aircraft orders have surged at recent airshows and aircrafts have been taken from storage at a rate of 195 in 2Q and a further 84 in Jul. While few details were given about the capacity addition in the air freight market, we note that there has also been an additional 11.9% of capacity brought back in Jul (7.7% YTD). Being the world’s largest aircraft MRO service provider, we thus see potential for STE to gain from the return of passenger and freight capacity into the market, especially those coming out of storage.
Higher turnover and PBT expected in 2H10. As a note, STE had guided during its 2Q10 results that its sales and profit before tax (PBT) in 2H10 are likely to fare better than 1H10, lifted by positive contribution from its Electronics, Aerospace and Marine segments. Only the Land Systems segment is expected to post lower PBT in 2H10.
Upgrade to BUY. While STE cautioned that the aviation MRO demand is still lagging and may only see a recovery in 2H11, we believe that the group may get a boost from recent positive news and an earlier-than-expected recovery in the MRO market. As such, we raise our FY10-11 forecasts by 0.4-0.8% to factor in our more optimistic view. With just over a quarter to year end, we also roll our valuation to FY11. At 21x FY11F EPS, our fair value is in turn raised to S$3.66 (S$3.28 on 20x blended FY10/11F EPS previously). We upgrade STE to BUY as we now see a total expected return of 15%.
SATS – OCBC
Datapoints suggest another quarter of growth
Continued growth in demand. We expect SATS Ltd to deliver another positive set of results when it reports its 2QFY11 performance in Oct. The international air travel and freight markets continued to show strengthening of demand in Jul, despite uncertainties about global economic growth in 2H10. According to the International Air Transport Association (IATA), international revenue-passenger-kilometers (RPKs) and scheduled freight traffic in Jul were up by 9.2% and 22.7% YoY respectively. This follows a 11.6% YoY growth in travel market and 26.6% YoY growth in cargo traffic in Jun. More importantly, both the Asia-Pacific passenger and cargo demand continued to outperform the industry average with a 10.9% and 25.3% YoY growth in Jul. As such, we believe that SATS may potentially gain from this continued expansion in demand, given its significant exposure in the region.
Sound performance at customer side. In the announcement by its customer Singapore Airlines on Wed, we also note that the airline’s system-wide passenger carriage grew by 0.1% YoY in Aug. This marks another month of positive growth in the quarter. While the growth rate was lower than the 3.6% YoY growth clocked in Jul, this was partially due to earlier commencement of Ramadan. In Sep, we expect the passenger demand to register relatively stronger growth as Ramadan ends early in the month. For its cargo segment, we also understand that the overall traffic had continued to improve by 9.0% YoY, repeating the 8.2% YoY increase in Jul. These improvements are likely to lead to further demand for SATS’ services, and in turn better financial performance for its 2QFY11.
Integrated pig farm progressing as planned. Further to the JV agreement in May to develop an integrated pig farm in Jilin Province, China, we also note that SATS had begun construction of the 100,000sqm site. The building of the farmis expected to be completed in nine months, with an annual production of 100k pigs in the first phase. While it will not contribute to earnings in the current fiscal year, we are confident that it will provide SATS with another avenue of growth in the years ahead, considering the strong support from both the Singapore and Chinese governments.
Maintain BUY. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and generous dividend payouts. We are keeping our fair value of S$3.30 as the developments are consistent with our expectations. At current level, we see an attractive 19.1% upside potential in the stock. Maintain BUY.
SATS – OCBC
Datapoints suggest another quarter of growth
Continued growth in demand. We expect SATS Ltd to deliver another positive set of results when it reports its 2QFY11 performance in Oct. The international air travel and freight markets continued to show strengthening of demand in Jul, despite uncertainties about global economic growth in 2H10. According to the International Air Transport Association (IATA), international revenue-passenger-kilometers (RPKs) and scheduled freight traffic in Jul were up by 9.2% and 22.7% YoY respectively. This follows a 11.6% YoY growth in travel market and 26.6% YoY growth in cargo traffic in Jun. More importantly, both the Asia-Pacific passenger and cargo demand continued to outperform the industry average with a 10.9% and 25.3% YoY growth in Jul. As such, we believe that SATS may potentially gain from this continued expansion in demand, given its significant exposure in the region.
Sound performance at customer side. In the announcement by its customer Singapore Airlines on Wed, we also note that the airline’s system-wide passenger carriage grew by 0.1% YoY in Aug. This marks another month of positive growth in the quarter. While the growth rate was lower than the 3.6% YoY growth clocked in Jul, this was partially due to earlier commencement of Ramadan. In Sep, we expect the passenger demand to register relatively stronger growth as Ramadan ends early in the month. For its cargo segment, we also understand that the overall traffic had continued to improve by 9.0% YoY, repeating the 8.2% YoY increase in Jul. These improvements are likely to lead to further demand for SATS’ services, and in turn better financial performance for its 2QFY11.
Integrated pig farm progressing as planned. Further to the JV agreement in May to develop an integrated pig farm in Jilin Province, China, we also note that SATS had begun construction of the 100,000sqm site. The building of the farmis expected to be completed in nine months, with an annual production of 100k pigs in the first phase. While it will not contribute to earnings in the current fiscal year, we are confident that it will provide SATS with another avenue of growth in the years ahead, considering the strong support from both the Singapore and Chinese governments.
Maintain BUY. We continue to like SATS for its growth opportunities, consistently strong operating cashflows and generous dividend payouts. We are keeping our fair value of S$3.30 as the developments are consistent with our expectations. At current level, we see an attractive 19.1% upside potential in the stock. Maintain BUY.