STEng – DBSV
Currency issues derail earnings slightly
At a Glance
• Net profit of S$93m (including forex losses) was slightly below our estimates as Aerospace earnings disappointed
• Earnings should, however, gather momentum in 2H10 as new projects in Aerospace, Land Systems contribute
• Management more upbeat on prospects for rest of year, expects FY10 Group PBT to be “higher” than FY09
• Maintain BUY with reduced TP of S$3.55 as we trim our FY10 EPS estimates by 3.6% on account of weaker US$
Comment on Results
Weak margins and forex losses. Owing to a slowdown in the components business, Aerospace division margins weakened to 9.6% in 1Q10 vs. 12.9% in 4Q09 and PBT declined 26% q-o-q. As a result, the Group’s reported net profit of S$92.8m (up 9% y-o-y, down 28% q-o-q), on the back of S$1.36bn in revenues, came in slightly below our estimates, even after adjusting for a forex loss of S$8.3m. Being more heavily exposed to the heavy maintenance business, the ongoing recovery in air travel has had a more lagged effect on STE’s MRO business than earlier anticipated. Land Systems PBT was also down 13% y-o-y, partly due to a weak Euro.
Recommendation
Management seemed more upbeat about the Group’s prospects for the rest of the year, as they now expect FY10 PBT to be “higher” than FY09 PBT, rather than “comparable” as guided at end-FY09. This comes on the back of a robust orderbook of S$11.8bn, up significantly from the S$10.3bn as of end-FY09. The new contract from Jet Airways (India) should commence in 2Q10, and a majority of the Warthog deliveries to the UK MOD are also scheduled for 2H10. On the PTF conversion front, 3 aircraft were redelivered in 1Q10 and another 14 aircraft are scheduled for redelivery in FY10, thus adding to Aerospace division profitability. Key risk is currency. Every 1 % change in USD/SGD rate affects topline by S$13m and bottomline by about S$1.3m. Thus, given the prospects of a weaker US$ –our economist recently revised his end-FY10 USD/SGD target to 1.34 from 1.38 – we trim our FY10-11 EPS estimates by 3-4% and adjust our TP to S$3.55. Maintain BUY; given the largely stable earnings base and decent dividend yield of 4.5%.
SingTel – DBSV
Reversal of traditional role
• Mature markets to outshine regional associates in 4Q10F – a reversal of traditional role.
• SingTel may report 4Q10F profit of S$973m (+1% yoy, – 2% qoq) in line with street expectations. Special dividends cannot be ruled out, in our view.
• FY11F earnings lowered by 2.5% due to weaker than expected Telkomsel. TP lowered to S$3.40
• BUY quality blue chip at 12x PER (Hist. average 13.4x)
Expect in line 4Q10 results on 13 May, despite weak associate numbers. Consensus has not caught up with the strong Singapore earnings (up 7% yoy) and Optus earnings (up 17% yoy in AUD) in 9M10, attributed to exclusive iPhone advantage in Singapore and decrease in debt & interest expenses at Optus. While we know that Bharti and Telkomsel are down sequentially in 4Q10F, Singapore and Optus should be up sequentially in a seasonally strong 4Q10F.
Growth from regional associates and Optus. Despite potential single-digit earnings decline at Bharti, associate contribution should witness low-single digit growth, thanks to (i) lower losses at Warid, PBTL and (ii) single-digit earnings growth at Telkomsel, AIS. Optus earnings are expected to register single digit growth (in AUD terms) helped further by strong AUD. Singapore earnings may not grow due to high content costs and the launch of National Broadband Network.
Special dividends cannot be ruled out with 4Q10F results. We believe that Bharti would manage its debt (for Zain acquisition) through free cash flow and listing of tower subsidiary Bharti Infratel (rather than raising equity at AirTel level). This leaves SingTel with the flexibility of paying out additional 8-10 Scents in special dividends, in our view.
STEng – BT
ST Engg net profit rises 8.9% to $92.8 million in Q1
SINGAPORE Technologies Engineering (ST Engg) yesterday reported first-quarter net profit rose 8.9 per cent to $92.8 million, from $85.2 million a year ago.
This was on the back of a 3.2 per cent increase in sales, to $1.36 billion from $1.32 billion last year. The company, which is in defence, aerospace and marine engineering, said it had a record order book of $11.8 billion as at end-March, with some $3.2 billion or 27 per cent of that expected to be delivered this year.
All the group’s arms reported stronger operating profit, resulting in earnings before interest and tax growth of 25 per cent to $110.9 million, ST Engg said. Earnings per share were 3.08 cents for the quarter, up from 2.84 cents a year ago. ‘Barring unforeseen circumstances, the group expects to achieve higher turnover and profit before tax for FY2010 compared to FY2009,’ said president and chief executive officer Tan Pheng Hock.
While the group’s aerospace division reported marginally lower sales, pre-tax profit rose 7 per cent due to a favourable sales mix and lower financial expenses from recognition of fair value of an interest rate swap, ST Engg said. The electronics arm posted 8 per cent or 25 per cent higher sales on the back of milestone completions of the Circle Line MRT project as well as rail projects in Guangzhou and Taiwan and 29 per cent higher pre-tax profit, partially offset by lower income from the Jobs Credit Scheme.
Sales in land systems gained 7 per cent or $18 million, while marine posted 9 per cent or $22 million more in sales from higher engine repair activity offset by lower ship repair turnover.
However, quarter-on-quarter, all four divisions recorded a total of some 21 per cent or $30.3 million less in pre-tax profit, largely due to lower quarter-on-quarter sales figures.
ST Engg shares closed unchanged yesterday at $3.13.
SMRT – AmFraser
Forecasts cut, fair value reduced
• SMRT Corp Ltd results came in sharply below ours and market expectations, at 10% below consensus EPS of 11.9 cents Singapore.
• We have cut EPS by 3%-4% to 10.3 cents for FY11F and 10.9 cents for FY12F. The lowered operating performance also reduces our fair value by 9% to S$1.99. Stock now trades at premium of less than 15% and we maintain our HOLD rating.
• Only bring spot is a hike in DPS to 8.5 cents for FY10 (7.75 cents in FY09), with final 6.75 cents declared. We believe this would be possible to maintain going forward; however, on recent price surge, yield of 4% p.a. is not compelling.
• SMRT’s 4QFY10 expense growth of 10% YoY, brought operating profit plunge of 28% to S$27mil. This muted FY10’s operating profit growth to 5% YoY. Lower interest and investment income and higher tax rate at 15%, led to flat net earnings of S$163mil.
• Nasty cost surprises were particularly in the area of staff, and repair and maintenance. This hit operating profit margins hard for train and bus operations. Margins in 4QFY10 for train fell to 64% while bus fell to -11%, versus 70% and 3% respectively for 4QFY09. Going forward, firm oil prices caps potential for upside surprises.
• Ramped up requirements for line CCL 1 and 2 since April 2010 opening, and preparation for CCL 4 and 5 (13 stations) opening in FY12, will ensure no let up in such cost increases. At the same time, savings from Jobs Credit will cease from July 2010.
• SMRT’s fare business performed in line with expectations at topline – FY10 ridership grew 5% YoY to 536.6 million for train and +0.7% YoY to 290 million for bus – though faring worse than FY09 due to a weak 1HFY10. One encouraging note was a pick up in momentum for 4QFY10, with 10% YoY for train and 3% YoY for bus.
• We maintain our FY11 ridership forecast at 9% YoY for train and 6% YoY for bus; buoyed by a strong economy as well as enhanced attractiveness of public transportation with progressive stages of CCL. The Land Transport Authority projects 200,000 ridership for operational CCL 1, 2 and 3.
• Fare cuts implemented on 1 April 2009 resulted in 4% YoY fall in average train fares and 6% YoY fall in average bus fares for FY10. The new fare structure from July 2010 will be mildly positive, offsetting much of the end to a 3% temporary cut for April 2009 to June 2010.
• One bright spot in non-fare business is that management expects incremental revenue of S$6mil in FY11 from new commercial space to be added at nine stations – of which Orchard and Esplanade Xchange will account for a combined 3,600 sq m.
• Management plans to add to its current taxi fleet of 2,572 as well; however on rising COE prices, yield would be less attractive. Capex projections is now raised to S$150-S$200mil for FY11.
SingPost – CIMB
Final dividend as expected
• Within expectations; maintain NEUTRAL. FY10 core net profit rose 10.9% yoy to S$165.0m, 1% above our expectations and consensus. 4Q10’s core net profit of S$40.9m, a rise of 15.8% yoy, was also within expectations and accounts for 24% of our full-year estimate. SingPost announced a final dividend of 2.5 cts/share, in line with our forecast. After raising our FY11-12 earnings estimates by 2-3% as we account for higher logistics revenue, our DDM-derived target price (discount rate 7.3%) rises from S$1.11 to S$1.13. We also introduce our FY13 estimates. Although dividend yields are rather attractive at 5.8%, we remain NEUTRAL on the stock due to a lack of catalysts. Furthermore, operating margins will be affected by higher net terminal dues for international mailing from Jan 2010.
• Logistics revenue drove growth. FY10 revenue grew 9.2% yoy, thanks to logistics revenue growth. Mail revenue fell 2.3% while logistics revenue leapt 140.2% yoy due to the inclusion of Quantium Solutions (QS). Retail revenue rose 2.4% yoy on the back of increased contributions from financial services and retail products. Rental and property-related income rose 20.9% yoy to S$40.4m, driven by higher rental income from the Singapore Post Centre and the leasing of repurposed post office buildings. Operating profit increased 12.9% yoy to S$201.5m, due largely to the inclusion of QS, but was partially offset by lower retail operating profit as a result of higher staff costs and lower contributions from higher-margin financial services.
• Outlook. SingPost is cautiously optimistic on its outlook, given an improving economy. We believe that more acquisitions could be in the pipeline as part of its regional expansion strategy given its strong cash position and recent S$200m fixed rates notes issuance. It has maintained its dividend policy of a minimum 5cts/share.