SIAEC – CIMB
Losing its gem
Weak contribution from associates & JVs in 1Q15 (-33% yoy, -15% qoq) caught us by surprise. This, coupled with higher subcontractors’ costs drove 1QFY3/15 below expectations at 19% of our and consensus full-year forecast. We cut our FY15-17 EPS by 16% to reflect the poor quarter and slower associates & JV growth. Not only is SIE struggling with margin pressure from high labour costs in Singapore, the loss of earnings momentum from associates/JVs dampens the investment attractiveness of the stock. We downgrade from hold to Reduce. Switch to ST Engineering for a similar yield profile but lower cost pressure given its diversified geographical spread. Our lowered target price is still based on blended valuation of 19x P/E & DCF.
Margin pressure is not easing
Revenue was flat yoy but dropped by 6% qoq to S$294m with lower airframe and component MRO due to fewer planned heavy checks. Staff cost remained stable at S$127m in 1Q15, or 46% of total opex but subcontractors’ costs jumped 15% yoy to S$44m, possibly due to higher fleet management work. Accordingly, EBITDA margin dipped to 12.4% from 12.9% in 1Q14.
JVs & associates back to crisis level
Contribution from associates/JVs dropped to S$30.6m, of which JVs were S$16.3m (-40% yoy, -26% qoq) and associates were S$14.3m (-11% yoy, +1% qoq). We believe the plunge in JV performance was due to lesser repairs of Trent engines from its Rolls-Royce JV, Singapore Aero Engine Services. In the short term, as SIE is gearing up for Trent 900 (for A380), Trent 1,000 (for B787) and Trent XWP (for A350), it may see slower workload for maturing engines such as Trent 800 (for B777) and Trent 500 (for A340-500). Annualised contribution from JVs/associates could return to post-Global Financial Crisis level in FY10 (S$129m).
Toned down guidance
Management changed its guidance from “stable performance” in May 14 to a “more challenging outlook” with the decline in heavy checks and reduction in engine shop visits. Net cash was strong at S$581m but weakness in JVs/associates could affect dividend repatriated to SIE and dividend payout.
SATS – DBSV
Slow start
- 1Q15 results slightly below estimates, dragged by higher costs and lower JV/associates contribution
- Muted outlook due to overcapacity in the aviation sector and higher costs
- Strong net cash position; 4.1% dividend yield to support share price
- Maintain HOLD with TP adjusted slightly lower to S$2.90
Highlights
1Q15 earnings slightly below. 1Q15 earnings (S$43.3m, -6% yo-y) was slightly below our expectations, making up 22% of our full year forecast of S$196m. Flat revenue (S$435.2m, +0.2% y-o-y) along with increases in operating costs (+0.4%) and lower JVs/associate income (S$10.4m, -17%) led to the slower earnings Growth in gateway services revenue (+2% y-o-y), was dragged by lower food revenue (-0.9% y-o-y). Higher staff costs (+3%) resulted in a decline in operating margins (-0.3ppts, 9.1%), while lower regional cargo volumes led to a drop in JVs/associate income.
Strong net cash and free cash flow generation. Despite slower than expected earnings, SATS’ balance sheet and cash generating ability remained strong. Net cash increased to S$280m (from S$227m in 4Q14) while its operations generated S$31m in free cash flow which amounted to 72% of net income.
Our View
Lackluster outlook. We believe SATS’ growth outlook will be soft as the regional aviation market continues to see overcapacity. The rise in the number of LCCs will also undermine utilisation at its flight kitchens and growth in food solutions revenue. In addition, we see higher staff cost increases as dampeners to margin and earnings growth. We look forward to SATS growing its revenue streams away from aviation, into institutional catering (i.e. at Sports Hub) and maritime gateway services (i.e. at Marina Bay Cruise Centre).
Expect share price to be supported by dividend yield. Based on our FY15F DPS estimate of 13 Scts, SATS’ share price currently offers 4.1% dividend yield. Although earnings were slightly below our expectations, we do not believe this will undermine SATS’ DPS payout for this year. We therefore believe that SATS’ share price will be well supported by its dividend yield.
Recommendation
Maintain HOLD with lower S$2.90 TP. Following the slower than expected 1Q15 earnings, we trim our FY15F/FY16F earnings marginally by 1-2%. This resulted in a lower TP of S$2.90, based on average valuations using DCF (WACC 7.5%, t=1.5%) and PE (16x blended FY15F/FY16F EPS). Maintain HOLD.
M1 – DBSV
Declining handset subsidies
- 2Q14 net profit of S$43.9m (+12.1% y-o-y, +2.5% q-o-q) was 4-5% ahead our estimates. Declared interim DPS of 7Scts (+2.9% y-o-y) or 75% payout ratio
- Postpaid acquisition costs declined sharply, partly offset by a drop in International Call Service (IDD) revenue.
- BUY with TP of S$3.85 for mid single-digit growth and 4.6% yield
Highlights
Cost reduction offset weak IDD revenue. Postpaid acquisition cost per subscriber declined sharply to S$268 (-19% y-o-y, -13% q-o-q). It was partly offset by a drop in IDD revenue to S$23.7m (-20% y-o-y, -1% q-o-q).
Tiered data plan seeing fast adoption. About 58%of postpaid subscribers (54% in 1Q14) adopted the tiered data plan, with 20% (16%) exceeding their caps. M1 expects adoption of tiered plans to stabilise at around 65%.
SATS – OCBC
Uninspiring 1QFY15 results
- 1QFY15 results below forecasts
- Focus on creating operating leverage
- Maintain HOLD
1QFY15 results below expectations
SATS’s 1QFY15 results came in below our expectations. Revenue increased 0.2% YoY to S$434.5m, or 6.4% below our forecast. Food Solutions revenue dropped by 0.9% to S$262.7m due to weaker performance from subsidiary TFK. The drop is smaller compared to the previous quarter’s 5.7% as the effect of Quantas’ move to Dubai from Changi Airport is absent in the current quarter’s YoY comparison. Gateway Services revenue increased by 2.0% to S$171.2m, which we deem to be largely in line with the 2.5% growth in flights handled in Singapore. Despite top line growth, PATMI dropped 6.3% YoY to S$43.3m, which is 4.6% below our estimate. This is due to: 1) lower operating margin (-0.3ppt to 9.1% in 1QFY15) mainly caused by higher staff costs, and 2) lower contributions from associates and JVs (-16.8% YoY to S$10.4m in 1QFY15) on the back of muted Asian cargo volumes.
Creating operating leverage is multi-year process
Management guided that headcount reduction will continue as processes are made more efficient. Capex spending is rising (S$14.2m in 1QFY15 vs. S$12.8m in 1QFY14) and will stay elevated. Additionally, airlines at existing Changi Airport terminals are still switching to self-check-in processes, eventually reducing the need for staff. With regional airlines struggling, we think the cost-saving switch will come in the foreseeable future. We note that initiatives to create operating leverage are multi-year processes which involve clients as well. Thus, we are not too worried about the current fall in operating margin.
M&A to tap on regional air traffic growth
Management said they are on the lookout for M&A opportunities to grow inorganically. SATS is well-poised to do so with a healthy net cash balance of S$270m and interest coverage ratio of 99x as of Jun-14. This is likely a key source of overseas growth going forward, to enjoy economies of scale in a capital intensive business. Incorporating the latest results and retaining a 20x FY15F PER, we derive a lower TP of S$3.20 (previous: S$3.23). Maintain HOLD.
SATS – OCBC
Uninspiring 1QFY15 results
- 1QFY15 results below forecasts
- Focus on creating operating leverage
- Maintain HOLD
1QFY15 results below expectations
SATS’s 1QFY15 results came in below our expectations. Revenue increased 0.2% YoY to S$434.5m, or 6.4% below our forecast. Food Solutions revenue dropped by 0.9% to S$262.7m due to weaker performance from subsidiary TFK. The drop is smaller compared to the previous quarter’s 5.7% as the effect of Quantas’ move to Dubai from Changi Airport is absent in the current quarter’s YoY comparison. Gateway Services revenue increased by 2.0% to S$171.2m, which we deem to be largely in line with the 2.5% growth in flights handled in Singapore. Despite top line growth, PATMI dropped 6.3% YoY to S$43.3m, which is 4.6% below our estimate. This is due to: 1) lower operating margin (-0.3ppt to 9.1% in 1QFY15) mainly caused by higher staff costs, and 2) lower contributions from associates and JVs (-16.8% YoY to S$10.4m in 1QFY15) on the back of muted Asian cargo volumes.
Creating operating leverage is multi-year process
Management guided that headcount reduction will continue as processes are made more efficient. Capex spending is rising (S$14.2m in 1QFY15 vs. S$12.8m in 1QFY14) and will stay elevated. Additionally, airlines at existing Changi Airport terminals are still switching to self-check-in processes, eventually reducing the need for staff. With regional airlines struggling, we think the cost-saving switch will come in the foreseeable future. We note that initiatives to create operating leverage are multi-year processes which involve clients as well. Thus, we are not too worried about the current fall in operating margin.
M&A to tap on regional air traffic growth
Management said they are on the lookout for M&A opportunities to grow inorganically. SATS is well-poised to do so with a healthy net cash balance of S$270m and interest coverage ratio of 99x as of Jun-14. This is likely a key source of overseas growth going forward, to enjoy economies of scale in a capital intensive business. Incorporating the latest results and retaining a 20x FY15F PER, we derive a lower TP of S$3.20 (previous: S$3.23). Maintain HOLD.