STEng – OSK DMG
Back-end Loaded Year
In line with expectations, ST Engineering reported 1Q14 results with SGD137.2m PATMI (+2.4% y-o-y) on the back of SGD1.55bn revenue (+0.5% y-o-y). 1Q results was hit by recognition timing issues in Electronics and Land System business. We expect these segments to pick up as this will be a back-end loaded year. Maintain BUY with TP unchanged at SGD4.66 based on DCF (WACC: 8.4%; growth: 0%).
1Q14 results helped by wage credit scheme. Growth of PBT for the quarter would have been flat instead of a 6% y-o-y increase, if it had not been for one-off other income which jumped 85% y-o-y to SGD17.4m. These was likely due to maiden contributions from the yearly government wage credit scheme which will end in 2016.
Marine shine and Aerospace grow. Marine growth was the most outstanding of all divisions growing 27% y-o-y to SGD323m, largely due to the recognition of the Oman Navy contracts. Aerospace was the second growth sector, growing 5% y-o-y to SGD501m while the other two sectors shrunk. Going forward, we expect Marine PBT growth to normalize to single digits and Aerospace PBT growth rate to hover at the same levels.
Electronics and Land System were weak. Electronics revenue fell the most by 13% y-o-y to SGD369m while Land Systems fell 6% y-o-y to SGD325m. We believe that there is no cause for panic as it is a project revenue recognition timing issue for Electronics and Land System’s defense business. We expect more project to be completed in subsequent quarters and revenue growth should return. Land System’s commercial business continued to face weaknesses in 1Q14 due to lukewarm economic conditions in China but should see more optimism moving forward.
Record order book to provide downside cushion. Most importantly, order book continue to make new record high, hitting SGD13.4bn (+3% y-o-y). We estimate that the current order book which generally drive 60% to 70% of the annual revenue is sufficient to cover for the next three years, providing downside cushion.
Starhub – OCBC
Uninspiring FY14 start
- 1Q NPAT met 22% of FY14 forecast
- No change to FY14 outlook
- Maintain SELL
Uninspiring start to FY14
StarHub Ltd posted 1Q14 revenue of S$571.4m, down 1.5% YoY and 6.9% QoQ, meeting just 23.5% of our full-year forecast; StarHub blamed the drop on lower service revenue (mainly due to intense competition in its Broadband business, where revenue tumbled 13.6% YoY and 4.3% QoQ) and lower equipment sales (down 15.9% YoY and 44.7% QoQ on fewer handsets sold). We also note that mobile revenue saw a muted 1.3% YoY rise (but slipped 1.5% QoQ); and as StarHub declined to break down the mobile revenue into pre-paid and post-paid revenue, we estimate that pre-paid revenue probably slipped as much as 11.7% YoY and -1.7% QoQ, while post-paid rose just 1% YoY but fell 4.9% QoQ. Net profit fell 7.7% YoY (+0.6% QoQ) to S$84.2m, or 22.4% of our FY14 estimate; this as tax increased 15.7% YoY and 21.6% QoQ to S$21.4m, but management expects it to “normalize” over the next few quarters. StarHub declared a quarterly dividend of S$0.05/share as guided.
No change to FY14 guidance
As before, StarHub continues to guide for single-digit growth in service revenue. And despite achieving a service EBITDA margin of 32.6% in 1Q14, management has kept its service EBITDA margin guidance at 32%, possibly due to the still-intense competition in the broadband space; this as it expects to see further pricing pressure to weigh on ARPUs. Management believes that its fixed
network business should still gain more traction, although it did see lower voice revenue in 1Q14. Last but not least, it has kept its capex spending guidance around 13% of total revenue; also kept its annual cash dividend of S$0.20/share, or S$0.05/quarter.
Maintain SELL and S$3.81 FV
For now, we opt to keep our estimates unchanged for now; but we will be looking to trim them if 2Q14 results show no signs of recovering. Our DCF-based fair value also remains unchanged at S$3.81; and with no likelihood of a special dividend this year, we maintain our SELL rating on the stock.
Starhub – Maybank Kim Eng
Muted quarter with no surprises
- 1Q14 was rather muted but results were within expectations. Maintain BUY and TP of SGD4.98. Prefer M1.
- Service EBITDA margin was above full-year guidance of 32%, which StarHub maintained.
- Net debt/EBITDA ratio fell to fresh 0.4x low, pointing to capacity for higher dividends in future.
Muted 1Q14 but within expectations
It was a rather muted 1Q for StarHub. QoQ performance was steady with net profit of SGD84m, up 1%. On a YoY basis, lower NBN adoption grants and a higher tax provision led to an 8% drop in net profit. On the positive side, mobile revenue rose 1.3% YoY on better postpaid contributions, fixed network revenue rose 2.2% YoY on stronger corporate business and stabilised international roaming, and EBITDA margin of 32.6% was above full-year guidance of 32%. The negatives were lower broadband and pay TV revenue due to intense competition, but this was expected.
4G price hike blocked but inevitable ARPUs will rise
StarHub tried to raise 4G premiums in mid-April by SGD2.14 a month for all its tiered subscribers but this was blocked by the IDA, which ruled that existing subscribers should not be affected until their contracts expire. But new and recontracting subscribers will still be affected. As for M1 and SingTel, we think it is just a matter of time before they follow suit and postpaid ARPUs will inevitably rise. Even with the higher 4G premium, StarHub’s postpaid plans remain competitive. For every 100k new tiered subscribers on the higher premium, we estimate a 0.1% benefit to earnings.
Maintain BUY and TP of SGD4.98. Prefer M1
While 1Q14 did not contain any surprises, we believe positive trends such as falling handset subsidies, stabilising roaming revenue and rapid data monetisation will strengthen throughout the year. In addition, net debt/EBITDA ratio fell to a fresh low of 0.4x, which will improve StarHub’s capacity to increase dividends.
SIAEC – OCBC
Stable outlook
- FY14 results in-line
- Modest gain from regional airlines’ capacity growth
- Maintain HOLD
FY14 results within expectations
SIA Engineering Company’s (SIAEC) FY14 results were within expectations. FY14 revenue increased 2.7% to S$1.18b, forming 101.4% of our forecast. However, lower margins resulted in PATMI declining 1.6% to S$266m, making up 99.1% of our forecast. The S$44.0m increase in expenditure (+4.3%) came mainly from higher staff costs, sub-contracting and material costs.
This is partly compensated by associates’ and JVs’ share of profits increasing steadily by 8.3% to S$162.6m, representing 61% of the SIAEC’s net profit. The main contributors were the engine repair and overhaul centres which accounted for S$125.0m. A final ordinary and special dividend of 13 S-cents and 5 S-cents respectively were recommended, bringing full-year dividend to 25 S-cents.
Modest upside from high capacity growth in Asian airlines
Though Asian airlines are adding capacity aggressively, bulk of the capacity growth is in the low cost carrier (LCC) segment. According to CAPA, APAC LCCs aircraft order book is 2.4x of current fleet as of Dec-13. As LCCs typically use older aircraft models with minimal cabin works, there is less earnings from MRO per aircraft. The tight operating budgets of LCCs also mean they are more likely to choose other lower-cost sites nearby for MRO even if the turnaround time is higher. Hence, we see modest upside and think SIAEC’s outlook will continue to be stable.
Philippines’ third hangar to start operations in Jun-14
Management guided that the third hangar at Clark base (Philippines) is expected to come on-stream in Jun-14. With this new hangar, Clark base’s capacity is expected to double. As the two existing Clark base hangars are already fully utilised, we expect the third hangar to start contributing to earnings in 2HFY15.
Maintain HOLD
Incorporating the latest results, we maintain a HOLD rating on SIAEC but raise our FV slightly from S$4.77 to S$4.83 based on 19.0x FY15 EPS of 25.4 S-cents (previous: 25.1 S-cents). Assuming a 90% payout ratio (vs. three-year historical average of 93.5%), we expect FY15F dividend yield to be reasonably attractive at 4.7%.
SIAEC – OCBC
Stable outlook
- FY14 results in-line
- Modest gain from regional airlines’ capacity growth
- Maintain HOLD
FY14 results within expectations
SIA Engineering Company’s (SIAEC) FY14 results were within expectations. FY14 revenue increased 2.7% to S$1.18b, forming 101.4% of our forecast. However, lower margins resulted in PATMI declining 1.6% to S$266m, making up 99.1% of our forecast. The S$44.0m increase in expenditure (+4.3%) came mainly from higher staff costs, sub-contracting and material costs.
This is partly compensated by associates’ and JVs’ share of profits increasing steadily by 8.3% to S$162.6m, representing 61% of the SIAEC’s net profit. The main contributors were the engine repair and overhaul centres which accounted for S$125.0m. A final ordinary and special dividend of 13 S-cents and 5 S-cents respectively were recommended, bringing full-year dividend to 25 S-cents.
Modest upside from high capacity growth in Asian airlines
Though Asian airlines are adding capacity aggressively, bulk of the capacity growth is in the low cost carrier (LCC) segment. According to CAPA, APAC LCCs aircraft order book is 2.4x of current fleet as of Dec-13. As LCCs typically use older aircraft models with minimal cabin works, there is less earnings from MRO per aircraft. The tight operating budgets of LCCs also mean they are more likely to choose other lower-cost sites nearby for MRO even if the turnaround time is higher. Hence, we see modest upside and think SIAEC’s outlook will continue to be stable.
Philippines’ third hangar to start operations in Jun-14
Management guided that the third hangar at Clark base (Philippines) is expected to come on-stream in Jun-14. With this new hangar, Clark base’s capacity is expected to double. As the two existing Clark base hangars are already fully utilised, we expect the third hangar to start contributing to earnings in 2HFY15.
Maintain HOLD
Incorporating the latest results, we maintain a HOLD rating on SIAEC but raise our FV slightly from S$4.77 to S$4.83 based on 19.0x FY15 EPS of 25.4 S-cents (previous: 25.1 S-cents). Assuming a 90% payout ratio (vs. three-year historical average of 93.5%), we expect FY15F dividend yield to be reasonably attractive at 4.7%.