TELCOs – OCBC
4QCY13 results mostly tracking our estimates
- All largely in line
- Outlook still muted
- Yields are bit more decent
StarHub missed our forecast
Both M1 and SingTel reported 4QCY13 results that came in within our expectations, while StarHub’s results tracked below forecast. M1’s core FY13 earnings was 3.5% above our full-year forecast and SingTel’s 9MFY14 earnings met 73% of our FY14 estimate. But due to lower-than-expected EBITDA margin, StarHub’s core FY13 earnings was 5% below our forecast. Interestingly, M1 declared a special dividend, which brought its total payout to 121% of earnings; StarHub kept its payout at S$0.20 as guided.
Review of Singapore mobile operations
Total post-paid mobile subscribers grew by a stronger-than-expected 2% QoQ to 4.53m in the Dec quarter, led by StarHub (+5.2%), SingTel (+1.1%), then M1 (+0.4%). Meanwhile, the decline in monthly ARPUs appears to be stabilizing; and telcos are optimistic that ARPUs should improve as more subscribers switch over to the new tiered pricing plans with less generous data bundles.
Little change to FY14 outlook
M1 continues to expect moderate single-digit earnings growth, although capex will be slightly higher at S$130m (versus S$125m in FY13). SingTel still sees mid-single digit decline in group revenue and low-single digit fall in EBITDA for FY14 (ending 31 Mar); but expects lower S$2.2b capex spend versus S$2.5b guided previously. StarHub is still guiding for low single-digit revenue growth with 32% EBITDA margin (vs. 32.9% in FY13).
Yields are still decent
As before, the spectre of rising interest rates is looming; but the recent pullback in the telcos’ share prices is starting to bring dividend yields back towards the 5% handle (4.8% average forecast). Hence we think that these stocks should continue to have a place in any portfolio also for their defensive earnings. Maintain NEUTRAL on the sector.
SATS – MayBank Kim Eng
TFK at inflection point
- TFK’s contribution to SATS has been lacklustre since it was acquired in 2010, hampered by the 2011 Tohoku earthquake, rising Sino-Japanese tensions since 2012 and falling JPY.
- But positive developments are afoot: 1) rise in China visitation numbers to Japan, 2) steady growth in JAL’s international traffic, and 3) expanding customer base.
- Longer-term outlook is bright as well. Reiterate BUY on SATS with DCF-based TP of SGD3.47.
Lacklustre contribution since acquisition
We believe the market has been overly pessimistic about TFK Corporation’s near-term weakness and ignoring the upside potential for SATS. Granted, the Japan-based inflight catering unit has not been a significant earnings contributor since SATS acquired it in Dec 2010 (FY3/13: 18% of revenue and 6% of EBIT). But its poor performance could be traced to weak meal volumes as a result of lacklustre air traffic growth in Japan following the Tohoku earthquake in Mar 2011 and the rise in Sino-Japanese political tensions since 2012. The sharp drop in the JPY, which dented TFK’s SGD-translated contributions to the group, compounded matters.
But at an inflection point now
The dismal performance notwithstanding, we believe TFK is now at an inflection point and anticipate improving performance hereon. Our positive view is premised on three emerging trends: 1) rise in China visitation numbers to Japan, 2) steady growth in Japan Airlines’ (JAL) international traffic, and 3) expanding customer base. The longer-term outlook is bright too, with additional international slots at Haneda Airport and Japan’s continued emphasis to promote the country’s tourism industry. A potential regional air services agreement between Japan and ASEAN would give a new fillip to air traffic and hence, meal volumes at TFK. SATS is a play on the structural trend of rising air traffic in the region. Reiterate BUY with DCF-based TP of SGD3.47 (WACC = 7.6%, terminal growth rate = 1.0%).
SATS – MayBank Kim Eng
TFK at inflection point
- TFK’s contribution to SATS has been lacklustre since it was acquired in 2010, hampered by the 2011 Tohoku earthquake, rising Sino-Japanese tensions since 2012 and falling JPY.
- But positive developments are afoot: 1) rise in China visitation numbers to Japan, 2) steady growth in JAL’s international traffic, and 3) expanding customer base.
- Longer-term outlook is bright as well. Reiterate BUY on SATS with DCF-based TP of SGD3.47.
Lacklustre contribution since acquisition
We believe the market has been overly pessimistic about TFK Corporation’s near-term weakness and ignoring the upside potential for SATS. Granted, the Japan-based inflight catering unit has not been a significant earnings contributor since SATS acquired it in Dec 2010 (FY3/13: 18% of revenue and 6% of EBIT). But its poor performance could be traced to weak meal volumes as a result of lacklustre air traffic growth in Japan following the Tohoku earthquake in Mar 2011 and the rise in Sino-Japanese political tensions since 2012. The sharp drop in the JPY, which dented TFK’s SGD-translated contributions to the group, compounded matters.
But at an inflection point now
The dismal performance notwithstanding, we believe TFK is now at an inflection point and anticipate improving performance hereon. Our positive view is premised on three emerging trends: 1) rise in China visitation numbers to Japan, 2) steady growth in Japan Airlines’ (JAL) international traffic, and 3) expanding customer base. The longer-term outlook is bright too, with additional international slots at Haneda Airport and Japan’s continued emphasis to promote the country’s tourism industry. A potential regional air services agreement between Japan and ASEAN would give a new fillip to air traffic and hence, meal volumes at TFK. SATS is a play on the structural trend of rising air traffic in the region. Reiterate BUY with DCF-based TP of SGD3.47 (WACC = 7.6%, terminal growth rate = 1.0%).
STEng – DBSV
Strong finish to the year but dividend cut a surprise
- 4Q13 results in line, earnings up 10% y-o-y
- Strong order wins reported in 4Q13; orderbook at record levels of S$13.2bn underpins earnings visibility
- Cuts dividend payout ratio to 80%; nevertheless net cash levels remain elevated at S$692m and can be invested for growth in US operations
- Maintain BUY with lower TP of S$4.30
Highlights
After an uninspiring performance in 3Q, STE reversed the trend with a solid set of numbers for 4Q13, with net profit up 10% y-o-y to S$167.5m on the back of 12% rise in revenue to S$1.9bn. Except the Land Systems sector, all other divisions reported y-o-y
growth in revenues, led by the Marine segment, where revenues were up 48% y-o-y on the back of strong project deliveries. PBT margins were also maintained across sectors, with Group PBT margin of 11.1% flattish compared to 4Q12 and 3Q13. However, for the full year-FY13, earnings growth was only 1% due to losses from “Others” segment – largely unprofitable non-core projects undertaken by ST Synthesis – and the impairment charge on its Ropax vessel, which has since been chartered out to a Canadian cruise ferry line for 3+7 years term. Without these items, we believe FY13 net profit of S$581m could have been up almost 6% y-o-y.
Our View
Earnings outlook remains encouraging. Order wins were buoyed in 4Q13, with all segments reporting new contract wins in the quarter that were higher than the usual run rate. As a result, STEclosed FY13 with a record orderbook of S$13.2bn despite strong
revenue recognition in 4Q13.
Recommendation
Dividend cut will affect sentiment in near term, but doesn’t change fundamentals. STE cut its dividend payout ratio from 90% to 80% in FY13 (final dividend of 12Scts + 3Scts interim already paid out) as most of the cash flow growth is trapped in the US operations due to the 30% withholding tax hurdle. However, this does not take away STE’s cash generation ability as it ended the year with a higher net cash balance of S$692m. The US operations will continue to invest the cash in expanding its capabilities in aircraft cabin reconfiguration and VIP completions, and is also exploring the possibility of setting up a MRO facility near Pensacola Airport. While we cut our TP to S$4.30 to account for the lower dividend payout and dividend growth expectations over the next 2 years, and expect some negative reaction to stock price in the near term given that STE is traditionally considered a steady dividend stock, we believe this should provide opportunities to accumulate a quality company with leverage to the global recovery story along with 4%+ yield.
STEng – DBSV
Strong finish to the year but dividend cut a surprise
- 4Q13 results in line, earnings up 10% y-o-y
- Strong order wins reported in 4Q13; orderbook at record levels of S$13.2bn underpins earnings visibility
- Cuts dividend payout ratio to 80%; nevertheless net cash levels remain elevated at S$692m and can be invested for growth in US operations
- Maintain BUY with lower TP of S$4.30
Highlights
After an uninspiring performance in 3Q, STE reversed the trend with a solid set of numbers for 4Q13, with net profit up 10% y-o-y to S$167.5m on the back of 12% rise in revenue to S$1.9bn. Except the Land Systems sector, all other divisions reported y-o-y
growth in revenues, led by the Marine segment, where revenues were up 48% y-o-y on the back of strong project deliveries. PBT margins were also maintained across sectors, with Group PBT margin of 11.1% flattish compared to 4Q12 and 3Q13. However, for the full year-FY13, earnings growth was only 1% due to losses from “Others” segment – largely unprofitable non-core projects undertaken by ST Synthesis – and the impairment charge on its Ropax vessel, which has since been chartered out to a Canadian cruise ferry line for 3+7 years term. Without these items, we believe FY13 net profit of S$581m could have been up almost 6% y-o-y.
Our View
Earnings outlook remains encouraging. Order wins were buoyed in 4Q13, with all segments reporting new contract wins in the quarter that were higher than the usual run rate. As a result, STEclosed FY13 with a record orderbook of S$13.2bn despite strong
revenue recognition in 4Q13.
Recommendation
Dividend cut will affect sentiment in near term, but doesn’t change fundamentals. STE cut its dividend payout ratio from 90% to 80% in FY13 (final dividend of 12Scts + 3Scts interim already paid out) as most of the cash flow growth is trapped in the US operations due to the 30% withholding tax hurdle. However, this does not take away STE’s cash generation ability as it ended the year with a higher net cash balance of S$692m. The US operations will continue to invest the cash in expanding its capabilities in aircraft cabin reconfiguration and VIP completions, and is also exploring the possibility of setting up a MRO facility near Pensacola Airport. While we cut our TP to S$4.30 to account for the lower dividend payout and dividend growth expectations over the next 2 years, and expect some negative reaction to stock price in the near term given that STE is traditionally considered a steady dividend stock, we believe this should provide opportunities to accumulate a quality company with leverage to the global recovery story along with 4%+ yield.