STEng – MayBank Kim Eng
Dividend upside to be capped
- Net income of SGD580.8m in line with expectations and guidance. DPS cut to SGD 15.0 cts (80% payout).
- Upside in sales for aircraft engine work delayed.
- Payout ratio cut to 75% for FY14E-16E with stock yielding 4% at current price. Maintain HOLD and TP of SGD4.00.
Earnings in line with expectations
STE reported net income of SGD580.8m (+0.8% YoY) for FY13, in line with our expectations and management’s guidance for comparable profits for the year. Sales grew by 4%, with the marine division seeing the largest expansion (+23% YoY). Strong contract wins in 4Q13 took the orderbook to a record high of SGD13.2b (Dec 2012: SGD12.1b, Sep 2013: SGD12.5b). However, DPS was lowered to SGD 15.0 cts (FY12: SGD 16.8 cts) following a cut in payout ratio to 80% from 90% last year. Management expects revenue and PBT for FY14 to exceed FY13’s achievement.
Disappointing DPS
Although STE’s earnings were within our expectations, the lower DPS of SGD 15.0 cts was a disappointment. Management said that as the group’s share of earnings from overseas increase, there will be a cap on its ability to pay out higher dividends, given the need to pay withholding tax on overseas income (it guided for a payout ratio of 75% over the next 3-5 years). It added that overseas earnings will be retained to fund expansion. Our expectations for higher sales for aircraft engine work failed to materialise due to improved reliability of the CFM56 engines. Management expects upside in engine sales to be delayed to 2016/2017. For its marine business in Singapore, it sees heightened competition from local players for ship repair. We keep our FY14E-16E forecasts largely unchanged but lower our payout ratio to 75%. Consequently, we expect the stock to yield approximately 4% over the next three years. Our TP of SGD4.00 is based on 20x FY14E P/E. Maintain HOLD.
SATS – MayBank Kim Eng
Raises exposure to Indonesia
- Acquires 42% stake in Indonesia’s leading aviation service provider CAS.
- Positive move as it raises exposure to fast-growing Indonesia.
- Purchase adds 3% to our FY3/15E-16E EPS. Maintain BUY.
Acquires 42% stake in PT CAS
SATS announced yesterday the acquisition of a 41.65% stake in PT Cardig Aero Services TBK (CAS) for IDR1,108b (approximately SGD118.3m). CAS is a food solutions and gateway services provider in Indonesia that is listed on the Indonesia Stock Exchange. It derives 73% of its sales from SATS’ 49.8%-owned associate PT Jasa Angkasa Semesta(JAS), which offers ground & cargo services across 11 airports in Indonesia. According to SATS, CAS is the leading player in the Indonesian aviation market with major international airlines, including Singapore Airlines, as its customers. Through its relationship with JAS, SATS has over 10 years of working relations with the CAS management. This acquisition will not trigger a General Offer for the rest of CAS’s listed shares and SATS will continue to equity account for both CAS and JAS post acquisition.
Positive on larger exposure to fast-growing Indonesia
Many airlines have been increasing their capacity between Singapore and Indonesia ever since the two countries inked a bilateral air service agreement last year. With its international clientele, we expect CAS to benefit from the traffic growth between the two countries. While the acquisition price implies a significant 50% premium to CAS’s market price, we argue that an estimated valuation multiple of 21.5x CY14E P/E is reasonable, given the positive growth outlook for the business. Furthermore, SATS can comfortably fund this acquisition with its war chest of SGD355m (Dec 2013). We estimate that this acquisition will add 3% to our FY3/15E-16E earnings forecasts and raise our estimates accordingly. Reiterate BUY with unchanged DCF-based TP of SGD3.47 (WACC = 7.6%, tg= 1.0%).
SATS – MayBank Kim Eng
Raises exposure to Indonesia
- Acquires 42% stake in Indonesia’s leading aviation service provider CAS.
- Positive move as it raises exposure to fast-growing Indonesia.
- Purchase adds 3% to our FY3/15E-16E EPS. Maintain BUY.
Acquires 42% stake in PT CAS
SATS announced yesterday the acquisition of a 41.65% stake in PT Cardig Aero Services TBK (CAS) for IDR1,108b (approximately SGD118.3m). CAS is a food solutions and gateway services provider in Indonesia that is listed on the Indonesia Stock Exchange. It derives 73% of its sales from SATS’ 49.8%-owned associate PT Jasa Angkasa Semesta(JAS), which offers ground & cargo services across 11 airports in Indonesia. According to SATS, CAS is the leading player in the Indonesian aviation market with major international airlines, including Singapore Airlines, as its customers. Through its relationship with JAS, SATS has over 10 years of working relations with the CAS management. This acquisition will not trigger a General Offer for the rest of CAS’s listed shares and SATS will continue to equity account for both CAS and JAS post acquisition.
Positive on larger exposure to fast-growing Indonesia
Many airlines have been increasing their capacity between Singapore and Indonesia ever since the two countries inked a bilateral air service agreement last year. With its international clientele, we expect CAS to benefit from the traffic growth between the two countries. While the acquisition price implies a significant 50% premium to CAS’s market price, we argue that an estimated valuation multiple of 21.5x CY14E P/E is reasonable, given the positive growth outlook for the business. Furthermore, SATS can comfortably fund this acquisition with its war chest of SGD355m (Dec 2013). We estimate that this acquisition will add 3% to our FY3/15E-16E earnings forecasts and raise our estimates accordingly. Reiterate BUY with unchanged DCF-based TP of SGD3.47 (WACC = 7.6%, tg= 1.0%).
Land Transport – MayBank Kim Eng
Convergence of negative events
- Downgrade sector rating to Underweight from Neutral in view of recent negative developments.
- Maintain SELL on SMRT (TP SGD0.60).
- Reiterate BUY on ComfortDelGro (TP SGD2.40) for its low exposure to fare-based business in Singapore.
Recent Developments Lead Us To Turn Negative
- Heightened regulatory pressure. Parliament passed a Bill on 17 Feb 2014 that will increase the maximum fine for every rail disruption to 10% of the train operators’ annual fare revenue. This is up from SGD1m previously. The amended Rapid Transit Systems Bill implies that a network-wide rail incident would subject SMRT and SBS Transit (SBST) to a maximum fine of SGD63.2m and SGD14.8m respectively, based on our estimates. In our view, the implementation of the revised financial penalty would easily tip the operators into the red, considering their depressed profit bases.
- Risk of higher repair and maintenance expenses. Transport Minister Lui Tuck Yew highlighted an impending change in the maintenance regime for the rail network from the current “find and fix” approach to a new “predict and prevent” approach. He said this in reply to questions from Members of Parliament on the recent train service disruptions. Given the increased scrutiny on system reliability, we expect regulators and operators to adopt a conservative approach, which could lead to higher spending on maintenance work.
- Quantum of fare hike lower than expected. The 3.2% increase in bus and train fares that would be implemented from April 2014 fell short of our expectations for a 5% hike. While the fare revision will provide some relief, it will not be sufficient to offset losses at the operators’ fare-based business.
What’s Our View
We downgrade our rating for the Land Transport sector to Underweight from Neutral to reflect the abovementioned negative events. Our SELL call on SMRT (TP SGD0.60) remains unchanged, so is our BUY rating on ComfortDelGro (CDG). We are less worried about CDG than SMRT because: 1) CDG’s Singapore fare-based business accounts for just 7% of its market value, 2) losses at its rail segment is mainly due to start-up costs for the Downtown Line, and 3) there may be upside to rental and advertising beyond 2017.
Land Transport – MayBank Kim Eng
Convergence of negative events
- Downgrade sector rating to Underweight from Neutral in view of recent negative developments.
- Maintain SELL on SMRT (TP SGD0.60).
- Reiterate BUY on ComfortDelGro (TP SGD2.40) for its low exposure to fare-based business in Singapore.
Recent Developments Lead Us To Turn Negative
- Heightened regulatory pressure. Parliament passed a Bill on 17 Feb 2014 that will increase the maximum fine for every rail disruption to 10% of the train operators’ annual fare revenue. This is up from SGD1m previously. The amended Rapid Transit Systems Bill implies that a network-wide rail incident would subject SMRT and SBS Transit (SBST) to a maximum fine of SGD63.2m and SGD14.8m respectively, based on our estimates. In our view, the implementation of the revised financial penalty would easily tip the operators into the red, considering their depressed profit bases.
- Risk of higher repair and maintenance expenses. Transport Minister Lui Tuck Yew highlighted an impending change in the maintenance regime for the rail network from the current “find and fix” approach to a new “predict and prevent” approach. He said this in reply to questions from Members of Parliament on the recent train service disruptions. Given the increased scrutiny on system reliability, we expect regulators and operators to adopt a conservative approach, which could lead to higher spending on maintenance work.
- Quantum of fare hike lower than expected. The 3.2% increase in bus and train fares that would be implemented from April 2014 fell short of our expectations for a 5% hike. While the fare revision will provide some relief, it will not be sufficient to offset losses at the operators’ fare-based business.
What’s Our View
We downgrade our rating for the Land Transport sector to Underweight from Neutral to reflect the abovementioned negative events. Our SELL call on SMRT (TP SGD0.60) remains unchanged, so is our BUY rating on ComfortDelGro (CDG). We are less worried about CDG than SMRT because: 1) CDG’s Singapore fare-based business accounts for just 7% of its market value, 2) losses at its rail segment is mainly due to start-up costs for the Downtown Line, and 3) there may be upside to rental and advertising beyond 2017.