SATS – MayBank Kim Eng
New CEO sets out his vision
- Leverage on technology to ease labour cost pressure, new catering centre required to support Changi Airport expansion
- Higher capex could put our DPS forecasts at risk, but we see scope to optimise capital structure
- Valuation still attractive at 15x FY15E P/E with dividend yield of 5.0-5.6% over the next three years. Maintain BUY.
What’s New
Mr Alex Hungate, the new CEO of SATS, held his first meeting with the analyst community yesterday and shared his strategy for the group. His key points are: 1) cement its presence in Asia, 2) leverage on technology to ease labour cost pressure, 3) take advantage of Changi Airport’s expansion, and 4) raise capex if needed but there would still be room to gear up the balance sheet.
We also visited SATS’s Inflight Catering Centre (ICC) 1 and were impressed with the attention to detail, cleanliness and organised operations at the facility. This has enabled us to better appreciate the synergies between SATS and its non-aviation food business, which processes food before final packaging at the airport.
What’s Our View
We remain positive on the stock as ongoing initiatives to drive productivity will better position SATS for the future. With demand for air travel in the region on the rise, the outlook for its aviation business is bright. Incremental contributions from its non-aviation business will also continue to provide stable income and enhance economies of scale for the group.
Although guidance for a higher capex could put our call for higher dividends over the next three years at risk, we reiterate our view that SATS could enhance shareholders’ returns by optimising its capital structure. At 15x FY15E P/E, valuation remains attractive with the stock offering a dividend yield of 5.0-5.6% over the next three years. Maintain BUY with unchanged TP of SGD4.00 (DCF based: WACC= 7.6%, tg= 1.0%)
SATS – MayBank Kim Eng
New CEO sets out his vision
- Leverage on technology to ease labour cost pressure, new catering centre required to support Changi Airport expansion
- Higher capex could put our DPS forecasts at risk, but we see scope to optimise capital structure
- Valuation still attractive at 15x FY15E P/E with dividend yield of 5.0-5.6% over the next three years. Maintain BUY.
What’s New
Mr Alex Hungate, the new CEO of SATS, held his first meeting with the analyst community yesterday and shared his strategy for the group. His key points are: 1) cement its presence in Asia, 2) leverage on technology to ease labour cost pressure, 3) take advantage of Changi Airport’s expansion, and 4) raise capex if needed but there would still be room to gear up the balance sheet.
We also visited SATS’s Inflight Catering Centre (ICC) 1 and were impressed with the attention to detail, cleanliness and organised operations at the facility. This has enabled us to better appreciate the synergies between SATS and its non-aviation food business, which processes food before final packaging at the airport.
What’s Our View
We remain positive on the stock as ongoing initiatives to drive productivity will better position SATS for the future. With demand for air travel in the region on the rise, the outlook for its aviation business is bright. Incremental contributions from its non-aviation business will also continue to provide stable income and enhance economies of scale for the group.
Although guidance for a higher capex could put our call for higher dividends over the next three years at risk, we reiterate our view that SATS could enhance shareholders’ returns by optimising its capital structure. At 15x FY15E P/E, valuation remains attractive with the stock offering a dividend yield of 5.0-5.6% over the next three years. Maintain BUY with unchanged TP of SGD4.00 (DCF based: WACC= 7.6%, tg= 1.0%)
M1 – CIMB
Dividend surprise
While M1’s FY13 core net profit missed our estimate (94% of our forecast), its dividend exceeded our raised expectations. The earnings miss was largely due to higher-than-expected opex. However, its core net profit met consensus expectations(98% of FY13 estimates). M1 proposed a final DPS of 7.1 Scts and a special DPS of 7.1 Scts, bringing the full-year total to 21 Scts (121% payout),up 44% yoy. The take-up of tiered data plans surged 17%pts qoq to 49%,which we believe offset the lower international roaming revenues. We cut our FY14-15 EPS by 6-14% and DCF-based (WACC 7.2%) target price by 7.3%. However,M1 remains an Add with the dividend surprise and rapid take-up of tiered data plans acting as likely re-rating catalysts.
An accounting matter
FY13 earnings missed our estimates as more Android devices were sold vs. iPhones. M1 smoothens out the iPhone subsidy by recognising a large part of the future revenues to offset the subsidy, while the subsidy for an Android device is expensed off without recognising the revenue upfront. Also, the higher-than-expected labour and traffic costs hurt FY13 earnings.
Data growth offsets lower roaming revenues
The adoption of tiered data plans surged 17% pts to 49%, ahead of our expectations, and appears to have offset the decline in international roaming revenues. This is indicated by post-paid ARPU which seems to have bottomed out (Figure 3). International roaming revenues now make up 10-12% of total revenues vs. 12-15% previously. The users of tiered data plans pay S$3/month more than the users of the old plans (5% of post-paid ARPUs), while the lower data bundles force heavy data users to upgrade.
Rapid fixed broadband take-up
A key growth driver is fixed broadband, which formed 8% of the total revenues in FY13 vs. 6% in FY12. The fixed broadband revenue was driven mostly by the take-up of lower-end plans as indicated by the rapid 6% qoq and 13% yoy fall in 4Q13 ARPUs (Figure 1). The subscriber base rose 10% qoq and 64% yoy.
Delivered on dividends
M1’s total FY13 DPS of 21 Scts was above our estimate of 19 Scts which we had raised from 16 Scts earlier.
M1 – OCBC
Declares S$0.07 special dividend
- Payout of 121% vs. 80% minimum
- Sees moderate NPAT growth
- Raising FV to S$3.30
FY13 results still in-line; declares S$0.07 special dividend
M1 Ltd reported 4Q13 revenue of S$278.6m, down 14.9% YoY, affected by lower handset sales (down 46.3%); but EBITDA slipped by a smaller 2%, with service EBITDA margin holding relatively steady at 38.2% in 4Q13, versus 41.6% a year ago. Net profit climbed 6.9% to S$40.5m, mainly due to lower taxes (down 44.6%). FY13 revenue fell 6.4% to S$1007.9m, and was around 3.8% below our forecast, while net profit climbed 9.4% to S$160.2m, or 3.5% above our forecast. M1 declared a final dividend of S$0.071 per share and a special dividend of S$0.071 as well, bringing the total full year dividend to S$0.21 per share. This translates into a payout ratio of 121% of its earnings, versus its official minimum payout ratio of 80%.
Guiding for moderate earnings growth
Going forward, management believes that it can continue to achieve moderate earnings growth (within the single-digit range), driven by increased mobile data usage as customers upgrade their smartphone plans (already 49% are on tiered pricing, with 16% exceeding their data allocation) and also pre-paid customers adopting smartphone plans. While it continues to see growth in fixed services, it notes the ongoing price competition in that segment; but believes it should be “promotional” rather than structural. Nevertheless, it notes that a growing adopting of the mass market plan (200Mbps at S$39/month) could see further erosion in ARPU. It has also guided for slightly higher capex of S$130m
Maintain HOLD with higher S$3.30 fair value
Factoring in the latest developments, we opt to pare our FY14 revenue forecast by 8% but increase our earnings estimate by 2%. Our DCF-based fair value will also improve from S$3.17 to S$3.30 as we roll forward to FY14. As we are unlikely to see a repeat of such a hefty special dividend this year, we maintain our HOLD rating.
M1 – MayBank Kim Eng
Dishing out special dividends
- M1 declared a special dividend of 7.1 cents for FY13, as expected. Including the final dividend of another 7.1 cents, it will pay out 120% of its FY13 profit.
- In our view, there could be more special dividend payouts to come as we expect free cash flow to remain strong this year and capex to decline next year.
- Maintain BUY. TP is lowered slightly to SGD3.86 as we factor in lower growth forecasts for fibre revenue that will slightly offset strong growth in data usage.
What’s New
M1’s FY13 net profit of SGD160m was slightly below our expectations of SGD169m, mainly due to lower-than-expected fibre revenue. But the telco delivered on the one thing we had anticipated the most – an additional substantial payout to shareholders. It declared a special dividend of 7.1 cents a share for FY13, equalling the final dividend of 7.1 cents a share. Taking advantage of its strong balance sheet, with a net debt/EBITDA ratio of just 0.6x, M1 will be paying out 120% of its FY13 net profit in total.
What’s Our View
We lower our target price slightly to SGD3.86 as we scale back our FY14E-16E forecasts on lower expectations for the fibre business. However, we think there is potential for M1 to further return cash to shareholders this year. Its free cash flow should remain strong in FY14E and guidance for lower capex in FY15E indicates that net debt/EBITDA will stay low at 0.6-0.7x for this year and the next. We maintain our BUY call on M1, which stays as our top Singapore telco pick.