StarHub – OCBC
Downgrade to SELL; BPL likely non-event
- Likely no major BPL boost
- More downside risk ahead
- Downgrade to SELL
BPL cross-carriage likely non-event
StarHub Ltd will be able to cross carry the widely-followed BPL (Barclays Premier League) live matches for the upcoming 2013 to 2016 seasons; this after rival SingTel’s appeal against the MDA’s (Media Development Authority) direction was rejected. However, with a seemingly steep price point of S$59.90/month (before GST) for new subscribers (while existing mioTV subscribers continue to pay the current S$34.90 (before GST)), we suspect that any migration of subscribers from mioTV to StarHub’s cable TV platform would be quite muted. And even if there are migrations, StarHub subscribers will be paying the fees directly to SingTel.
Strong recovery after our upgrade
Meanwhile, StarHub has seen a strong recovery after we upgraded our rating from Sell to Hold on 3 Jun, with the stock rising some 9.5% to a recent S$4.39 high. Back then, we note that the dividend yield has risen back to around 5% (or 5.2% based on our fair value), but based on current price, the yield has fallen back to 4.7%, which is just decent. However, with 10-year SGS bond yields back to around 2.5%, we feel that further upside from here may be capped, especially with consensus siding towards further rate increases in the future.
Downgrade to SELL
In light of the likely muted boost from the BPL cross carriage and recent strong run-up in share price, we feel that the stock may have run ahead of its fundamentals. Recall previously that StarHub has guided for a lower single-digit revenue growth while maintaining its service EBITDA margin at 31%. As we are also keeping our DCF-based fair value unchanged at S$3.82 (already accounted for a higher risk-free rate), we foresee more downside risk from here. Hence, we downgrade our call back from Hold to SELL.
STEng – MayBank Kim Eng
Robust Outlook To Support Lofty Valuations
- Despite premium valuations, ST Engineering (STE)’s defence and commercial-driven record order book of SGD13b, along with a potential catalyst in the form of a major billion-dollar contract, continue to justify a BUY rating. As a heuristic gauge of the stock’s valuation, STE trades at an undemanding market capitalisation-to-order ratio of 1.0x, below its market cycle average of 1.2x. Our target price of SGD4.80 is based on 23x blended FY13/14 PER.
- STE is in the running for a major contract from the US Coast Guard (USCG), which could be worth c.USD10b. This could be announced as early as 3Q13. Closer to home, a recent Singapore Navy patrol vessel contract could be its biggest since 2008.
- ST Aerospace’s recent acquisition of a 35% stake in EADS EFW, a Centre of Excellence for freighter conversions, is meant to leverage on its years of experience in passenger-to-freighter (PTF) conversions. It plans to develop a conversion package for two versions of converted freighters – A330-200P2F and A330-300P2F – where there is a major market opportunity, as Airbus estimates that 847 mid-sized aircraft would be converted into freighters over the next 20 years.
STEng – MayBank Kim Eng
Robust Outlook To Support Lofty Valuations
- Despite premium valuations, ST Engineering (STE)’s defence and commercial-driven record order book of SGD13b, along with a potential catalyst in the form of a major billion-dollar contract, continue to justify a BUY rating. As a heuristic gauge of the stock’s valuation, STE trades at an undemanding market capitalisation-to-order ratio of 1.0x, below its market cycle average of 1.2x. Our target price of SGD4.80 is based on 23x blended FY13/14 PER.
- STE is in the running for a major contract from the US Coast Guard (USCG), which could be worth c.USD10b. This could be announced as early as 3Q13. Closer to home, a recent Singapore Navy patrol vessel contract could be its biggest since 2008.
- ST Aerospace’s recent acquisition of a 35% stake in EADS EFW, a Centre of Excellence for freighter conversions, is meant to leverage on its years of experience in passenger-to-freighter (PTF) conversions. It plans to develop a conversion package for two versions of converted freighters – A330-200P2F and A330-300P2F – where there is a major market opportunity, as Airbus estimates that 847 mid-sized aircraft would be converted into freighters over the next 20 years.
SATS – OSK DMG
Weaker Japan Operations Weigh On Revenue
SATS posted a 1QFY14 revenue of SGD434.5m (-0.8% y-o-y) on weaker contribution from its TFK subsidiary and a PATMI of SGD46.2m (+11.9% y-o-y). Excluding the writeback for prior year tax provisions and an impairment loss during 1QFY14, PATMI would have risen by 6.8% y-o-y. As passenger traffic growth moderates, Management remains focused on managing costs and raising productivity. Maintain NEUTRAL.
Revenue slightly below expectations. SATS’ 1QFY14 revenue was slightly below our expectations, although PATMI was in line – due to the SGD3.8m writeback of the prior year’s tax provisions and a SGD1.7m oneoff impairment loss. The decline in the JPY, as well as a lower load factor for the Japan-China route, had led to lower business volume for its TFK Corporation subsidiary. Despite that, TFK remained profitable during the quarter under review. Meanwhile, the diversion of Qantas’ European flights to Dubai had an impact on SATS’ overall meal volume.
Outlook stable, but expect challenges. The addition of new flight destinations by airlines, an increase in airline budget for in-flight services offerings and the growth in the low cost carrier segment could help boost SATS’ revenue. However, with the global economy still uncertain, passenger traffic numbers are expected to slow down somewhat. We expect this factor, coupled with the ongoing downtrend for airfreight, to translate into a challenging outlook for the aviation business. The weaker JPY and TFK’s lower business volumes may persist over the next few quarters, although SATS has maintained its positive long-term view on its investment in Japan.
Lower earnings estimate, TP unchanged. We have adjusted our revenue estimate in anticipation of lower revenue growth. We have also tweaked our staff cost assumptions, as SATS has raised some wages. This has prompted us to revise our FY14F PATMI estimates downwards to SGD215.6m. Maintain NEUTRAL.
SATS – OSK DMG
Weaker Japan Operations Weigh On Revenue
SATS posted a 1QFY14 revenue of SGD434.5m (-0.8% y-o-y) on weaker contribution from its TFK subsidiary and a PATMI of SGD46.2m (+11.9% y-o-y). Excluding the writeback for prior year tax provisions and an impairment loss during 1QFY14, PATMI would have risen by 6.8% y-o-y. As passenger traffic growth moderates, Management remains focused on managing costs and raising productivity. Maintain NEUTRAL.
Revenue slightly below expectations. SATS’ 1QFY14 revenue was slightly below our expectations, although PATMI was in line – due to the SGD3.8m writeback of the prior year’s tax provisions and a SGD1.7m oneoff impairment loss. The decline in the JPY, as well as a lower load factor for the Japan-China route, had led to lower business volume for its TFK Corporation subsidiary. Despite that, TFK remained profitable during the quarter under review. Meanwhile, the diversion of Qantas’ European flights to Dubai had an impact on SATS’ overall meal volume.
Outlook stable, but expect challenges. The addition of new flight destinations by airlines, an increase in airline budget for in-flight services offerings and the growth in the low cost carrier segment could help boost SATS’ revenue. However, with the global economy still uncertain, passenger traffic numbers are expected to slow down somewhat. We expect this factor, coupled with the ongoing downtrend for airfreight, to translate into a challenging outlook for the aviation business. The weaker JPY and TFK’s lower business volumes may persist over the next few quarters, although SATS has maintained its positive long-term view on its investment in Japan.
Lower earnings estimate, TP unchanged. We have adjusted our revenue estimate in anticipation of lower revenue growth. We have also tweaked our staff cost assumptions, as SATS has raised some wages. This has prompted us to revise our FY14F PATMI estimates downwards to SGD215.6m. Maintain NEUTRAL.