SATS – DBSV
1QFY14 profit in line despite lower revenues
- 1QFY14 net profit was boosted by a tax write-back
- Revenues slipped due to lower contributions from TFK and Qantas Airways
- EBIT margins improved marginally on the back of lower operating costs
- Maintain HOLD, TP is intact at S$3.29
Highlights
1QFY14 profit in line. Net profit grew 11.9% to S$46.2m while revenues dipped 0.8% to S$434.5m. There was a S$3.8m tax writeback in the quarter and it booked S$1.7m impairment charge on assets held for sale. Excluding these items, net profit would have registered lower 6.8% y-o-y growth to S$44.1m.
Lower revenues due to TFK, lower meals uplift. 1QFY14 revenues were affected by lower contribution from food solutions (-5.6%), partly offset by higher gateway contribution (+7.9%). The weaker food solutions contribution was due to a 22% drop in TFK’s revenues as a result of a weaker yen and lower load factor amid strained Sino-Japan relations. Food solutions revenue was also affected by a 6.6% dip in unit meals uplifted, largely a result of Qantas moving its European flights to Dubai, from Singapore. Qantas redrawn about 52 flights/ week, which accounts for about 2% of total flights handled by SATS.
EBIT margins improve marginally to 9.4%. The dip in revenue was mitigated by lower operating expenses (-1.2%). The drop in opex was led by lower raw material costs (-2.8%), depreciation (-14.7%), premise and utilities expenses (-7.6%), and others (-2.5%).
Our View
Limited re-rating due to weak outlook. 1QFY14 earnings were in line at c.22% of our FY14F profit, similar to the year-ago quarter. There is little scope for share price upside in view of moderating passenger traffic growth and declining airfreight volume. However, this should be mitigated by its commitment to manage costs, as well as relatively attractive yields.
Recommendation
Maintain HOLD, TP S$3.29. SATS is currently trading at +1 SD of its historical PE band, in line with regional/global peers’ average. Our TP is the average of the values derived from our DCF model (WACC 7.7%, t=1.5%) and PE valuation model (16x FY14/15 EPS).
SIAEC – DBSV
Mixed bag
- 1QFYMar14 net profit of S$69m largely in line
- Weaker core operating margins offset by stronger contributions from JV/ associates
- Trading cum dividend (FY13 final DPS of 15Scts) till 25 July; lacks major catalysts for any further re-rating
- Maintain HOLD while revising our TP higher to S$5.10, as we benchmark valuations to listed peers
Highlights
Weaker core operating margins. 1QFY14 net profit of S$69m (up 5% q-o-q, down 2% y-o-y) came in largely within expectations, and made up more than 24% of our full-year FY14 earnings estimates. Revenue of S$289.4m showed similar flattish trends – lower 4% y-oy on lower material and fleet management revenue – but core operating margins dipped during the quarter to 9.6%, down from 10.9% in 4Q13 and 11.4% in 1Q13, likely on the back of higher subcontract costs.
Offset by strong performance at JV/assoc level. The performance of the Group’s JV/ associates – largely driven by its engine shops like SAESL and Eagle Asia – picked up strongly in 1Q14, likely helped by a stronger USD as well. Contributions from JV/ associates improved 14% y-o-y to S$45.6m, accounting for close to 58% of Group PBT during the quarter.
Our View
Near term outlook steady but unexciting. We expect sustained demand for the Group’s core MRO businesses in the near term, despite the uncertain macro environment. SIE should continue to benefit from growth in air traffic in the Asia-Pacific region, supporting the relative resilience of Asian carriers. Growth will be driven by its cluster of strategic partnerships that SIE has established in various pockets of the MRO value chain over recent years, but the ramp up will be gradual, as evidenced by the flattish growth in FY13.
Recommendation
Trading at close to +2 S.D. valuations, maintain HOLD. Cash generation continued to be robust in 1Q14 and net cash is now close to S$620m, supporting the Group’s ability to pay steady dividends. However, further growth in dividends is unlikely in FY14 and current valuations look rich at 20x FY14 PE. Given the lack of significant near term catalysts, we maintain HOLD at a revised TP of S$5.10 (adjusting for higher relative valuation pegs).
M1 – Lim & Tan
- M1 Ltd reported 2Q13 net income of S$39.2 million, which was in line with market expectations. Operating revenue of S$244.5 million for 2Q13 rose 5.3% y-o-y, mainly driven by higher service revenue, as its cellular customer base (+307K 4G new customers) and market share edged higher.
- Cost of sales increase 1.5% y-o-y in 2Q13, as higher traffic expenses was partially offset by lower handset costs. Operating expense also grew 4.8% in 2Q13, due to higher staff costs, as well as higher advertising and promotion expenses.
- The firm was allocated 40 MHz of paired spectrum rights (in the 1800 MHz and 2.5 GHz bands) at a reserve price of S$104 million, bringing the total capital commitment as at 30 Jun 2013 to S$194.8 million.
- The company’s balance sheet remains sound, with net gearing ratio at 52.7%, compared to 74.8% as of 4Q12.
- The company declared an interim dividend of 6.8 cents per share, up from 6.6 cents per share in the same period last year.
- Consensus FY14E dividend yield stand at 5.0%.
- Going forward, management expects a sustained shift towards 4G smartphones, higher data usage per smartphone user, as well as better traction in gaining customers in its fiber services offerings. In addition, they guided for “moderate growth” in net profit after tax for FY2013.
- We believe that M1 would continue to exhibit resilience in its operating performance over the long term, and would continue to remain as a safer alternative compared to the REIT sector.
M1 – Lim & Tan
- M1 Ltd reported 2Q13 net income of S$39.2 million, which was in line with market expectations. Operating revenue of S$244.5 million for 2Q13 rose 5.3% y-o-y, mainly driven by higher service revenue, as its cellular customer base (+307K 4G new customers) and market share edged higher.
- Cost of sales increase 1.5% y-o-y in 2Q13, as higher traffic expenses was partially offset by lower handset costs. Operating expense also grew 4.8% in 2Q13, due to higher staff costs, as well as higher advertising and promotion expenses.
- The firm was allocated 40 MHz of paired spectrum rights (in the 1800 MHz and 2.5 GHz bands) at a reserve price of S$104 million, bringing the total capital commitment as at 30 Jun 2013 to S$194.8 million.
- The company’s balance sheet remains sound, with net gearing ratio at 52.7%, compared to 74.8% as of 4Q12.
- The company declared an interim dividend of 6.8 cents per share, up from 6.6 cents per share in the same period last year.
- Consensus FY14E dividend yield stand at 5.0%.
- Going forward, management expects a sustained shift towards 4G smartphones, higher data usage per smartphone user, as well as better traction in gaining customers in its fiber services offerings. In addition, they guided for “moderate growth” in net profit after tax for FY2013.
- We believe that M1 would continue to exhibit resilience in its operating performance over the long term, and would continue to remain as a safer alternative compared to the REIT sector.
STEng – OCBC
REDUCING PEG FROM 22X TO 20X
- Sell-down along with broader market
- Risk-off approach for market
- Cut FV to S$3.97
Recent sell-down
As part of the recent general sell-down in the market, STE’s share price has fallen 12.1% since the peak of S$4.56 on 24 April 2013. But we note recent contract wins that attest to the group’s market leading positions. Just yesterday, ST Aerospace announced that that it has signed a longterm agreement with UTC Aerospace Systems to provide maintenance, repair and overhaul (MRO) services on the Boeing 787 Dreamliner nacelle systems for the Rolls-Royce Trent 1000 and General Electric GEnx engines. This follows a string of ST Aerospace announcements on 18 Jun, including an eight-year component MBHTM agreement with Spring Airlines Japan.
Solid 1Q13 despite no airshow
To recap, STE reported 1Q13 results that were in line with ours and consensus expectations. Revenue grew 0.2% YoY to S$1.54b, and PATMI fell 0.3% YoY to S$134m. PBT margin for the group stayed flat YoY at 10.5%. Highlights include: 1) lack of the biennial Singapore Airshow in 1Q13, which contributed to a S$6.1m drop in share of results of associates and jointly controlled entities, 2) growth in administrative expenses by S$7.9m (7% YoY) due to increased headcount from new Aerospace subsidiaries. STE’s order book reached a new high of S$13.0b as of end-Mar 2013, of which S$3.6b is expected to be delivered in the remainder of 2013.
Better outlook for 2H13
STE continues to anticipate achieving higher revenue and PBT in FY13 versus FY12. For 1H13, STE expects higher revenue and comparable PBT YoY. These suggest that 2H13 is likely to be strong for the group.
Maintain HOLD
Nevertheless, as the market seems to be in a more “risk-off” mode, we lower our FY13F EPS peg to 20.0x (versus 22x previously), which results in our fair value easing to S$3.97 from S$4.36. We maintain a HOLD rating on STE, supported by an estimated FY13 dividend yield of 4.4%.