SIAEC – MayBank Kim Eng
Worth More Than The SOTP Now
Beneficiary of SIA’s constant re-jig of business models. SIA had been trying out various means to restructure its business model over the years, which includes the introduction of Low Cost Carrier units (Scoot & Tiger Airways), aircraft reconfigurations to fit business conditions and orders for new aircraft. In order to cater to growing demand for regional air travel, SIA also recently placed a record aircraft order for SilkAir. Collectively, SIA, SilkAir and Scoot have 143 aircraft on order as compared to their current combined fleet of 127 aircraft, which is a reflection of the future growth in MRO work for SIAEC. On top of this, we believe that SIA Engineering Company (SIAEC) offers excellent exposure to the structural growth in air traffic in the Asia-Pacific region, which would account for 35% of global aircraft deliveries over the next 20yrs. 65% of the group’s pro-forma revenue comes from non-SIA customers.
New angle – unlocking latent value in the JVs. We believe that there is latent value in the JVs held by SIAEC, which could be unlocked with a separate listing. In particular, we are bullish on the outlook for one of its JVs with Rolls Royce, SAESL, which specializes in the repair and overhaul of Trent engines. Our bullish view on the prospects for the JV is backed by the 2,400 Trent engines on Rolls Royce’s order book (vs the 2,200 Trent engines currently in service). For the aircraft on SIA’s order book, 5 A380s (Trent 900), 40 A350s (Trent XWB) and 14 A330s (Trent 700) will be utilizing the Trent series of engines. We believe that SAESL’s future workload could increase even further, if Scoot decides on using the Trent 1000 engines for its new fleet of 20 B787s.
Upgrade to Buy, TP of SGD6.16 based on SOTP. Given the diversity of the underlying businesses, we believe that the stock is best valued using a sum-of-the-parts (SOTP) methodology. While P/E multiples appear rich relative to its historical trading range, we argue that there is hidden value within its business units that are not fully reflected with a P/E valuation method. Our SOTP does not take into account potential upside from a separate spin-off of its JVs. Furthermore, in the current low interest rate environment, we expect stock interest to remain high with its strong track record of dividend distributions. On our forecast, SIAEC offers potential 3yr yield of 4.6-5.0%.
ComfortDelgro – OSK DMG
Steady As She Goes
ComfortDelGro (CD) reported strong 1Q13 PATMI that grew 8% y-o-y to SGD58m. 1Q13 earnings accounted for 22.1% of our full year estimates, which were in-line with our expectations. We maintain our BUY rating and TP of SGD2.20 based on DCF (WACC: 9.0%; TGR: 2.5%). CD remains our pick within the land transport space for its 46% overseas operating profit exposure and more attractive valuations.
Another strong quarter of broad based growth. CD’s 1Q13 EBIT grew 3% to SGD96m due to growth across the board, which was partially offset by weakness from Singapore and UK bus, as well as Singapore rail operations. Singapore bus remained subdued with higher staff, repair and maintenance and depreciation costs, while Singapore rail was weak due to higher staff costs largely from the DTL start up. UK bus EBIT fell 17% y-o-y to SGD9.2m due to a declining GBP and lower Metroline revenue from a difference in billing cycle timing.
Ridership growth appears to be moderating. Bus average daily ridership grew 2.3% in 1Q13 while rail average daily ridership rose 6.4% for the same period. This compares to the 4.2-7.6% run rate for bus and 9-16.8% run rate for rail, for the same periods in the last two years. Though it may be too early to classify this as a trend, slower ridership growth is a negative for land transport operators. However, we are not overly concerned for CD given its large overseas exposure and its intention to target for overseas profit contribution to hit the 50% level (from current c.45%).
Share price has run up but stock still offers value. At FY13 P/E of 16.6x, CD remains more attractive than SMRT’s 25.0x FY14 P/E (FYE Mar). We like CD for its widespread overseas network which allows it better overseas growth prospects – something we view as a strong advantage given the challenging domestic land transport market.
SingTel – MayBank Kim Eng
The Heavy Lifting Begins
“Hype” phase over, time to deliver. SingTel is a SELL with a target price of SGD3.38 as the easy “hype” phase is over now that the stock has gained 30% in a year and SingTel has to deliver. Even as it prepares to pour in more billions into loss-making, very long-term investments with no hope for positive short-term returns, capex is expected to rise 25% and free cashflow is expected to drop by a third, it is on the eve of having to spend even more money that is beyond its current guidance – if it wins one of two Myanmar telecom licences (deadline 27 June 2013). M1 is our top pick among Singapore telcos.
Within expectations. FY13 underlying net profit of SGD3,611m was within expectations mainly because of strong contributions from Telkomsel and Globe that offset continued poor results from Bharti Airtel. Singapore operations (rev +3%, ebitda +0.9%) benefited from higher market share in mobile, fixed broadband and Pay TV, but Optus results were below expectations (rev -6.7%, ebitda -1.2%) as the Australian market remained buffeted by competition. A final dividend of 10 cents was announced, up from 9 cents, for a total payout of 74%.
Crunch time in FY14. Results-wise, FY14 is likely to be muted, with stable group revenue (Singapore to do better but Australia muted) and low single digit rise in EBITDA (on cost controls in Australia and Singapore). However, SingTel is in spending mode. It plans to spend more on Digital investments (SGD2b allocated over 3 years) and capex (SGD2.5b in FY13, up from SGD2b in FY13 – mainly on 3G and 4G networks and spectrum). As such, free cashflow will drop 28% to SGD2b in FY14, though still enough to fund a 75% dividend payout.
Myanmar investment will be on top of guidance. SingTel is tipped to be a hot favourite for the two new foreign operator licences in Myanmar. 12 applicants have been pre-qualified, with submission on 3 June and the winners known on 27 June. The capex and investment guidance of SGD2.5b and SGD2b respectively does not include investments needed for Myanmar, which could also run in the billions. Digicel, which is bidding with George Soros’ fund, has suggested that the initial project investment could be USD1.5b to USD2b.
SIAEC – OCBC
FY13 within expectations
- PATMI climbs 0.4% YoY
- EPS is 98% of ours and street’s FY13 est.
- Increase FV to S$5.00
FY13 as anticipated
SIA Engineering Company’s (SIAEC) FY13 results were in line with ours and the street’s expectations. Revenue decreased 2.0% to S$1,147m, chiefly due to lower fleet management and project revenue. Project revenue refers to the provision of services for the cabin interior reconfiguration of aircraft. Operating profit fell 1.2% to S$128.1m. Share of profits from associated and JV companies increased 1.5% to S$159.2m, representing a contribution of 52.0% of the group’s pre-tax profits. PATMI was up 0.4% to S$270.1m. Basic EPS of 24.51 S cents formed 98% of ours and the street’s FY13 estimates.
Slight improvement in operating margin
Salary costs increased 5.7% to S$498.2m due to wage increases; headcount stayed roughly flat. Increase in staff cost was outweighed by decreases in subcontract services (-19.3% to S$136.7m on the back of lower project costs), material cost (-2.2% to S$214.2m) and overheads (-6.3% to S$169.5m), leading expenditure to fall 2.1% to S$1,019m.
Business likely to remain stable
Management guides that the group’s business is expected to remain stable in the near term while acknowledging that the operating environment remain challenging due to uncertainties regarding the world economy. SIAEC will continue to focus on improving productivity and controlling costs. Management is continuously evaluating potential investment opportunities.
Maintain HOLD
The board is recommending a final ordinary dividend of 15.0 S cents, which will bring total FY13 dividends to 22.0 S cents per share. SIAEC intends to maintain a payout ratio of 85-90%. Increasing our P/E peg from 17.1x to 20.0x and using an EPS forecast of 25.0 S cents for FY14F, we increase our fair value from S$4.38 to S$5.00 and maintain our HOLD rating on SIAEC.
SingTel – OCBC
Upside fairly limited; downgrade to HOLD
- Guides for stable group revenue
- Low single-digit EBITDA growth
- Downgrade to HOLD with S$3.83 FV
FY13 results mostly in line
SingTel saw its 4QFY13 revenue slipping 6% YoY and 3% QoQ to S$4.48b, weighed down by the weaker A$. Full-year revenue fell 3% to S$18.18b, and was 3% shy of our forecast. Reported net profit for 4Q came in at S$868.2m, down 33% YoY but up 5% QoQ; core earnings slipped 2% YoY and rose 15% QoQ to S$1.0b. Core FY13 earnings eased 1.8% to S$3.61b, or about 4% below our forecast. SingTel has declared a final dividend of S$0.10/share, bringing the fullyear payout to S$0.168 (74% of underlying net profit).
Guides for stable group revenue
Going forward, SingTel expects group consolidated revenue to remain stable. For Group Consumer, it expects revenue to show a low single-digit decline, with lower revenue from Australia; but EBITDA to show a low single-digit rise. Group Enterprise revenue is expected to deliver low single-digit growth, with EBITDA to remain stable. For Group Digital Life, revenue could jump by at least 50%, but it will continue to register startup losses. Overall EBITDA for the group should show low single-digit growth, led by productivity and yield management.
Capex spend of S$2.5b; raises payout guidance
SingTel expects to increase capex spending to S$2.5b (from S$2.1b in FY13), mainly for expansion of its LTE coverage and 3G network enhancement. FCF (free cashflow) is likely to come in at around S$2.0b; it also expects ordinary dividends from associates to grow. Finally, it has raised the dividend payout ratio to 60-75% (from 55-70% previously).
Revising FV to S$3.83; downgrade to HOLD
Incorporating the latest guidance, we pare our FY14 forecasts for revenue by 3% and core earnings by 2%. After updating the value of its listed associates, our SOTP fair value rises from S$3.68 to S$3.83. But given the recent sharp run-up, the upside from here looks fairly limited. Hence we downgrade our call from Buy to HOLD.