Brief Equities Bottom-Up: HKT Benefits from Price Increases and Offers Strong Dividend Support. and more

In this briefing:

1. HKT Benefits from Price Increases and Offers Strong Dividend Support.
2. PRM: Thai Largest Tanker Fleets Assured of Consistent Growth
3. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex
4. IPO Stalker: SISB’s Growth Plans
5. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

1. HKT Benefits from Price Increases and Offers Strong Dividend Support.

HKT (6823 HK) reported 2H18 EBITDA slightly below our estimates but free cash flow was in line and allowed a 5% increase in the dividend (to a 5.7% yield). We look for the dividend to grow gradually going forward as management’s focus is once again on returns. We saw that with the move by HKT to raise prices in September 2018 which is already helping mobile top-line trends.

Despite HKBN (1310 HK) and China Mobile HK not following, the pre-paid segment does not appear to be suffering. Management has not ruled out further tariff increases, and they clearly want to see more rational competition in the run up to 5G (and to allow for dividend growth).

Growing cash flow has allowed management to maintain an attractive dividend policy which we see as supportive for the group overall. The improved monetization in mobile and continued efficiencies is likely to support future cash flow growth. Given the encouraging mobile outlook we have lifted our target slightly HKD13.8 from HKD13.6), and maintain a BUY on the stock. For a discussion on parent PCCW (8 HK) and the stub trade, please see David Blennerhassett ‘s recent note: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating.

2. PRM: Thai Largest Tanker Fleets Assured of Consistent Growth

We initiate coverage of PRM with a BUY rating, based on a target price of Bt7.70, derived from a PEG ratio of 0.9x, which is the average for the Asia ex-japan transportation sector, implying 22.0x PE’19E.

The story:

• Secured revenue from domestic trading business
• IMO 2020 implementation to propel floating storage demand
• Recovery in T/C rate should prompt international trading turnaround

Risks:  Lower-than-expected domestic oil consumption and trading activities in ASEAN, foreign currency and fuel cost fluctuations

3. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex

Aem Holdings (AEM SP) reported solid FY18 results and gave a decent outlook for FY19. Customer concentration remains high (85%+ of revenues linked to one of biggest IT companies globally) but new growth opportunities with Huawei and Novoflex could potentially add meaningfully to earnings and customer diversification as of FY20.

The balance sheet remains strong (58M SGD net cash) and should be further utilized for M&A to complement the current product offering.

Given the large change in the shareholder register over the past twelve months (after Novo Tellus distributed the shares to its LPs) free float is now 83% with Aberdeen and UBS among the largest shareholders. The high free float and low market cap make AEM a prime takeover candidate the coming 2-3 years.

Fair Value of 2.1 SGD remains unchanged (based on just 2x revenue or 10x FY2020 EV/EBITDA).

4. IPO Stalker: SISB’s Growth Plans

SISB has been one of the best investments in our portfolio, rising 26% since we jumped in shortly after the IPO. Founder Kelvin Koh reiterated the strengths in his prospectus (English-Chinese language, affordability, own brand) and backs it up with:

• positive stats and trends. 7.8% CAGR in international students, growth in high net worth Thais (11.4% CAGR) and expat population (6.9% CAGR) all of which are supportive of the business.
• expansion plans both abroad and domestic. A Bt70m investment in the Thonburi site as well as talks to potentially set up new campuses in China and/or CLMV region.
• Financials. An almost sixfold jump in earnings from Bt18m in 2017 to Bt103.5m in 2018 primarily due to its high operating leverage and now debt-free status after the IPO.
• favorable operating environment. High availability of Caucasian teachers in Thailand and growing Chinese expat community due to China’s increasing environment.

5. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

• The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
• De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
• Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
• Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut
• StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents’ market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation