SGX Yield Stocks

Some help in funding bus capex

Sector Overview

The Transportation Sector under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT, ComfortDelGro) & Aviation Services (SIA Engineering, ST Engineering, SATS).

• Government initiative to fund bus capex

• Profitability of bus business had been poor

• Mildly positive for Land Transport operators

• Continue to prefer ComfortDelGro over SMRT

What is the news?

Singapore's government announced a commitment to increase bus capacity in Singapore over the next 5 years. The government recognized that planned rail capacity injections from the new rail lines would take time to materialize, but easing of daily congestion is a more immediate task. Consequently, the government would partner the public transport operators (PTOs) to add c.800 buses into the system over the next 5 years. Of these new buses, the government would fund the purchase of 550 buses, while the PTOs would add the balance 250. To fund this purchase and the running costs for 10years, the government will establish a Bus Services Enhancement Fund worth S$1.1bn.

How do we view this?

We view this as mildly positive for the Land Transport operators (SMRT, ComfortDelGro). Higher CAPEX and increased operating expenses due to the increase in fleet size had been a drag on the profitability of the bus business for both PTOs that are struggling to breakeven in recent quarters. SBST and SMRT operate c.3k and c.1k buses respectively and the capacity injection would increase capacity by 20%.

Investment Actions?

We continue to prefer ComfortDelGro over SMRT due to its cheaper valuation and better geographical diversification. While the initiative is positive for the PTOs, We opine that better clarity on the future fare review mechanism would provide better confidence to investors.

Margins to remain under pressure

Downgrade to Hold. We expect SingTel’s EBITDA margin to remain under pressure for the next few quarters as the telco focuses on building its mobile customer base aggressively in Singapore. While it expects long-term benefits, the costs related to its build-up of mobile device content, as well as subscriber acquisition and retention, are expected to stay high, thus eating into margins.

3Q12 results below expectations. SingTel’s 3QFY Mar12 results fell short of expectations, reflecting higher acquisition and retention costs on a strong mix of smartphones and tablets in Singapore and weak associate contributions. However, we had expected this, following similar trends in M1′s results. The only question was the extent of the damage to margins, which was quite severe in 3QFY Mar12, down to 32.7% from 34.5% in the previous quarter and 35.9% a year ago.

Margin decline to continue. SingTel has seen its EBITDA margin decline for four quarters now. However, there is likely to be further downside in the short term. In particular, management mentioned that it will step up its level of aggression to acquire smartphone and fibre customers as NGNBN rollout progresses. In the long run, it hopes to reap the benefits of upselling customers on a wider range of services but the short-term, impact on margins will be negative.

Older and wiser on BPL but… The better news is SingTel is unlikely to want to be perceived as Mister Moneybags again when bidding for the 2013-16 seasons of the BPL starting in March 2012. According to Mr Allen Lew, SingTel’s Singapore CEO, it will be “a bit wiser on this”. However, cross-carriage notwithstanding, management still views BPL as a key piece of content. Depending on the dynamics with the content owner, SingTel may not have a choice but to bid aggressively.

Lack of catalysts. While we do not expect any positive catalysts in the near future, we also do not anticipate any event that could pull the rug from below SingTel’s earnings, which should remain fairly resilient. We value SingTel at $2.95, or 13x FY Mar12 earnings, similar to the region’s integrated telcos as well as its own historical average PER.

Slightly below expectations

Company Overview

ComfortDelGro Corporation (CDG) is a land transport conglomerate with businesses across various business segments and geography. The bus and taxi businesses are the largest profit contributors for the Group.

• Net income increased 3.1%y-y

• Higher fuel expense, staff cost & depreciation expense resulted in a 0.4ppt decline in EBIT margin

• Final DPS of 3.30cents proposed

• Maintain Buy with revised TP of S$1.66

What is the news?

CDG announced a 6.4% and 3.1% increase in sales and net income for the year. However, margin pressures from higher fuel expense, staff cost and depreciation expense resulted in a 0.4ppt decline in EBIT margin. While revenue continue to increase sequentially, 4QFY11 net profits fell by 18%q-q, due to a c.S$10mn decline in operating profits for both the taxi and bus businesses. Final dividends of 3.30cents proposed, translating to a full year payout ratio of 53.3%.

How do we view this?

The results for the year were slightly weaker than expected. Key variances from our 4QFY11 estimates were 1) Operating losses of S$5mn at SBST’s bus business; 2) c.3.4% decline in average passenger rail fare; 3) operating losses at China’s bus business. Looking ahead to FY12E, we believe that rail business would likely register a decline in margins as the company increase staff headcount in preparation for the launch of Downtown Line (DTL) at the end of FY13E.

Investment Actions?

We revised our forecasts down by 7.9-11.4% for the next 2 years and lowered our target price to S$1.66 based on 15X FY12E EPS. CDG remains undervalued at the current market price. Maintain Buy.

Lacking catalysts

We are little less optimistic on SingTel after its conference call today as the negatives pileup: rivalry in Australia’s mobile sector remains stiff and competition could intensify in the Philippines. We also see Australia’s fixed broadband competition heat up due to the NGNBN.

SingTel intends to retain its rights to carry the BPL but expects to be more rational with its bid. We downgrade SingTel to Neutral from Outperform, maintain our earnings estimates but tweak our SOP-based target price given its rising risks and CIMB’s rising optimism on the stock market.

What Happened

SingTel held a conference call after its 3QFY12 results. We are a little more negative on the stock as we think fixed broadband competition in Australia may intensify ahead of the introduction of the next generation broadband (NGNBN), similar to what happened in Singapore. Competition in the Australian mobile space remains intense with no sign of a let-up.

In Singapore, it expects to be more rational in bidding for the rights to the 2013-15 BPL seasons in 2H12. We believe SingTel intends to win the rights to this content, although it will be non-exclusive, given that is the anchor content for its pay TV.

We expect SingTel to continue to aggressively acquire both mobile and fixed broadband customers given its view to upsell them with content and applications down the road. It has a commanding 63% market share in fibre broadband.

What We Think

We think risks are rising for SingTel. Competition in Australia’s fixed broadband could intensify with the migration to NBN, similar to what happened in Singapore. StarHub’s broadband revenue and ARPU declined ahead of the launch of NGNBN as it jostled with SingTel for market share. In the Philippines, we think competition will be intense despite industry consolidation as Globe and PLDT slug it out for market share. Lastly, the Indian rupee remains weak.

What You Should Do

We advocate switching from SingTel to StarHub which we think will undertake a capital management in 2H12. We think SingTel’s earnings will likely be flattish in the coming quarters with growth in Singapore offset by competitive pressures in Australia, the Philippines and currency weakness in India.

ComfortDelGro’s Q4 profit up 3.5%

Full-year net up 3.1% at $235.6m; rise driven mainly by taxi, rail businesses

COMFORTDELGRO’S net profit for the 2011 fourth quarter climbed 3.5 per cent to $56.5 million, from $54.6 million a year earlier.

The rise in profit attributable to shareholders came on the back of a 7.2 per cent year-on-year rise in group revenue to $887.2 million.

Total operating expenses for the quarter increased 7.7 per cent to $791.5 million, contributed in part by a 20.2 per cent year-on-year surge in fuel and electricity costs to $73.9 million. The quarter saw taxi drivers’ benefits dropping 14.2 per cent to $19.3 million.

For the full year ended Dec 31, 2011, net profit rose 3.1 per cent to $235.6 million, with the increase driven mainly by its taxi and rail businesses.

Full-year revenue climbed 6.4 per cent to a record $3.41 billion, with the land transport giant attributing growth from all business segments. Revenue could have been higher if not for the negative foreign currency effect of $16.0 million.

Group operating expenses for the 12 months rose 6.9 per cent to $3.01 billion on increases in materials and consumables, fuel and electricity costs, staff costs and depreciation, among others, although these were mitigated by a positive foreign currency translation effect of $20.2 million. For example, materials and consumables jumped 23.8 per cent to $336.4 million, while fuel and electricity costs surged 20.7 per cent to $283.3 million. Staff costs, the group’s biggest cost component, rose 5.0 per cent to $1.04 billion. Taxi drivers’ benefits fell 14.3 per cent to $66.7 per cent.

Operating profit was 2.8 per cent higher at $399.2 million.

ComfortDelGro said that overseas operating profit accounted for 45.8 per cent of group operating profit, while overseas revenue made up 42.2 per cent of group revenue. Its global fleet size of buses, taxis and rental vehicles has also increased to a record of some 46,300 vehicles.

Full year earnings per share rose to 11.26 cents from 10.95 cents, while the group’s net asset value was 90.46 cents as at Dec 31, 2011, up from 86.20 cents 12 months earlier.

A final dividend of 3.30 cents per share has been proposed.

As its biggest business segment, buses brought in revenue of $1.69 billion for the group in 2011, or up 4.5 per cent. Operating profit slipped 2.8 per cent to $145.0 million due mainly to decreases in SBS Transit and the China bus business but was offset by an increase in the Australian bus business. The operating profit of the overseas bus business continued to outstrip that of the Singapore bus business and accounted for 85.8 per cent of group bus operating profit.

The group’s taxi business chalked up revenue of $1.039 billion or a 5.8 per cent hike, with taxi revenue crossing the $1 billion mark for the first time thanks to a larger global fleet. Operating profit rose 8.6 per cent to $129.6 million. In Singapore, revenue from the local taxi business climbed 7.6 per cent to $748.7 million due to an increase in replacement taxis, a larger fleet, and a higher volume of cashless transactions. Operating profit was 9.7 per cent higher at $83.8 million.

Revenue from the rail business grew 10.5 per cent to $134.4 million due to an increase in average daily ridership and in spite of lower average fares, with operating profit rising 8.2 per cent to $27.7 million.

Also showing an improvement in operating profit was the vehicle inspection and testing business. Revenue rose 8.7 per cent to $93.5 million, with operating profit rising 12.5 per cent to $30.7 million as more cars were inspected and higher sales were achieved by Setsco Services.

Looking ahead, ComfortDelGro sees bus and rail ridership increasing at a slower rate because of the expected economic slowdown. It expects revenue from the UK bus business to continue being affected by the currency translation effect of the weaker pound sterling. But improvements are likely from the Australian bus business, and the taxi businesses in Singapore, China and Australia.

ComfortDelGro shares closed trading yesterday at $1.48, up half a cent.