Month: March 2012
SingPost – Kim Eng
Issuer of excellent pedigree
Potential for higher payout, reiterate Buy. SingPost’s recent issue of $350m in perpetual securities is superior to other issues as it commands the highest debt rating in the market and its 4.25% coupon rate is also the lowest. We see this as an opportune time to remind investors of the company’s financial strength and the fundamental stability of its core mail business. Reiterate Buy on SingPost for its very attractive dividend yield of 6.4%, which we believe is almost guaranteed, based on its history of very stable earnings, even before counting any potential upside from special dividends. Our target price is slightly reduced to $1.05 as we roll forward our valuation basis to FY Mar13F.
Not at shareholders’ expense. The $350m senior perpetual cumulative securities, or Perps, pay a 4.25% coupon, which is higher than SingPost’s overall cost of debt of 3.13-3.5%. With the Perps, the group’s interest expense is expected to double to $26m. Nonetheless, management’s dividend commitment of 6.25 cents per share is intact. In fact, there may be room for dividend upside as SingPost may not use up all the additional funds for acquisitions. And even as the company continues to face cost pressures, our earnings sensitive analysis shows that pre-tax income can withstand a decline of 20% before the payout ratio begins to look too generous on paper.
Time to flex financial muscle? To recap, SingPost has not even used up half the $200m it raised in March 2010 for acquisitions. The additional $350m raised will give the group substantial firepower to gun for bigger acquisitions, if not offer a higher dividend payout or even buy back its own shares that are giving a higher yield than its coupon rate.
Balancing optimal gearing ratio and ROE. Management is comfortable with a gearing level of up to 2x. With Perps being classified as equity, SingPost’s net gearing thus falls from 0.5x as of FY11 to $224m net cash including the Perps. This implies significant debt headroom not only for expansion, but also in support of our argument for higher dividend payouts to optimise its gearing ratio and ROE.
Dividend provides valuation support. We roll forward the basis of our target price to FY Mar13F, using a historical average PER of 14x to arrive at a target price of $1.05, slightly reduced from $1.09 previously. While SingPost continues to face cost pressure, its dividend payout should provide valuation support. Buy for a total return of 15%.
Yield Stocks – AmFraser
DIVIDEND YIELD
We think investing in high yield stocks is a way to protect and grow wealth, particularly in an inflationary yet uncertain environment. When the market dips or corrects, yields rise on lower prices, which is an opportune time to invest. Should the market remain flat thereafter, investors have dividend returns to fall back on even when there is no capital appreciation.
We shortlisted stocks based on three criteria: 1) more than 7% dividend yield, 2) more than $150mil market capitalization and 3) trading volume in the past 30‐days of more than 100k shares. Macquarie International Infrastructure Fund ($0.570, BUY), on which we have a buy rating, topped the list with 9.6% yield.
Accordingly, we examined each stock to determine 1) the consistency of the dividend payouts in the past three years; and 2) its ability to maintain earnings. Out of 15 high yield stocks, Second Chance Properties ($0.365, UNRATED), Sim Lian Group ($0.605 , UNRATED) and QAF ($0.670, UNRATED) have the strongest combination in terms of consistency in dividend payout and earnings growth.
Second Chance Properties is trading at 8.8% dividend yield and 5.6x T12M P/E. It has a reasonable gearing of 0.37x, with bulk of its assets in retail properties in Singapore. It has a growing DPS of 15.0% CAGR over FY07‐11, backed by strong and stable cash flow from operations where they achieved S$9.0‐S$12.0mil every year in the past five financial years.
Sim Lian Group is trading at 7.9% yield, 2.6x FY11P/E and 0.9x P/B. Balance sheet has strengthened over the years, with net gearing ratio dropping from 3.3x in FY08 to 1.1x in FY11. The company recorded 110% YoY jump in earnings in 1HFY12 to $139m.
QAF is trading at 7.5% dividend yield, 5.8x T12M P/E and 0.9x P/B. Their growth in DPS over the past 5 FYs has been exponential, with CAGR of 19%. With a strong current ratio of 1.5x and strong cash flow from opera
SMRT – Phillip
No fare adjustment this year
Company Overview
SMRT is a multi-modal land transport operator with exposures to various modes of operations, including rail, bus & taxi services. A significant part of its profits are generated from its ancillary businesses, such as advertising & rental of commercial spaces.
• No fare adjustments for 2012
• Under existing framework, capacity injection into the rail network would lead to mounting “Off Balance Sheet Liabilities
• Cut estimates by 8.4%/2.8% for FY13/14E
• Maintain Sell with revised target price of S$1.33
What is the news?
Singapore’s Transport Minister updated on plans for the public transport system during the Ministry’s Committee of Supply (COS) debate. (See: Transportation Sector Update, dated 8 March 2012) The key implication for SMRT is that there would be no fare revisions for 2012, implying that public transport fares for 2013 would be kept unchanged from current levels. Rail capacity would expand with more trains to be gradually injected into the system. Bus capacity would increase with the government retrieving its share of fare revenue from the 550 buses paid for by them.
How do we view this?
We reviewed our earnings forecasts to account for unchanged fares in 2013 (previous: +2.3%), but lifted fare adjustments in 2014 to 4.1% (2.3%+1.8%= 4.1%). Our fare adjustment for 2014 is on the premise that a substantial fare increase would be allowed, due to unchanged fares in 2013. With more trains to be injected into the system, we believe that a switch to the new rail financing framework is necessary for SMRT. If SMRT stays on its existing rail financing framework, the company’s “Off Balance Sheet Liabilities” could increase substantially and will be a major drag on future cash flows.
Investment Actions?
We kept our estimates for FY12E unchanged, but cut estimates by 8.4%/2.8% for FY13/14E. After adjusting our estimates, SMRT is currently trading at near historical peak multiples of 20X FY13E EPS. With the challenging
operating outlook, likely impairment charges to its bus business and uncertainties over implications of the Committee of Inquiry (COI) into Dec 2011’s disruptions, we believe that such pricey valuations are not justified. Maintain Sell, with TP lowered to S$1.33.
ComfortDelgro – Phillip
No fare adjustment this year
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.
• No fare adjustments for 2012
• Lost of bus revenue share to fleet introduced by government
• Cut estimates by 0.5%/2.6% for FY12/13E
• Maintain Buy with revised TP of S$1.65
What is the news?
Singapore’s Transport Minister updated on plans for the public transport system during the Ministry’s Committee of Supply (COS) debate. (See: Transportation Sector Update, dated 8 March 2012) The key implication for CDG is that there would be no fare revisions for 2012, implying that public transport fares for 2013 would be kept unchanged from current levels. Rail capacity would expand with more trains to be gradually injected into the system. Bus capacity would increase with the government retrieving its share of fare revenue from the 550 buses paid for by them.
How do we view this?
We reviewed our earnings forecasts to account for unchanged fares in 2013 (previous: +2.3%), but lifted fare adjustments in 2014 to 4.1% (2.3%+1.8%= 4.1%). Our fare adjustment for 2014 is on the premise that a substantial fare increase would be allowed, due to unchanged fares in 2013. Being the largest bus operator in Singapore, CDG’s subsidiary SBST would suffer from bus revenue share erosion to the 550 buses introduced by the government. With the new Quality of Service (QOS) standards requiring that bus loading be reduced from the current 95% to 85%, we believe that SBST’s bus business could sink deeper into the red.
Investment Actions?
We tweaked our forecasts down with the revisions made to our estimates for CDG’s public transport business in Singapore. However, with its geographical diversification, CDG is less affected by the changes in policy implemented in Singapore. We maintain our Buy recommendation with revised target price of S$1.65.
STEng – BT
ST Kinetics braces itself for fallout from India
It’s official now and the fallout could be far-reaching.
Singapore Technologies (ST) Kinetics confirmed that it had received a formal order from the Indian defence agency blacklisting it from defence deals with the government of India for the next decade.
Legal documents reveal that the land systems company may also face potential damage settlement and criminal charges.
The Singapore company has already indicated that it would take legal steps in India to clear its name.
ST Kinetics had maintained, until recently, that ‘there were no official statements or notifications from the Indian authorities’ on an alleged blacklisting of the company from doing business with the India’s defence procurement agency, the Ordnance Factory Board (OFB).
But the company yesterday said ‘it has since received an Order dated 5 March 2012 from the OFB ordering: (a) the cancellation of all agreements with ST Kinetics, specifically a Non-Disclosure Agreement signed on 11 August 2008 with the OFB; and (b) that ST Kinetics be debarred from entering into any contract with the OFB for a period of 10 years’.
Last year, ST Kinetics had approached the Delhi High Court after receiving a show-cause notice on why it should not be barred from doing business with the Indian government. The court said that ‘the notice (by OFB) proposes to take action against the petitioner (ST Kinetics)’ which entails ‘cancellation of the Non-Disclosure Agreement; debarring the petitioner from entering into a contract with Government of India for a period of ten years, and; recovering from the petitioner the loss sustained by the Ordnance Factory Board due to cancellation of the agreement.’
ST Kinetics confirmed yesterday that the non-disclosure agreement has been cancelled and it has been blacklisted by the Indian government for 10 years. It remains to be seen if this would now lead to any damages incurred by the company.
The court order, dated May 11, 2011, also specified that the alleged conduct of corruption ST Kinetics was suspected of is deemed as criminal.
‘The alleged conduct of the petitioner (ST Kinetics), in the present case, however, if believed to be true, is a criminal conduct,’ the judge ruled.
The company was dragged into the case following a report by the Comptroller and Auditor-General of India (CAGI), which outlined the behaviour of the former director-general of OFB, Sudipta Ghosh, who is at the heart of the case, and his involvement with ST Kinetics and six other defence companies ranging from India, Israel, Russia and Switzerland.
ST Kinetics had an agreement with Mr Ghosh’s agency to supply 50,000 Singapore Assault Rifles (SAR) 21 carbines to the Indian home affairs ministry (MHA). Mr Ghosh claimed that ST Kinetics would co-produce the weapons with an Indian partner. No such arrangement existed, the report said.
Mr Ghosh recommended that MHA purchase the weapons even though they had failed one of the two trials they were put through, the report added.
Nevertheless the court order states that both parties had ‘entered into a Non-Disclosure Agreement (NDA) on 30 July, 2008 / 11 August, 2008 … as a preliminary step to explore the possibility of supply of the required Arms and Ammunition by the petitioner (ST Kinetics) to the respondent (OFB)’.
ST Kinetics’ senior counsel in Delhi had petitioned against OFB taking the three actions listed in the show-cause notice on the grounds that there is breach of the NDA by the Singapore company as he argues that this has yet to be decided by arbitration proceedings.
The judgment in the court order rejected this notion though as it separated the NDA from any alleged corruption practice. ‘During the course of execution of a contract with the Government, if a party is alleged to have indulged in a corrupt practice, the said conduct may not only lead to the termination of the contract, which would be an action taken in terms of the contract, but would also entitle the Government to take action against such a party … This alleged conduct falls outside the realm of the contractual obligations of the parties.’