Month: March 2013
SingPost – OCBC
AWAITING NEWS OF LARGER ACQUISITIONS
- Self-storage company for S$37m
- Also acquires freight forwarding firm
- Enhances logistics & e-commerce capabilities
Building its non-mail businesses
In recent months, Singapore Post (SingPost) has been acquiring stakes in companies to build its non-mail businesses – it completed the 100% acquisition of General Storage Company Pte Ltd (GSC) in end Jan for S$37m and the 62.5% acquisition of Famous Holdings Pte Ltd (FH) in end Feb this year for S$60m.
Acquired self-storage company and freight-forwarding firm
GSC operates a self-storage business in Singapore, under the Lock+Store brand. This is not a new business area for SingPost, which has been offering self-storage solutions through S3 (Self Storage Solutions) since 2009. The acquisition will add storage facilities in Tanjong Pagar and Chai Chee for SingPost. Meanwhile, FH is a Singapore-based sea freight consolidator and freight-forwarder. SingPost acquired a 62.5% stake, and there is also an option to transact the remaining 37.5% stake at the end of 2015. Founded in 1988, FH has a regional network with offices in six countries.
Synergies with logistics and e-commerce
Self-storage solutions offer synergies with SingPost’s existing businesses in logistics and e-commerce – delivery and other value-added services can be added to storage solutions. With its network of properties including post offices and delivery bases, SingPost is able to provide integrated services spanning warehousing, fulfillment, delivery and distribution. The selfstorage business is also a good usage option for SingPost’s properties that are industrial-zoned. Meanwhile, FH’s freight-forwarding capabilities complement SingPost’s e-commerce logistics capabilities in regional fulfillment and warehousing, as well as its postal & parcel delivery networks.
Maintain HOLD
SingPost had S$661.5m in cash and cash equivalents, along with financial assets worth S$36.5m, as at Dec 2012. In comparison, these acquisitions remain on a relatively small scale and we are awaiting news of larger acquisitions. Meanwhile, the stock has been trading in a range of S$1.18-S$1.23 since we downgraded it to HOLD on 28 Jan. We like SingPost’s stable operating cash flows and consistent dividends, but see few re-rating catalysts for now. Maintain HOLD with S$1.23 fair value.
SingTel – CIMB
Investor Day takeaways
At its Investor Day, SingTel said it plans to list its investments in the digital space to unlock value. The growth driver across the group is mobile data via bundling of services in more developed markets while it is dependent on lower smartphone prices in emerging markets.
It wants to focus more on monetising pay TV subscribers in Singapore and less on acquisition. SingTel remains an Underperform with an SOP-based target price of S$3.23. Likely de-rating catalysts are earnings disappointment and regulatory developments in India.
Interest aplenty in Group Digital Life
Investor interest was strongest in Group Digital Life, which complements the group’s consumer offerings with digital services. SingTel’s investments in the digital space must have a competitive edge, the ability to leverage its existing assets and involve the core daily activities of customers. It is eyeing video, digital advertising, games, e-commerce and advanced communications. While it did not reveal how much it is setting aside for investments in digital, SingTel will detail this during its FY13 results announcement. It will also disclose milestones achieved by GDL and its targets. SingTel is prepared to list these investments on the stock market to unlock their value.
Group Consumer
At the Group Consumer level, SingTel is changing its business model in terms of: 1) customer experience, 2) monetisation and scientific marketing, 3) network, and 4) the introduction of Digital Life in Singapore and Australia. SingTel plans to extend these strategies to its associates. SingTel’s lack of management control over its associates and the disparate maturities of the markets in which SingTel’s associates operate are key challenges in driving these initiatives across the group, in our view.
Dialling up data
The growth driver across the group is mobile data as wallet share rises when users move up from 2G to 3G and to 4G. In Australia and Singapore, SingTel plans to: 1) offer digital services to stimulate data usage and encourage loyalty, and 2) bundle multiple services which lowers user churn. In emerging markets, the key to data usage is lower smartphone prices. Most of its associates say the sweet spot for greater smartphone uptake is US$100 or less.
SPH – DMG-OSK
REIT Listing Min. Impact to Valuations
SPH has announced a potential REIT listing for its property assets. The properties and terms to form the portfolio are still under review. A scenario in which Paragon and Clementi Mall form the REIT portfolio with a dividend yield of 5.5% by our estimates will have little impact to our SOTP TP. We are maintaining our NEUTRAL call, but raise our SOTP TP to SGD4.30 (from SGD3.80 previously). Our revised TP does not factor in a listing of its property assets into a REIT.
Positives of a REIT listing include cash inflow, asset value realization. The listing of SPH’s property assets (we assume Paragon and Clementi Mall) into a REIT has its positives: (1) potential gross cash inflow of SGD1.5bn (assuming SPH keeps 50% cash and remainder as REIT shares), (2) upside in gross asset value realization of SGD1.3bn (Paragon and Clementi are valued at SGD1.75bn on SPH’s books versus market value of SGD3.03bn), (3) higher income in the form of dividends as a REIT is tax exempt with a minimum earnings payout of 90%.
However we see a REIT listing to have little impact on our valuations. With the assumption of SPH receiving 50% of the asset value (of Paragon and Clementi) in cash, and the remainder as equity interest in the REIT (which trades at implied dividend yield of 5.5%), our SOTP TP would be unchanged at SGD4.30. Should the REIT trade at a lower 5.0% dividend yield, our SOTP TP would increase by 2.1% to SGD4.39.
Positive for investors given retail REITs current 4.5-5.0% yield. We assumed (1) a listing of Paragon and Clementi Mall, (2) 35% debt ratio, (3) NPI of SGD140m, (4) finance cost at 2% of debt to derive a dividend yield of 5.5%, which is more attractive than the current retail REIT sector’s 4.5-5.0%.
Maintain NEUTRAL, SOTP TP of SGD4.30. We have (1) increased our N&M segment P/E multiple by 25% to 13.8x (in line with peers), (2) revised our in house property segment valuation to that of market, and (3) updated value of stakes in list cos. Our SOTP TP has been lifted to SGD4.30 (from SGD3.80). Our TP does not factor in a REIT listing of SPH’s property assets.
SMRT – DMG
Downgrade To Sell On Wage Revision
SMRT has announced a progressive revision of its non-executive wage scale, excluding Bus Captains, from 1 March. Despite factoring in payouts via the Wage Credit Scheme, we are lowering our FY13 and FY14 earnings by 4.2% and 11.9% respectively. Downgrade to SELL (from NEUTRAL), with a lower TP of SGD1.43 (from SGD1.55 previously) based on DCF. This implies a FY14 P/E of 19.3x.
Full impact of wage revision partially offset by Wage Credit Scheme. SMRT’s wage revision mainly targets the non-executive staff, excluding Bus Captains. This exercise is estimated to account for c. 63% of SMRT’s 7,350 employees. It is anticipated that almost all of those employees who qualify for the wage revision would see their monthly revised pay move up to no more than SGD4,000, making them eligible for the Wage Credit Scheme, through which the government co-funds 40% of the wage increases from 2013 to 2015. Although we expect this Scheme to help mitigate the full impact of the increased staff cost, we are cutting our FY13/14 earnings by 4.2%/11.9%.
Revision aims at nurturing a better public transport system. SMRT views the wage revision as a step towards creating a more productive, motivated and efficient workforce, which will in turn give rise to a safe and reliable public transport system. This move follows a series of train breakdowns as well as a strike by the company’s bus drivers. Although we agree that a wage revision could incentivize staff and ultimately improve public transport service levels, we believe it would be challenging for SMRT to achieve this while keeping profits tight, especially amidst an environment where transport fares are not keeping pace with cost increases.
Downgrade to SELL. No light yet at the end of the tunnel. SMRT does not appear attractive, trading at a 21.8x FY14 (FYE Mar) P/E vs ComfortDelGro’s 15.8x FY13 P/E. Apart from a higher than expected fare revision following a fare formula review deferred until at least May 2013, we see little potential catalysts for a share price upside given the cost pressure concerns.