Author: kktan
SMRT – DBSV
Still riding against headwinds
- 2Q13 net profit within expectations with marginal 2% drop; 1H13 accounts for 50% of our FY13F
- EBIT margins dropped 1.7ppts on higher operating costs
- Cut in interim DPS of 1.5 Scts was expected, down from 1.75 Scts in 1H12, due to higher capex
- Above mean valuations unwarranted, dividend yield at 3.9% is unattractive, maintain Fully Valued. TP at S$1.50
Highlights
2Q13 within expectations. 2Q net profit dipped 2% y-o-y to S$33.3m despite an 8% increase in revenue to S$281.2m. 1H13 accounts for 50% of our FY13F forecasts. All business segments registered revenue growth, except Engineering due to lower consultancy revenue. Rail continued to be the main revenue driver with average daily ridership up by 7.3% to 1.9m. This was helped by Circle MRT Line (CCL) average ridership of 350k/day.
Margins under pressure from higher costs. EBIT margins dipped by 1.7ppts to 14.4% as a result of higher staff costs (+10% y-o-y), depreciation (+20%), repairs and maintenance (+28%) and other operating expenses (+10%). This was partially mitigated by lower electricity and diesel costs (-6%) due to lower tariffs and diesel price.
Our View
Lower interim DPS of 1.5 Scts not a surprise. The Board declared a lower interim DPS of 1.5 Scts (1H12: 1.75 Scts), which was not a surprise to us given the higher capex needs and operating expenses. Management had guided for capex of S$500m in FY13F, and S$118.5m has been incurred as of 1H. As such, we should see a significant ramp up in capex in 2H.
Lacklustre growth. While ridership is expected to grow, operating costs is projected to increase at a faster pace due to higher staff costs, repair & maintenance and depreciation. Thus, bottomline growth is expected to remain unexciting.
Recommendation
Maintain FV, TP unchanged at S$1.50. The stock is trading at c.0.5 std dev above its historical trading mean (c.16x), which is unwarranted in our view given its lackluster growth due to higher operating costs. Maintain FULLY VALUED recommendation with an unchanged TP of S$1.50. Furthermore, lower interim dividends should further signal the Board’s conservatism in its payout in view of capex and operational challenges, thus undermining its attractiveness as a yield counter.
SMRT – DBSV
Still riding against headwinds
- 2Q13 net profit within expectations with marginal 2% drop; 1H13 accounts for 50% of our FY13F
- EBIT margins dropped 1.7ppts on higher operating costs
- Cut in interim DPS of 1.5 Scts was expected, down from 1.75 Scts in 1H12, due to higher capex
- Above mean valuations unwarranted, dividend yield at 3.9% is unattractive, maintain Fully Valued. TP at S$1.50
Highlights
2Q13 within expectations. 2Q net profit dipped 2% y-o-y to S$33.3m despite an 8% increase in revenue to S$281.2m. 1H13 accounts for 50% of our FY13F forecasts. All business segments registered revenue growth, except Engineering due to lower consultancy revenue. Rail continued to be the main revenue driver with average daily ridership up by 7.3% to 1.9m. This was helped by Circle MRT Line (CCL) average ridership of 350k/day.
Margins under pressure from higher costs. EBIT margins dipped by 1.7ppts to 14.4% as a result of higher staff costs (+10% y-o-y), depreciation (+20%), repairs and maintenance (+28%) and other operating expenses (+10%). This was partially mitigated by lower electricity and diesel costs (-6%) due to lower tariffs and diesel price.
Our View
Lower interim DPS of 1.5 Scts not a surprise. The Board declared a lower interim DPS of 1.5 Scts (1H12: 1.75 Scts), which was not a surprise to us given the higher capex needs and operating expenses. Management had guided for capex of S$500m in FY13F, and S$118.5m has been incurred as of 1H. As such, we should see a significant ramp up in capex in 2H.
Lacklustre growth. While ridership is expected to grow, operating costs is projected to increase at a faster pace due to higher staff costs, repair & maintenance and depreciation. Thus, bottomline growth is expected to remain unexciting.
Recommendation
Maintain FV, TP unchanged at S$1.50. The stock is trading at c.0.5 std dev above its historical trading mean (c.16x), which is unwarranted in our view given its lackluster growth due to higher operating costs. Maintain FULLY VALUED recommendation with an unchanged TP of S$1.50. Furthermore, lower interim dividends should further signal the Board’s conservatism in its payout in view of capex and operational challenges, thus undermining its attractiveness as a yield counter.
SMRT – Kim Eng
Interim Dividend Cut on Cautious Outlook
1HFY3/13 results, dividend cut in line with our forecasts. SMRT reported 1HFY3/13 NPAT of SGD69.8m, which came in at 50% of ours and consensus’ full-year estimates. In our July 2012 land transport sector note “No light at the end of SMRT’s tunnel yet”, we had cut our FY3/13 dividend forecast by 10% due to impinged cashflow. This projection was seemingly validated as SMRT cut its interim dividend by 14% from SG1.75cts/sh to SG1.50cts/sh on the premise of prudence – management guided that FY3/13 will remain challenging on cost pressures and lack of fare adjustments until 2013. We maintain our SELL call, and roll forward our valuations based on FY3/14 PER.
Buses still weighing down transport portfolio. SMRT’s bus business continued its poor results, as operating profits were down SGD4mil (-157% YoY) on increased staff costs from salary revisions and higher depreciation and R&M costs associated with a larger fleet. This was mitigated by operating profit growth YoY in the rail (+6.5%), taxi (+SGD1.2m) and commercial space rental (+7.4%) segments.
Government help still not guaranteed. Management shared that the company had applied to, and was awaiting a response from the LTA for asset replacement grants for funding part of the SGD900m asset renewal plan announced earlier. In addition, grant amounts / formulas have yet to be nailed down for the sharing of bus shelter advertising revenues as part of the Bus Services Enhancement Programme (BSEP).
Outlook challenging, yields unattractive – reiterate SELL. The future for SMRT looks daunting as operating costs escalate, the group takes on debt (now net debt vs net cash in FY3/12), and fare revisions likely only kick in from mid-2013. We roll forward our valuations to 15x FY3/14 PER, maintaining our SELL call and adjusting our Target Price accordingly to SGD1.37. SMRT’s stable-to-increasing dividends are a thing of the past, as our forecasts of a full-year dividend cut to SG 6.8 cts/sh (~74% payout ratio) are also maintained.
SIAEC – Phillip
Buy for the attractive yields!
Company Overview
SIA Engineering Company (SIAEC) is a maintenance, repair & overhaul (MRO) company with a dominant market share in Changi Airport’s Line Maintenance business. The Group also has significant stakes in joint ventures that contribute approximately half of the Group’s profits.
- Sales growth in line with expectations
- Higher contributions from Associates & JVs
- Still our top pick in the Transport sector
- Maintain Buy with unchanged target price of S$5.00
What is the news?
SIAEC reported a 6% improvement in sales and a marginal decline in profit for 1HFY13. SIAEC’s Rolls Royce JVs continue to report strong contributions. However, the other Associates reported lower contributions as compared to the same period last year. Interim dividend increased from 6.0 cents to 7.0 cents with management highlighting that this is “to achieve a better balance between the interim and final dividends”. Outlook statement remains cautious with expectations of sustained demand in the near term.
How do we view this?
The results were in line with our expectations. The FX variance that negatively affected profits by S$12.3mn was non-operating in nature and not a source of concern. We believe that SIAEC has the capacity to maintain their final dividend for the year and bring its full year distribution above last year’s 21cents.
Investment Actions?
SIAEC remains as our top pick in the sector, premised on its pure exposure to the aviation growth story in Asia. We expect the stock to yield more than 5% over the next few years. Maintain Buy.
SIAEC – DBSV
Another steady quarter
- 2QFYMar13 net profit on track with our estimates
- Outlook for MRO demand remains fairly stable
- Higher interim DPS of 7Scts declared
- Maintain BUY for resilient earnings and >5% yield, TP is unchanged at S$4.40
Highlights
Headline net profit affected by forex losses. 2QFY13 net profit of S$67.1m came in line with our expectations, and 1HFY13 net profit accounts for more than 48% of our full year forecast. Net profit is down 6% y-o-y, but this is largely due to a couple of noncore items: i) forex loss of S$3.5m in 2Q13 compared to a forex gain of S$7.1m in 2Q12; and ii) S$3.1m tax writeback in 2Q12. Without the impact of these items, net profit would have been up about 15% y-o-y, on the back of a 4% growth in revenue to S$284m.
Core margins held up. Operating margins held largely steady on a sequential basis, at about 11.1%, which would have been higher at 12.2% if not for the forex losses. Contribution from JV/ associates was down about 4% y-o-y to S$39m, which is somewhat disappointing, but largely due to depreciation in the US$.
Our View
Steady outlook. Management continues to expect sustained demand for its core businesses in the near term, despite the ongoing challenges to the health of the airline industry. SIE should benefit from the growth in traffic in the resilient Asia-Pacific region. In 2Q13, the company won a S$166m MRO contract from Cebu Air, which further expands its fleet management business to cover 211 aircraft.
Recommendation
Dividend expectations intact, maintain BUY. SIE declared a higher interim DPS of 7Scts (compared to 6Scts interim DPS in 1HFY12) to achieve a better balance between interim and final dividends. Balance sheet continues to be robust and SIE closed the quarter with S$432m in net cash, higher compared to S$389m net cash at this point last year. While we lower our FY13/14F earnings estimates by about 1% each to account for forex losses, we believe SIE can continue to sustain total DPS of about 22Scts per year, which translates to a healthy yield of 5.3% at current prices, in addition to about 5% earnings growth. Hence, we retain our BUY call and TP of S$4.40.