Author: kktan
SMRT – Phillip
Profits flattered by one-off gains
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.
• Revenue growth in line with expectations
• Profits flattered by net one-off gain of S$4.5mn
• Undeserving of premium valuations with ongoing challenges to the business
• Maintain Sell with target price of S$1.35
What is the news?
Revenue for SMRT continued to trend north, driven mainly by higher ridership on its rail network with the full opening of Circle Line. Despite significantly higher operating expenses, the Group's EBITDA margins improved by 61bp in the quarter. Consequently, profits for SMRT increased by 4.7%y-y. Management highlighted that operational challenges for the Group remain, as profitability is expected to be impacted by higher staff, depreciation and repair & maintenance costs.
How do we view this?
The strong 4.7% increase in net income was flattered by one-off items that were booked in the quarter. After adjusting for the one-off net gains of S$4.5mn booked, we estimate that underlying profits would have declined by 8% in the quarter.
Investment Actions?
With our expectations of higher operating expenses and stagnant average fares for the year, we believe that the difficult financial performance for SMRT would persist. Despite the ongoing challenges to its outlook, the stock continues to trade at an undeserving premium valuation of 18X P/E. We roll forward our valuation basis and maintain our Sell recommendation on SMRT with target price of S$1.35.
RafflesMed – CIMB
Courting Miss Hong Kong
RFMD has submitted its tender for a private hospital development in Hong Kong. While there are no details of tender pricing or capex guidance, we believe the move is a positive one as the healthcare dynamics in Hong Kong now favour new curative healthcare players.
This tender is the most concrete overseas expansionary commitment the group has made since setting up its medical centre in Shanghai in 2010. Our forecasts and target price, pegged at 22x CY13 P/E, reflecting its mid-cycle valuation, are unchanged. Maintain Outperform.
What Happened
RFMD has submitted a tender called by the Hong Kong Government for the development of a private hospital on the Aberdeen Inland Lot No. 458 site. Tender results are likely be released in 4Q12.
What We Think
There are a few factors that favour new curative healthcare players in the Hong Kong market, including frequent long waiting lists for public hospitals causing a spillover to private sector and PRC patients choosing Hong Kong as a destination for their medical needs. All these are expected to drive the demand for private sector medical services in the territory.
When asked, management was understandably tight-lipped about the tender pricing. What we do know is that the site can accommodate a 300-500 bed hospital that will sit on a built-up of between 28,000–46,000 sq meters. Land premium is roughly 30% of the weightage. Good evidence-based medical practice, professional development, quality assurance as well as consistency and transparency in charging professional fees are also criteria being evaluated. Should the group be successful in this tender, capex requirements will only come in by 2Q13 and are to be paid progressively over three years.
What You Should Do
Stay invested. With readjustments in its inpatients billings, we see ample room for RFMD to catch up with rates, albeit gradually initially (5-10% in 4Q12). This provides scope for the company to close its pricing gap with its competitors. RFMD is still a laggard play in this sector; it has a strong balance sheet among peers in the region. ROEs have also been strong. Maintain Outperform.
RafflesMed – CIMB
Courting Miss Hong Kong
RFMD has submitted its tender for a private hospital development in Hong Kong. While there are no details of tender pricing or capex guidance, we believe the move is a positive one as the healthcare dynamics in Hong Kong now favour new curative healthcare players.
This tender is the most concrete overseas expansionary commitment the group has made since setting up its medical centre in Shanghai in 2010. Our forecasts and target price, pegged at 22x CY13 P/E, reflecting its mid-cycle valuation, are unchanged. Maintain Outperform.
What Happened
RFMD has submitted a tender called by the Hong Kong Government for the development of a private hospital on the Aberdeen Inland Lot No. 458 site. Tender results are likely be released in 4Q12.
What We Think
There are a few factors that favour new curative healthcare players in the Hong Kong market, including frequent long waiting lists for public hospitals causing a spillover to private sector and PRC patients choosing Hong Kong as a destination for their medical needs. All these are expected to drive the demand for private sector medical services in the territory.
When asked, management was understandably tight-lipped about the tender pricing. What we do know is that the site can accommodate a 300-500 bed hospital that will sit on a built-up of between 28,000–46,000 sq meters. Land premium is roughly 30% of the weightage. Good evidence-based medical practice, professional development, quality assurance as well as consistency and transparency in charging professional fees are also criteria being evaluated. Should the group be successful in this tender, capex requirements will only come in by 2Q13 and are to be paid progressively over three years.
What You Should Do
Stay invested. With readjustments in its inpatients billings, we see ample room for RFMD to catch up with rates, albeit gradually initially (5-10% in 4Q12). This provides scope for the company to close its pricing gap with its competitors. RFMD is still a laggard play in this sector; it has a strong balance sheet among peers in the region. ROEs have also been strong. Maintain Outperform.
SATS – Kim Eng
Decent 1Q despite Cost Pressures
1QFY3/13 showed robust revenue growth, TFK recovery. SATS reported a decent set of 1QFY3/13 results, posting a 3.8% YoY improvement in underlying NPAT from continuing operations to SGD41.3m. This was contributed by a healthy 13.6% increase in revenue to SGD437.9m. Revenue growth was led by both Gateway Services (+SGD11.6m, +8.1%) and Food Solutions (+SGD40.7m, +16.9%) segments. TFK saw a +40.7% YoY recovery in revenue from the Japanese March 11 disasters to SGD83.7m. Profits were also boosted by a greater contribution from its Associates/JVs (+SGD0.3m, +2.6%).
Keeping a lid on Cost pressures. Rising labour costs (Fig 2) have been cited as a concern by SATS, as their 13.4% YoY increase in staff costs contributed to their total group expenditure rising 12.6% YoY to SGD398.6m. However, management maintains a sharpened focus on productivity improvements to keep such cost pressures manageable. Their cost of raw materials have also increased significantly (+20.6%), but these were largely in line with revenue increases from their food solutions business (+16.9%).
The best has yet to come. SATS stated that TFK was still not operating at its pre-March crisis capacity, and we believe further progress in TFK’s recovery could provide further earnings upside for the Group. In addition, we should see further growth on the domestic front underpinned by robust passenger and aircraft arrivals at Changi Airport.
Maintain BUY, Ex-Div on 31 Jul. We maintain our optimism on SATS for its exposure to robust growth from domestic visitor arrivals and further TFK recovery. Its earnings resilience, strong cash-generating business and healthy balance sheet continue to support attractive forward dividend yields of 6-7%. Management does not rule out paying another special dividend with their excess cash even after the most recent bumper dividend of SGD0.21* per share going Ex-Div on 31 Jul. Maintain BUY, with Target Price pegged to 17x FY3/13 PER, 1 SD above its historical mean.
SATS – Phillip
Fair Valuations
Company Overview
SATS Ltd is a provider of Airport Services & Food Solutions with a dominant presence in Singapore’s Changi Airport. The Group also has a network of JVs across Asia and holds a majority stake in TFK Corp, an inflight catering business based in Japan.
• 3.8% growth in underlying net profit
• Higher than expected revenue growth
• Staff cost surprised on the upside
• Margin pressures at the core business
• Downgrade to Neutral with TP of S$2.65
What is the news?
SATS announced a 3.8%y-y increase in underlying net profits on revenue growth of 13.6%. TFK’s revenue surged by 40% as the inflight catering arm benefitted from the low base effects off the Japan Earthquake in 1QFY12. The company’s balance sheet remains healthy with low gearing and strong cash balance of S$532mn.
How do we view this?
While SATS’s revenue performed better than expected, cost pressures from rising staff cost led to margin compression at the core business. The Group’s high labour expense of S$194mn led to the weakest profit margins at the core business in 2 years. As staff expenses are usually sticky in nature, we doubt profitability could improve meaningfully in the near term.
Investment Actions?
We downgrade our recommendation to Neutral. As we expect the company’s earnings recovery to be a year away, the stock’s potential upside could be limited. Following a surge in its stock price in anticipation of the special dividend payout, current valuation seems fair. SATS would go XD on 31st July with its dividend payout of 21cents per share.