Author: kktan
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.’
Transport – BT
Public transport should stay a private matter: Tuck Yew
Transport Minister Lui Tuck Yew yesterday defended the country’s model of privately run public transport operators in Parliament. ‘Our current model leaves the operations of trains and buses to commercial entities as we believe the long term public interest is best served this way.
‘The profit incentive drives the operators towards higher efficiency and productivity, which keeps costs as low as possible . . . Otherwise, if the system is inefficiently run, the public will ultimately pay for the higher operating costs, either through higher fares, or greater government subsidies.’
The public transport model has come under scrutiny ever since a $1.1 billion package was announced by the government to supplement the existing privately run bus fleet with 550 buses. The package covers the purchase of the buses and their net operating costs for 10 years.
SBS Transit will get about two-thirds of this allocation, while SMRT Buses will get one-third. The two operators will add 250 buses of their own and the total of 800 buses will represent a 20 per cent increase in capacity.
Some 70 per cent of the additions will be made within the first three years.
Even as Mr Lui cited the privately driven success stories of the MTR in Hong Kong and London Buses, he pointed out the need for the government to ‘take control of key areas’ which include planning rail lines and bus routes, as well as deciding on ‘timely capacity injection to meet ridership growth’.
Transport researcher Lee Der Horng from the National University of Singapore told BT that there was an argument for both the private and nationalised models.
But where Singapore is concerned, the government’s selective intervention now is justified, he said. ‘Based on the government’s efficiency that has been exhibited, we should be able to further increase the government’s involvement in public transport,’ Prof Lee said.
Government involvement has increased somewhat in recent years. The hybrid of asset ownership by the government and operations by a private firm was first introduced for trains on the Downtown Line with SBS Transit as its operator. SBS Transit, which also operates the North East Line (NEL), will add 60 weekly train trips to the NEL from March 19, it was announced yesterday.
This hybrid system might soon spread to buses. ‘We will need to similarly relook the bus financing framework and decide . . . how best to introduce contestability,’ Mr Lui said yesterday.
While the government shells out the $1.1 billion for the additional buses, the operators will be expected to hold up their end of the bargain. Mr Lui said that the operators would be held to service levels for the entire fleet that will go beyond what is required by the Public Transport Council (PTC).
For example, 95 per cent of all feeder services will have to operate within 10-minute scheduled intervals or better during peak periods, up from the current 90 per cent that PTC guidelines dictate.
These requirements, however, will not be enshrined as the PTC’s Quality of Service standards for now.
As a more aggressive way to make operators pull up their socks, the government should consider setting up a separate body to operate the 550 buses, Prof Lee suggested. ‘It will be like a third operator with a different choice and the other two operators will feel the pinch of competition.’
This hike in service standards follows a drop in customer satisfaction about public transport for the second year in a row. The survey for 2011 – carried out in October after fares were adjusted but before the train service disruptions – saw overall satisfaction drop 1.9 percentage points to 90.3 per cent, the Land Transport Authority said yesterday.
On the upside, 69.1 per cent of people believe that public transport had improved from the year before.
This year, some solace will come from the absence of fare adjustments to public transport, according to Mr Lui. Instead, the current fare formula will be reviewed this year but implemented in 2013. PTC member Richard Magnus will head the review committee.
The new fare formula in 2013 could take into account the fact that fare adjustments were not made in 2012, Mr Lui said.