Author: kktan
Land Transport – Phillip
Some help in funding bus capex
Sector Overview
The Transportation Sector under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT, ComfortDelGro) & Aviation Services (SIA Engineering, ST Engineering, SATS).
• Government initiative to fund bus capex
• Profitability of bus business had been poor
• Mildly positive for Land Transport operators
• Continue to prefer ComfortDelGro over SMRT
What is the news?
Singapore's government announced a commitment to increase bus capacity in Singapore over the next 5 years. The government recognized that planned rail capacity injections from the new rail lines would take time to materialize, but easing of daily congestion is a more immediate task. Consequently, the government would partner the public transport operators (PTOs) to add c.800 buses into the system over the next 5 years. Of these new buses, the government would fund the purchase of 550 buses, while the PTOs would add the balance 250. To fund this purchase and the running costs for 10years, the government will establish a Bus Services Enhancement Fund worth S$1.1bn.
How do we view this?
We view this as mildly positive for the Land Transport operators (SMRT, ComfortDelGro). Higher CAPEX and increased operating expenses due to the increase in fleet size had been a drag on the profitability of the bus business for both PTOs that are struggling to breakeven in recent quarters. SBST and SMRT operate c.3k and c.1k buses respectively and the capacity injection would increase capacity by 20%.
Investment Actions?
We continue to prefer ComfortDelGro over SMRT due to its cheaper valuation and better geographical diversification. While the initiative is positive for the PTOs, We opine that better clarity on the future fare review mechanism would provide better confidence to investors.
Land Transport – Phillip
Some help in funding bus capex
Sector Overview
The Transportation Sector under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT, ComfortDelGro) & Aviation Services (SIA Engineering, ST Engineering, SATS).
• Government initiative to fund bus capex
• Profitability of bus business had been poor
• Mildly positive for Land Transport operators
• Continue to prefer ComfortDelGro over SMRT
What is the news?
Singapore's government announced a commitment to increase bus capacity in Singapore over the next 5 years. The government recognized that planned rail capacity injections from the new rail lines would take time to materialize, but easing of daily congestion is a more immediate task. Consequently, the government would partner the public transport operators (PTOs) to add c.800 buses into the system over the next 5 years. Of these new buses, the government would fund the purchase of 550 buses, while the PTOs would add the balance 250. To fund this purchase and the running costs for 10years, the government will establish a Bus Services Enhancement Fund worth S$1.1bn.
How do we view this?
We view this as mildly positive for the Land Transport operators (SMRT, ComfortDelGro). Higher CAPEX and increased operating expenses due to the increase in fleet size had been a drag on the profitability of the bus business for both PTOs that are struggling to breakeven in recent quarters. SBST and SMRT operate c.3k and c.1k buses respectively and the capacity injection would increase capacity by 20%.
Investment Actions?
We continue to prefer ComfortDelGro over SMRT due to its cheaper valuation and better geographical diversification. While the initiative is positive for the PTOs, We opine that better clarity on the future fare review mechanism would provide better confidence to investors.
SingTel – Kim Eng
Margins to remain under pressure
Downgrade to Hold. We expect SingTel’s EBITDA margin to remain under pressure for the next few quarters as the telco focuses on building its mobile customer base aggressively in Singapore. While it expects long-term benefits, the costs related to its build-up of mobile device content, as well as subscriber acquisition and retention, are expected to stay high, thus eating into margins.
3Q12 results below expectations. SingTel’s 3QFY Mar12 results fell short of expectations, reflecting higher acquisition and retention costs on a strong mix of smartphones and tablets in Singapore and weak associate contributions. However, we had expected this, following similar trends in M1’s results. The only question was the extent of the damage to margins, which was quite severe in 3QFY Mar12, down to 32.7% from 34.5% in the previous quarter and 35.9% a year ago.
Margin decline to continue. SingTel has seen its EBITDA margin decline for four quarters now. However, there is likely to be further downside in the short term. In particular, management mentioned that it will step up its level of aggression to acquire smartphone and fibre customers as NGNBN rollout progresses. In the long run, it hopes to reap the benefits of upselling customers on a wider range of services but the short-term, impact on margins will be negative.
Older and wiser on BPL but… The better news is SingTel is unlikely to want to be perceived as Mister Moneybags again when bidding for the 2013-16 seasons of the BPL starting in March 2012. According to Mr Allen Lew, SingTel’s Singapore CEO, it will be “a bit wiser on this”. However, cross-carriage notwithstanding, management still views BPL as a key piece of content. Depending on the dynamics with the content owner, SingTel may not have a choice but to bid aggressively.
Lack of catalysts. While we do not expect any positive catalysts in the near future, we also do not anticipate any event that could pull the rug from below SingTel’s earnings, which should remain fairly resilient. We value SingTel at $2.95, or 13x FY Mar12 earnings, similar to the region’s integrated telcos as well as its own historical average PER.
ComfortDelgro – Phillip
Slightly below expectations
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.
• Net income increased 3.1%y-y
• Higher fuel expense, staff cost & depreciation expense resulted in a 0.4ppt decline in EBIT margin
• Final DPS of 3.30cents proposed
• Maintain Buy with revised TP of S$1.66
What is the news?
CDG announced a 6.4% and 3.1% increase in sales and net income for the year. However, margin pressures from higher fuel expense, staff cost and depreciation expense resulted in a 0.4ppt decline in EBIT margin. While revenue continue to increase sequentially, 4QFY11 net profits fell by 18%q-q, due to a c.S$10mn decline in operating profits for both the taxi and bus businesses. Final dividends of 3.30cents proposed, translating to a full year payout ratio of 53.3%.
How do we view this?
The results for the year were slightly weaker than expected. Key variances from our 4QFY11 estimates were 1) Operating losses of S$5mn at SBST’s bus business; 2) c.3.4% decline in average passenger rail fare; 3) operating losses at China’s bus business. Looking ahead to FY12E, we believe that rail business would likely register a decline in margins as the company increase staff headcount in preparation for the launch of Downtown Line (DTL) at the end of FY13E.
Investment Actions?
We revised our forecasts down by 7.9-11.4% for the next 2 years and lowered our target price to S$1.66 based on 15X FY12E EPS. CDG remains undervalued at the current market price. Maintain Buy.
ComfortDelgro – Phillip
Slightly below expectations
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.
• Net income increased 3.1%y-y
• Higher fuel expense, staff cost & depreciation expense resulted in a 0.4ppt decline in EBIT margin
• Final DPS of 3.30cents proposed
• Maintain Buy with revised TP of S$1.66
What is the news?
CDG announced a 6.4% and 3.1% increase in sales and net income for the year. However, margin pressures from higher fuel expense, staff cost and depreciation expense resulted in a 0.4ppt decline in EBIT margin. While revenue continue to increase sequentially, 4QFY11 net profits fell by 18%q-q, due to a c.S$10mn decline in operating profits for both the taxi and bus businesses. Final dividends of 3.30cents proposed, translating to a full year payout ratio of 53.3%.
How do we view this?
The results for the year were slightly weaker than expected. Key variances from our 4QFY11 estimates were 1) Operating losses of S$5mn at SBST’s bus business; 2) c.3.4% decline in average passenger rail fare; 3) operating losses at China’s bus business. Looking ahead to FY12E, we believe that rail business would likely register a decline in margins as the company increase staff headcount in preparation for the launch of Downtown Line (DTL) at the end of FY13E.
Investment Actions?
We revised our forecasts down by 7.9-11.4% for the next 2 years and lowered our target price to S$1.66 based on 15X FY12E EPS. CDG remains undervalued at the current market price. Maintain Buy.