Author: kktan
SingTel – BT
SingTel may suffer fallout from A$ jitters
Its Australian unit, Optus, accounts for over 60 per cent of group revenue
While risks of a political stalemate in Australia are putting the Aussie dollar under pressure, the currency weakness is seen as a short-term blip with muted impact on Singapore-listed companies with exposure Down Under.
Analysts are circumspect about how long the currency weakness would persist and if it would affect corporate earnings just yet.
Among companies here with exposure to Australia, Singapore Telecommunications seems most vulnerable as its Australian unit Optus accounts for over 60 per cent of group revenue.
‘A significant portion of our business is outside of Singapore, which subjects our financial results to foreign exchange volatility as we report in Singapore dollars,’ a SingTel spokeswoman told BT yesterday. ‘This includes our business in Australia, through Optus.’
While currency weakness has no direct impact on Optus’ operations as its earnings and costs are predominantly in Australian dollars, there would be a translational impact when Optus’s earnings are converted to Sing dollars.
But the SingTel spokeswoman noted that this was unlikely to have a major impact on the year-on-year comparison as the fiscal second quarter ended Sept 30 last year also coincided with a weak Australian currency.
For fiscal Q2 reporting last year, SingTel used the exchange rate of A$1 to S$1.1998, compared to yesterday’s rate of A$1 to S$1.20 during Asian trading hours.
‘It all depends on how much the Aussie dollar moves. It’s still too early to tell. What we are seeing now is, it could be a knee-jerk reaction,’ said OCBC Investment Research analyst Carey Wong, who maintains a ‘buy’ call on SingTel with a $3.34 price target. But given Optus’s share of group revenue, any major movement in the Australian dollar would translate to a major impact on SingTel’s revenue, he added.
Another analyst, who declined to be named, noted that a bigger bugbear for SingTel is the expected rising cost pressures at Optus, fuelled by increased competition with Telstra as the once-dominant telco player in Australia seeks to regain market share.
Yesterday, the Australian dollar recovered from an initial fall triggered by an inconclusive election over the weekend that left behind the prospects of a hung Parliament for the first time in 70 years. While vote counting continues, political pundits believe that Australia’s leaders could take months to form a government.
After touching the day’s low of US$0.8833, the Aussie dollar clawed back to US$0.8912 yesterday, reflecting investors’ belief that the long-standing political stability is still going to hold.
Barclays said in a note that ‘the core fundamentals for these markets of stable government, sound fiscal policy and Australia being a premium location for foreign investment, especially in the mining sector, will remain intact’.
In Australia, stocks of mining companies including Melbourne-based BHP Billiton Ltd and London-based Rio Tinto Group rose on optimism that the election outcome would result in a proposed mining tax being either scrapped or diluted.
OCBC vice-president of treasury research & strategy Emmanuel Ng said that he saw more downside risks emanating from a further spike in risk aversion rather than from the political landscape.
‘With uncertainty blanketing global growth prospects and localised political uncertainty domestically, we (see) a bearish A$-US$, targeting 0.815 and placing a stop (price) at 0.9086,’ he said in a note yesterday.
Other Singapore-listed companies with interest in Australia include Ezion, SP AusNet, AusGroup and Australand – a 59 per cent subsidiary of CapitaLand.
AusGroup, Australand and SP AusNet report their earnings in Australian dollars and are hence not expected to suffer translational impact as a result of an Aussie dollar weakness.
Ezion, which operates in Australia through a joint venture, had Australian operations accounting for close to 8 per cent of net profit for the second quarter ended June 30. Its Australian operations received a further boost this month with a letter of intent for marine logistics work from a multinational with an estimated value at A$70 million (S$85 million).
Jason Saw, analyst at DMG & Partners Securities, said that he did not expect Aussie dollar movement to have a major impact on Ezion yet as work for their Australian contracts has not reached peak productivity and the revenue has not fully stream in yet.
ComfortDelgro – UBS
Steady outlook
• H110 net profit of S$113m in line with ests; 48% of UBS’ 2010E forecast
Q210 revenue grew S$31m YOY: Singapore taxis, buses and rail benefitted from strong domestic demand. Australian buses gained S$23m on more services and a
10% forex impact. CDG will pay interim DPS of S$0.027 (50% payout).
• H110 op profit from S’pore taxi and bus grew 8% YOY, and rail by 34%
CDG achieved 100% utilisation (fr 99% in Q1) on a slightly enlarged taxi fleet and the outlook for coming quarters appears positive based on CDG’s comments that they now have a waiting list from drivers for their taxis, a situation which we recall has not been observed since Sg’s taxi industry was liberalised in late 2003. Meanwhile, we expect ridership growth on the North East Line (+12% YOY) to remain high. The NEL is in an operating leverage sweet spot as ridership has already passed the breakeven point, but train carriages are not filled to capacity.
• Overseas operations: Australia growth offsets weak UK taxis
In A$ terms, Australia bus revenue grew 22% YOY due to a full quarter of profit from Melbourne. QOQ, profit grew on more routes operated in both Melbourne and Sydney. CDG expects upcoming growth from Australia to stay strong as more services have been secured. CDG’s high-teen Australian margins are buffered from rising cost pressure as contract terms allow for recovery of certain costs. CDG’s acquisition of Swan Taxis in Perth for A$39m, if successful, would boost 2011E net profit by about 1.5%.
• Valuation: Price target based on UBS VCAM
We use DCF and forecast long-term valuation drivers using UBS VCAM.
ComfortDelgro – UBS
Steady outlook
• H110 net profit of S$113m in line with ests; 48% of UBS’ 2010E forecast
Q210 revenue grew S$31m YOY: Singapore taxis, buses and rail benefitted from strong domestic demand. Australian buses gained S$23m on more services and a
10% forex impact. CDG will pay interim DPS of S$0.027 (50% payout).
• H110 op profit from S’pore taxi and bus grew 8% YOY, and rail by 34%
CDG achieved 100% utilisation (fr 99% in Q1) on a slightly enlarged taxi fleet and the outlook for coming quarters appears positive based on CDG’s comments that they now have a waiting list from drivers for their taxis, a situation which we recall has not been observed since Sg’s taxi industry was liberalised in late 2003. Meanwhile, we expect ridership growth on the North East Line (+12% YOY) to remain high. The NEL is in an operating leverage sweet spot as ridership has already passed the breakeven point, but train carriages are not filled to capacity.
• Overseas operations: Australia growth offsets weak UK taxis
In A$ terms, Australia bus revenue grew 22% YOY due to a full quarter of profit from Melbourne. QOQ, profit grew on more routes operated in both Melbourne and Sydney. CDG expects upcoming growth from Australia to stay strong as more services have been secured. CDG’s high-teen Australian margins are buffered from rising cost pressure as contract terms allow for recovery of certain costs. CDG’s acquisition of Swan Taxis in Perth for A$39m, if successful, would boost 2011E net profit by about 1.5%.
• Valuation: Price target based on UBS VCAM
We use DCF and forecast long-term valuation drivers using UBS VCAM.
ComfortDelgro – DB
2Q10 results in line, higher rail, bus and taxi contribution
2Q10 results in line with expectations and consensus. 2Q10 earnings rose S$58m (+2% YoY) with growth mainly from continued ridership momentum in rail/bus in Singapore (SG), improvement in operating environment in SG taxi and increase in bus services in Australia (Aust). We expect 2H10 earnings to be stronger due to continued ridership growth momentum in bus/rail and overseas contribution. CD remains positive on rail in SG, bus operations in Aust/SG and sees improvement in taxi business in SG.
Australia driving bus growth, fuel cost partially hedged. 2Q10 bus revenue +5% YoY and 4% QoQ to S$400m on the back of strong performance in Aust (+34% YoY to S$91m) and SG (+4% YoY to S$152m), partially offset by UK (-8% YoY to S$140m) due to weaker pound. 2Q10 EBIT +7% YoY and 14% QoQ to S$38m underpinned by growth from Aust (+37% YoY to S$16m), partially offset from SG, UK and China bus ops due to higher fuel costs. We expect 3Q10 CD’s bus ops to see a QoQ improvement underpin by higher ridership, increase in bus services in Australia and lower fuel costs as CD has hedged about 25% of its fuel requirements for 3Q10 at slightly below US$70/bbl.
Strong growth from rail and taxi business. Rail revenue in 2Q10 grew 15% YoY and 5% QoQ to S$33m aided by ridership growth. EBIT for rail grew 43% YoY and 11% QoQ to S$7m on the back of higher efficiency. Taxi revenue saw a 4% and 1% QoQ increase to S$239m, mainly due to the growth in SG taxi ops. EBIT grew 12% YoY and 22% QoQ to S$32m due mainly to higher fleet size and low idle rate at its taxi ops in SG.
CD remains our preferred land transport stock as a defensive low-beta play and we expect the stock to outperform the market if there is a pullback. Award of DTL is likely to be in the 2Q11 as the tender for the submission of bids has been delayed to 4Q10. Buy.
ComfortDelgro – JPM
2Q FY10 results: strength in Singapore taxis and Australia bus
• 2Q net profit in line: Net profit of S$58.2 (+1.6% Y/Y) was in line with expectations with revenue growth of 4.1% driven by good performance at (1) CDC NSW; (2) SBS Transit; (3) Singapore taxi; (4) NEL and (5) China driving centre. Interim DPS of 2.70 cents was declared (50% payout ratio).
• Singapore taxis posted strong EBIT growth: Singapore taxi revenue grew 9.2% Y/Y on the back of larger operating fleet and higher volume of cashless transactions. Management highlighted that it added 307 taxis in the last quarter and enjoys a near zero idle rate, with a waiting list of prospective taxi hirers. Notably, operating profit grew a strong 38% Y/Y as margin improved from 10% to 12.7%.
• Australia bus performance strong: Australia bus revenue/EBIT grew 34%/37% Y/Y as more bus services were contracted by CDC NSW and Victoria, and partly buoyed by the stronger AUD. For 2Q10, Australia bus was the second largest operating profit contributor (16% of group) after Singapore taxi, despite accounting for just 11.5% of group revenue, due to its high operating margin at 17%.
• Energy costs increase: Fuel and electricity costs rose 22.3% Y/Y mainly due to higher diesel costs which were not fully hedged as well as increased consumption. Management is taking advantage of the recent retreat in oil price to hedge its requirement ahead.
• Downtown Line tender update: Management expects tender for the DTL to be issued in Sep/Oct 2010 with the submission of the bid in early 2011. We continue to see its subsidiary, SBS Transit, well positioned to win.
• Positive organic growth outlook: Management sees stronger revenue for Singapore and Australia bus on stronger ridership (2Q10: +4% Y/Y) and increase in demand for bus frequencies respectively. It also expects Singapore taxi revenue to increase potentially from higher average rentals with new replacement taxis and possibly also from fleet additions to take advantage of the higher demand. Rail ridership, which grew 13% YTD should continue to see ridership growth and benefit from transfer commuter traffic with the ramp up of SMRT’s Circle Line. Maintain OW.