Author: kktan
ComfortDelgro – Kim Eng
Taking a Swan dive Down Under
What’s New
• ComfortDelgro is bidding to enter the Australian taxi market via an A$38.8m acquisition of Swan Taxis, the largest taxi operator in Perth, Western Australia. Priced at 13x earnings vs ComfortDelgro’s 14‐15x, this sounds like a good move in our view as it will be buying into a profitable company with a long operating history. It is also a natural extension of its bus businesses in Sydney and Melbourne. Maintain BUY with target price at $1.87 pending the completion of the deal.
Our View
• Swan Taxis is highly profitable with an EBIT margin that exceeds 30%, compared to ComfortDelgro’s 11‐12%. It is also practically zero debt and is in a strong net cash position. ComfortDelgro’s offer values Swan at earnings‐accretive levels.
• Growth prospects for Swan are excellent, in our view, as the population of Perth is expected to hit 2.2m by 2025, from 1.7m now. In fact, Perth’s population growth of 3.2% last year, driven by foreign immigration and interstate migration, made it the fastest‐growing city in Australia. The demand for taxi services is thus expected to
intensify.
• If the acquisition succeeds, we expect ComfortDelgro’s FY11F‐12F earnings would improve by 1.5‐2% and our fair value would increase from $1.87 currently to $1.90. The deal is likely to take three months to complete, subject to approval by the Australian Competition and Consumer Commission. Pending its completion, we are maintaining our forecasts for now.
Action & Recommendation
Pending the completion of the acquisition, we maintain our forecasts and target price of $1.87, based on 17x FY10 forecast. Maintain BUY.
SingPost – UBS
Strong performance could continue
• Beneficiary of the strong economy
We expect Singapore Post’s (SingPost) revenue in coming quarters to be strong given the robust Singapore economy, which our economist estimates could grow 14.7% this year. The share price is up 11% YTD and has outperformed the local market by 9%. We think it could continue to perform as earnings could surprise on the upside. We reiterate our Buy rating and raise our price target from S$1.15 to S$1.27.
• Mail revenue to benefit from domestic strength
Historically SingPost’s revenue has correlated strongly with GDP growth, albeit with a three to six month lag. A strong growth picture is emerging from various data points including advertising revenue, tourist arrivals and credit growth, and we believe SingPost’s business should be no exception. We raise our FY11/12/13 EPS estimates from S$0.08/0.07/0.08 to S$0.09/0.09/0.09
• 6.2% yield
In addition to trading at an attractive valuation of 13x FY11E earnings, the stock has an attractive yield of 6.2%. It has historically paid out 80% of its earnings and we believe this could continue as its balance sheet remains healthy.
• Valuation: raise price target from S$1.15 to S$1.27
We derive our price target of S$1.27 from a DCF methodology, assuming WACC of 7.38% and 3% terminal growth. We explicitly forecast long-term valuation drivers using UBS’s VCAM tool
ComfortDelgro – BT
ComfortDelGro makes play for SwanTaxis
A$38.8m cash takeover bid launched for Aussie firm, which has 9% share of the Perth metropolitan market
COMFORTDELGRO Corporation has launched an A$38.8 million (S$46.5 million) cash takeover bid for Australia’s Swan Taxis, which has a 91 per cent share of the Perth metropolitan market.
The offer for all the shares and options in Swan Taxis is conditional on ComfortDelGro obtaining at least 90 per cent of the company’s stock.
There are 225,545 Swan Taxis shares and options currently outstanding.
The offer price is about 1.4 times Swan Taxis’ book value and 6.6 times its Ebitda (earnings before interest, tax, depreciation and amortisation).
‘Swan is the leading taxi operator in Western Australia with an advanced despatch system and a strong customer base,’ said Kua Hong Pak, ComfortDelGro’s managing director and group chief executive.
‘We are excited about the prospects this proposed acquisition offers us – geographic expansion and extension of another of our core businesses in Australia.’
The acquisition, which will be funded internally, is not expected to have a material impact on the group’s net tangible assets per share or earnings per share for its financial year ending Dec 31, 2010.
ComfortDelGro said yesterday it has lodged a bidder’s statement with the Australian Securities & Investments Commission for Swan Taxis’ shares and options.
An offer letter will be sent to Swan Taxis shareholders within two weeks, and they will have seven weeks to decide.
If and when a 90 per cent acceptance rate is achieved, ComfortDelGro will compulsorily acquire all shares.
Swan Taxis, which has a fleet of 1,667 taxis, is an unlisted public company.
For the 12 months ended June 30, 2009, it reported revenue of A$13.3 million and a profit before tax of A$4.6 million.
ComfortDelGro is already one of the largest private bus operators in the Australian states of New South Wales and Victoria.
Australia accounts for the lion’s share of ComfortDelGro’s overseas investment, at $357 million to date.
Overseas ventures currently account for 42.9 per cent of ComfortDelGro’s group revenue – a figure it plans to grow to 70 per cent over the medium term.
The group’s counter closed one cent higher at $1.51 in trading yesterday.
M1 – DBSV
Focused on market share gains
• Net profit of S$40.8m (+10% yoy) and interim dividend of 6.3 Scents in line. Market share gains for the fifth consecutive quarter.
• FY10F revised up 4%, no change to FY11F, adjusting for fair value accounting (FVA)
• FY10F capex guidance lowered to S$100m from S$100m-120m. Due to FVA, we switch from PER to DCF based (WACC 8.4%, terminal growth 0%) TP of S$2.30.
Fifth consecutive quarter of mobile market share gain. M1’s overall mobile market share continued to inch up and reached 26.2% in 2Q10 (26% in 1Q10) from the low of 25.2% in 1Q10. Post-paid mobile share has been stable at 26.5% while pre-paid share increased to 26% from 23.7% in 1Q10. We estimate operators take longer time (5-6 months compared to 3-4 months earlier) to breakeven on the acquisition costs of new iPhone subscribers. However, Net Present Value (NPV) over 2-year contract period is higher for iPhone subscribers. With 7% yield plus capital management potential intact, we believe M1 is an attractive investment.
Fair value accounting for handsets, supports stable dividends. Under FVA, M1 expenses the handset costs during the period they are incurred. However, a part of the future service revenue over the contract period, attributable directly to the handset is recognized upfront as handset revenue. While FVA results in timing mismatch between earnings and operating cash flow, it does indicate the real profitability of subscribers on a quarterly basis. M1 is using FVA so as to prevent large swings in its earnings, which has implications for its dividends. With higher FY10F earnings, 80% dividend payout ratio should lead to higher dividends, as free cash flow should still exceed 80% of net profit. We expect FY11F earnings to still grow in FY11F, although not as much as without FVA policy.
M1 – CIMB
Keeping our faith in capital management
• In line; upgrade to Outperform. 1H10 core profit met our forecast and consensus, forming 49% and 51% of the respective FY10 numbers. An interim dividend of 6.3 cts was declared for 2Q10, representing a payout of 71%, in line with our forecast. 2Q10 revenue fell qoq following a strong 1Q led by iPhone sales, but margins improved as handset subsidies abated with lower handset volume. We leave our FY10-FY12 forecasts intact but cut our special DPS expectations from 23.5 cts/share to 10 cts/share due to higher working capital requirements from an increased stock of higher-value smartphones. We assume capex will be funded by borrowings, freeing up cashflows for special dividends. This also lowers our DCFbased target price (WACC: 8.5%) to S$2.20 from S$2.26. Despite this, we upgrade M1 from Neutral to Outperform given our strategists’ more cautious view on the market, M1’s defensive qualities and likely capital reduction/special dividend of 10 cts/share, and a beneficiary of soaring inbound visitors.
• Drop in revenue… 1H10 topline declined 10% qoq primarily because of lower handset sales as take-up of iPhones slowed owing to a lack of stock and as consumers waited for iPhone 4. Service revenue was flat as lower IDD revenue (from lower wholesale revenue) and prepaid revenue was offset by stronger postpaid revenue from a larger subscriber base and higher usage. Postpaid net adds were strong owing to good take-up of iPhones in Apr-May and participation in IT shows while prepaid net adds rose as more promotions were rolled out.
• …and costs. EBITDA margins jumped 4.7% pts qoq as handset costs fell (-36% qoq) on lower volumes sold. Other operating costs were stable qoq as lower leased line costs (-12.2% qoq) from more migration to its own backhaul transmission network were offset by higher traffic costs and wholesale costs for fixed services.
• Capital management ruled out for now. M1 also declined to provide a timeline for this. Despite acknowledging its capacity to return more cash and noting the revision in the government’s GDP growth forecast to 13-15% from 7-9% for 2010, M1 is still cautious over the economy. It would, however, re-visit this issue next quarter. We still believe it would pay a special dividend as its net debt/annualised EBITDA of 0.9x is below its limit of 1.5x and the economy continues to recover.