Author: kktan
SMRT – DMG
Trading at peak valuations; SELL
4QFY10 results below expectations. SMRT registered 4QFY10 net profit of S$22.7m, down 41.4% YoY (-42.2% QoQ), representing only 12.4% of our FY10 estimates. For FY10, net income growth was flat at S$163m. Earnings came in sharply below ours and streets’ expectations due to higher-than expected staff and maintenance costs. Management cautioned that staff costs are expected to be higher in FY11 as additional headcount of between 100-150 personnel is needed for CCL Stages 4-5. We reduce our FY11 net income by 9% to S$165m in view of higher operating costs. We maintain our TP at S$2.00 but downgrade our rating to SELL (from BUY) and sector to NEUTRAL (from OVERWEIGHT) on recent price rise. SMRT declared a final dividend of 6.75¢.
Rail ridership grew 9.7% in 1Q10 (SMRT’s 4QFY10). Between Jan-Mar 2010, SMRT’s daily rail ridership rose 9.7% YoY to 1.51m. We remain optimistic that ridership figures will remain positive this year on the back of strong economic and tourism growth. Stages 1-3 of the Circle Line was fully operational in April but has come short of the government’s daily ridership projections of 200,000 commuters. With the opening of the two integrated resorts, we expect rail ridership growth to register between 7-10% in 2010.
CCL is slated to be fully operational only in FY12 (2H2011). The functioning of Stages 1-3 will not be sufficient for SMRT to breakeven until the entire CCL becomes fully operational. Our channel checks have indicated that CCL Stages 4-5 will only be completed in 2H11 (SMRT’s FY12). A fully operational CCL could raise daily ridership to 500,000, thereby providing positive accretion to SMRT’s bottom line only from FY12 onwards. We believe SMRT will continue to come under significant cost pressures in FY11, offsetting any strong rail ridership expectations.
Trading at upper-end of its 14-22x P/E band; switch to ComfortDelGro. SMRT trades at an unappealing 21x FY11 P/E multiple, nearing its peak P/E multiple of 22x. We view risk-returns on the counter as unfavourable and recommend a pair trade with ComfortDelGro, which trades at an attractive 13x FY11 P/E. SELL SMRT (TP: S$2.00) and BUY ComfortDelGro (TP: S$1.78).
SingPost – DBSV
No surprises once again!
At a Glance
• Underlying net profit grew 12% y-o-y to S$36.5m, helped by S$1.4m forex gain and S$2.8m tax savings
• Declared 2.5 cents DPS, as expected.
• Potential investments should more than offset weakness due to higher terminal dues, in our view.
• Maintain HOLD and S$1.05 TP based on 6% target yield
Comment on Result
Net underlying profit of S$36.5m (+12% y-o-y, -7% q-o-q) exceeded our S$33m forecast because of (i) S$1.4m forex gain due to stronger regional currencies; and (ii) S$2.8m tax savings as Singpost had over-provided for taxes in previous years.
Business is on recovery path, but margins are under pressure. Revenue in all three business segments improved y-o-y, but operating margins were under pressure because of consolidation of (i) Quantium Solutions, which regional logistics business reaps lower margins, and (ii) smaller contribution from higher margin financial services.
Management on right track to face challenges ahead. Higher terminal dues could reduce Singpost’s earnings by up to 5%. Additionally, job-credit benefit would drop to S$2m in FY11F from S$7m in FY10F as the scheme will expire in June this year. However, Singpost did not include job-credit benefits in its underlying net profit. Recall that Singpost had issued S$200m 10-year notes at a fixed rate of 3.5% recently, whose proceeds could be utilized for regional acquisitions, in our view, to offset potentially weaker earnings.
Recommendation
We do not see any risk to its dividends and recommend to HOLD Singpost for the 6% yield.
SingPost – OCBC
FY10 results within expectations
Results within expectations. Singapore Post (SingPost) reported a 9.2% rise in revenue to S$525.5m and a 10.9% increase in net profit to S$165.0m in FY10, both within 4% of our full-year estimates. However, net profit was better than the street’s expectations (S$153m Bloomberg consensus). In 4QFY10, group revenue rose by 15.9% YoY due to improvements in all business segments (mail, logistics, retail), as well as inclusion of revenue of Quantium Solutions. Excluding Quantium’s consolidation, revenue rose by 3.8%. Rental and property-related income also grew by 5% to S$10.2m with higher rental income from the Singapore Post Centre and leasing of space at repurposed post office buildings.
Better outlook. The outlook for the group is now better with a pick up in business activities. SingPost’s earnings are directly dependent on the performance of the Singapore economy, with more than 95% of its profits coming from the island. Just last month, the official growth forecast of the economy was upgraded from 4.5-6.5% to 7-9% for 2010 after 1Q10 GDP expanded strongly by 13.1% YoY. However, SingPost maintains a “cautiously optimistic” outlook given the challenges facing the postal industry as a whole. The group is also looking to diversify its contributions from overseas markets to expand its non-mail business.
Seeking growth opportunities. The group said that it has been actively exploring investment and business opportunities in Singapore and the region. SingPost has a strong cash position of S$390m as at 31 Mar 2010, aided by its recent S$200m bond issuance, which the group will allocate between financing new investments (bulk of proceeds), anticipated capex and working capital requirements. The market is likely looking forward to expansion-related announcements but we do hope that any acquisition 1) is not made just for the sake of acquisition, 2) value-creation will happen, 3) new development leverages on the group’s core competencies and 4) avoid overpaying as with any acquisition.
Maintain BUY. The search for the CEO is still ongoing, but the group’s management has veterans in the relevant industries, which should keep operations running smoothly. Occupancy at the Singapore Post Centre also remains high at 98.6%. A dividend of S$0.025/share has been declared, bringing the full year payout to S$0.0625/share, same as FY09’s. With a total expected return of about 12% (including 5.7% expected dividend yield), we maintain our BUY rating on SingPost with a DCFbased fair value estimate of S$1.16.
SMRT – DBSV
Train derails at 4Q10
• 4Q10 net profit (S$22.7m, -41% yoy) way below consensus’ and our expectations
• Impacted by higher staff, R&M and depreciation costs; trimmed FY11F forecast by 6%
• Market has been overly euphoric over prospects, counter not cheap at c.20x PE
• Downgrade to Fully Valued; TP S$2.00
4Q earnings came in way below consensus’ and our expectations. Net profit of S$22.7m was down 41%/42% yoy/qoq. The dismal performance came from higher staff costs (+15% yoy), repair & maintenance (+33% yoy) and depreciation (+10% yoy), while topline grew by only 3.7% to S$225m. As a result, 4Q10 EBIT margin was at 12%, down 5.2ppt, a far cry from the 17.2% registered a year earlier. FY10 net profit ended flat at S$162.9m, against a year ago, 7.7% below our expectations.
Share price beat STI by 15.8% YTD. SMRT’s share price has done well, up 19.4% YTD and outperforming the STI by 15.8%. This was on the back of high market expectations of robust ridership growth and the opening of Circle Line Stage 1 & 2.
Time to disembark; Downgrade to Fully Valued, TP cut to S$2.00. We cut our FY11F forecasts by 6%, on higher staff, and repair and maintenance costs. This will be partially offset by higher train ridership, with the opening of the Circle Line. The recent strength in share price has exceeded our expectations. While the long term prospects for rail in Singapore is positive, we believe the market has been overly euphoric over the opening of the Circle Line Stages 1& 2 in the past couple of weeks. Our TP, based on average of PE (15x) and DCF, is cut to S$2.00 (S$2.08) on lower FY11F earnings.
Switch to cheaper ComfortDelGro. The counter is now trading at 20.4x on our FY11F revised earnings, which seems rather rich. For investors who would still like exposure to land transport counters, we recommend a switch to ComfortDelGro, trading at c.15x prospective PE, a 25% discount from SMRT.
SMRT – Kim Eng
Higher‐than‐expected costs take away the shine
Event
SMRT’s full‐year results were below expectations due to a sharper‐than‐expected spike in operating costs in 4Q10, mainly in the areas of bus and train repair and maintenance (R&M) and energy costs. However, rental income exceeded expectations as more commercial space was added in MRT stations. SMRT also raised its final dividend to $0.0675 per share, above our expectation of $0.06 per share.
Our View
The main reasons behind the lower‐than‐expected results were a sharp jump in both R&M and energy costs. There was also an unexpected $3.3m provision for doubtful debt in the engineering division and higher provision for taxi insurance.
However, revenue was slightly above our forecast due mainly to higher MRT revenue and rental income. For the full year, train ridership grew by 5%, propelled by higher ridership on the North‐South and East‐West lines, as well as contribution from Circle Line Stage 3.
We have cut our FY11 forecast by 10% as we now expect R&M cost, energy cost and depreciation charges to be higher than previously expected and may stay high for the next few quarters. SMRT’s fleet of buses and trains is ageing, hence the higher R&M cost while more renovated stations will lead to higher depreciation charges.
Action & Recommendation
We downgrade SMRT to SELL. At 20x our revised FY11 forecast and relative to its peak historical valuation of 21x, the stock is now fully valued. With the strong run‐up in the past few months (up from $2.13 since our last call), outperformance is unlikely for a couple of quarters until the jump in operating costs tapers off and the expected rise in ridership translates to a better bottom line.