Author: kktan
Land Transport – OCBC
Performing well as expected
- Fare hike from Apr-15 onwards
- Positive on several catalysts
- Maintain OVERWEIGHT
Review of CY14 results
The two public transport operators (PTOs) in Singapore, ComfortDelGro (CDG) and SMRT Corp (SMRT) had a smooth end to CY14, as results came in within expectations. CDG’s FY14 revenue rose 8.1% while PATMI grew 7.7%. Its PATMI formed 98.5% of our projection as it continued to achieve broad-based revenue growth across bus, rail and taxi segments. Business stability remains as CDG’s key characteristic but we note that there are other growth drivers going forward as well. For SMRT, recovery momentum continues on as 3QFY15 PATMI jumped 58.4% YoY as revenue rose 6.8% on both non-fare and fare businesses recorded broad-based growth. Its operating margins also improved YoY for the fourth consecutive quarters as 9MFY15 PATMI formed 76.5% of our projection. Similarly, we think SMRT has much more room to grow in view of the several catalysts we have identified.
Outlook remains positive on several catalysts
Going forward, we have reasons to believe that the sector outlook remains largely positive on several catalysts. On near-term catalysts, we expect: 1) further growth for CDG’s taxi segment as it is the only taxi operator in Singapore allowed to grow its fleet size by 2.0% in CY15, 2) higher taxi rental income for both PTOs in CY15 as they continue to renew their taxi fleet, 3) full rental income contribution from SMRT’s Kallang Wave Mall from FY16 onwards, and lastly, 4) savings from lower energy costs that will be more visible from FY16 for both PTOs with different hedging exposures. The longer-term catalysts are still the same from our last sector report: 5) with a little more than a year before the new bus government contracting model (GCM) commences, LTA has to take over all the bus assets from the PTOs and we believe both PTOs have much to gain if LTA pays in lump sum to purchase the bus assets, 6) the transition to the new GCM by 2HCY16 will see core bus operations of both PTOs turn profitable, and 7) the announcement of concrete details on new rail financing model, that has limited impact on CDG but large positive impact on SMRT.
Maintain OVERWEIGHT
Overall, the expected increase in ridership in addition to the catalysts stated above will continue to drive growth. We believe PTOs will also continue to manage costs and improve productivity gains, improving profitability further. Hence, we maintain OVERWEIGHT on land transport sector. However, given the recent runup in CDG’s share price, our top pick for the land transport sector is now SMRT as we reiterate BUY on SMRT [FV: S$1.85] while we maintain HOLD [FV: S$3.07] on CDG. However, note that we have also taken into account the potential fines and higher expenses resulting from the series of train disruptions on SMRT services thus far in CY15.
Land Transport – OCBC
Performing well as expected
- Fare hike from Apr-15 onwards
- Positive on several catalysts
- Maintain OVERWEIGHT
Review of CY14 results
The two public transport operators (PTOs) in Singapore, ComfortDelGro (CDG) and SMRT Corp (SMRT) had a smooth end to CY14, as results came in within expectations. CDG’s FY14 revenue rose 8.1% while PATMI grew 7.7%. Its PATMI formed 98.5% of our projection as it continued to achieve broad-based revenue growth across bus, rail and taxi segments. Business stability remains as CDG’s key characteristic but we note that there are other growth drivers going forward as well. For SMRT, recovery momentum continues on as 3QFY15 PATMI jumped 58.4% YoY as revenue rose 6.8% on both non-fare and fare businesses recorded broad-based growth. Its operating margins also improved YoY for the fourth consecutive quarters as 9MFY15 PATMI formed 76.5% of our projection. Similarly, we think SMRT has much more room to grow in view of the several catalysts we have identified.
Outlook remains positive on several catalysts
Going forward, we have reasons to believe that the sector outlook remains largely positive on several catalysts. On near-term catalysts, we expect: 1) further growth for CDG’s taxi segment as it is the only taxi operator in Singapore allowed to grow its fleet size by 2.0% in CY15, 2) higher taxi rental income for both PTOs in CY15 as they continue to renew their taxi fleet, 3) full rental income contribution from SMRT’s Kallang Wave Mall from FY16 onwards, and lastly, 4) savings from lower energy costs that will be more visible from FY16 for both PTOs with different hedging exposures. The longer-term catalysts are still the same from our last sector report: 5) with a little more than a year before the new bus government contracting model (GCM) commences, LTA has to take over all the bus assets from the PTOs and we believe both PTOs have much to gain if LTA pays in lump sum to purchase the bus assets, 6) the transition to the new GCM by 2HCY16 will see core bus operations of both PTOs turn profitable, and 7) the announcement of concrete details on new rail financing model, that has limited impact on CDG but large positive impact on SMRT.
Maintain OVERWEIGHT
Overall, the expected increase in ridership in addition to the catalysts stated above will continue to drive growth. We believe PTOs will also continue to manage costs and improve productivity gains, improving profitability further. Hence, we maintain OVERWEIGHT on land transport sector. However, given the recent runup in CDG’s share price, our top pick for the land transport sector is now SMRT as we reiterate BUY on SMRT [FV: S$1.85] while we maintain HOLD [FV: S$3.07] on CDG. However, note that we have also taken into account the potential fines and higher expenses resulting from the series of train disruptions on SMRT services thus far in CY15.
TELCOs – OCBC
Expects steady growth in 2015
- Stable FY15 outlook
- Rising interest rate threat
- Yields should remain fairly attractive
Stable outlook for 2015
For FY15, the three local telcos have guided for a relatively stable outlook. M1 is probably the most optimistic among them, as it is expecting moderate earnings growth (in single digit) and slightly lower capex of S$120m this year. On the other hand, StarHub eyes low single-digit revenue growth, but it has kept its EBITDA margin guidance at 32%; as this is lower than the 33.7% achieved in FY14, it could translate to a flat earnings growth. Singtel has kept its stable group revenue and EBITDA outlook unchanged.
Mobile market remains stable
On the main mobile market, we note that while there has been a pickup in net adds in subscribers as well as ARPUs in the post-paid space, mobile penetration continues to edge lower, suggesting that further growth in mobile revenue will have to be driven by increased data usage. The telcos are hopeful that the higher 4G speeds will trigger more data usage; but anecdotal evidence suggests that subscribers remain mindful of their data caps.
Some signs that broadband market is more rational
While telcos continue to expect the broadband market to remain competitive, we believe that there are signs that the competition is getting more rational; this as the ISPs are no longer using price to grab market share. Instead, more are starting to offer speed upgrades to entice customers to sign up with them. As the incremental cost of these speed upgrades are quite minimal, margins should also start to improve.
Interest rate threat looming
With telecom stocks being pitched as defensive stocks and “prized” for their stable and attractive dividend yields, the threat of higher interest rate is likely to be a concern. However, we believe that as long as local interest rates do not rise sharply, we do not expect the telcos to lose their appeal. Maintain NEUTRAL on the sector, with a preference for Singtel (HOLD, S$4.16).
SMRT – OCBC
Outlook remains largely positive
- Series of train disruptions
- Remains upbeat on same growth catalysts
- Lower FV; reiterate BUY
A series of unfortunate disruptions
SMRT’s trains experienced five disruptions over the past two weeks across the North-South Line (NSL), East West Line (EWL), Circle Line (CCL), and Bukit Panjang LRT Line. Last year, SMRT were fined S$1.6m for two safety breaches and two train disruptions. Of the S$1.6m, the heavier fines came from the two safety breaches amounting to a total of S$1.3m. On these recent incidents, the longest delay was more than four hours on NSL on 23-Feb due to damaged train components. With these disruptions deemed unacceptable by LTA, we updated in our forecasts to provide for fines in FY16 with an amount slightly more than twice of what was paid in FY15.
Higher expenses expected but growth catalysts still present
SMRT announced last Friday its plans to improve rail reliability. There were two key points that required us to update our forecasts from FY16 onwards: 1) SMRT is expected to expand its workforce of engineers and technicians by another 39% and 24% respectively, by 2018, and 2)SMRT to provide more training to ground staff, setting up maintenance operations centre to support and coordinate response by maintenance teams during rail incidents as well as investing to equip maintenance teams with computer tablets to support maintenance needs. However, we believe its growth catalysts are still valid: 1) energy expenses to see further savings as electricity costs is expected to continue to decrease while FY16 diesel needs are largely exposed, 2) full-year rental income contribution from Kallang Wave Mall in FY16, 3) taxi rental income growth through fleet renewal, 4) core bus operations to turn profitable with forecasted margins of ~9.0%, from 2QFY17 after transit to new bus model, 5) potential LTA’s purchase of SMRT bus assets with lump sum cash payment resulting to possible special dividend and/or acquisitions for growth, 6) longer-term catalyst of transit to new rail financing framework, leading to potential purchase of train assets by LTA, though no timeline is provided by LTA.
Lower FV; reiterate BUY
Consequently, we cut FY16 PATMI forecast by 10.5%, as we incorporate higher expenses and potential fines. We reiterate BUY on SMRT on positive growth outlook although our DDM-derived FV decreases from S$1.90 to S$1.85.
SMRT – OCBC
Outlook remains largely positive
- Series of train disruptions
- Remains upbeat on same growth catalysts
- Lower FV; reiterate BUY
A series of unfortunate disruptions
SMRT’s trains experienced five disruptions over the past two weeks across the North-South Line (NSL), East West Line (EWL), Circle Line (CCL), and Bukit Panjang LRT Line. Last year, SMRT were fined S$1.6m for two safety breaches and two train disruptions. Of the S$1.6m, the heavier fines came from the two safety breaches amounting to a total of S$1.3m. On these recent incidents, the longest delay was more than four hours on NSL on 23-Feb due to damaged train components. With these disruptions deemed unacceptable by LTA, we updated in our forecasts to provide for fines in FY16 with an amount slightly more than twice of what was paid in FY15.
Higher expenses expected but growth catalysts still present
SMRT announced last Friday its plans to improve rail reliability. There were two key points that required us to update our forecasts from FY16 onwards: 1) SMRT is expected to expand its workforce of engineers and technicians by another 39% and 24% respectively, by 2018, and 2)SMRT to provide more training to ground staff, setting up maintenance operations centre to support and coordinate response by maintenance teams during rail incidents as well as investing to equip maintenance teams with computer tablets to support maintenance needs. However, we believe its growth catalysts are still valid: 1) energy expenses to see further savings as electricity costs is expected to continue to decrease while FY16 diesel needs are largely exposed, 2) full-year rental income contribution from Kallang Wave Mall in FY16, 3) taxi rental income growth through fleet renewal, 4) core bus operations to turn profitable with forecasted margins of ~9.0%, from 2QFY17 after transit to new bus model, 5) potential LTA’s purchase of SMRT bus assets with lump sum cash payment resulting to possible special dividend and/or acquisitions for growth, 6) longer-term catalyst of transit to new rail financing framework, leading to potential purchase of train assets by LTA, though no timeline is provided by LTA.
Lower FV; reiterate BUY
Consequently, we cut FY16 PATMI forecast by 10.5%, as we incorporate higher expenses and potential fines. We reiterate BUY on SMRT on positive growth outlook although our DDM-derived FV decreases from S$1.90 to S$1.85.