Author: kktan
ComfortDelgro – CIMB
Positive steps forward
With our FY16 EPS raised by 2.3% as the first wave of the government’s contracting model for buses kicks in, we raise our DCF-based target price (7.1% WACC), to reflect its better earnings visibility beyond FY16. Reduced capex and overall improvements in its cash-flow profile and balance sheet should allow CD to boost its overseas growth and/or dividend payouts. We maintain our Add rating, with catalysts expected from the above.
What Happened
The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems). Implementation starts only in 2H16.
What We Think
Better earnings, also cash flow and balance sheet. More details will be out next week with the announcement of the first bus package. CD’s Singapore bus business (19% of revenue) made a small operating profit of S$3.2m (only 1.8% EBIT margin and 3% of group EBIT) in 1Q14. If its operating margins eventually mirror those of Australian and UK bus operators, which hover at 10-17%, CD’s bus EBIT margin as a whole could shift up to 10.5% in FY16. We are assuming 7% less capex for FY15 and 17% less for FY16, with asset disposals of c.S$80m in FY16. All these could lift its FY15-16 EPS, with a major impact from FY17 onwards.
What You Should Do
This shift to a cost-plus model, though not overwhelming for our estimates, has other implications. It would alter the cash outlays of the group, potentially propelling: 1) its overseas forays; and 2) dividend payouts. We believe that CD’s overseas ventures yield higher profit margins for the group than its local operations, as management intends to raise overseas revenue contributions to 60% of group revenue in 5-7 years’ time, from 40% currently. YTD net-cash inflows continue to enhance its balance sheet. We think that CD’s cash-flow-generation prowess and predictable capex give it room to increase gearing for M&As and/or commit to higher dividend payouts. We maintain our Add rating.
ComfortDelgro – CIMB
Positive steps forward
With our FY16 EPS raised by 2.3% as the first wave of the government’s contracting model for buses kicks in, we raise our DCF-based target price (7.1% WACC), to reflect its better earnings visibility beyond FY16. Reduced capex and overall improvements in its cash-flow profile and balance sheet should allow CD to boost its overseas growth and/or dividend payouts. We maintain our Add rating, with catalysts expected from the above.
What Happened
The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems). Implementation starts only in 2H16.
What We Think
Better earnings, also cash flow and balance sheet. More details will be out next week with the announcement of the first bus package. CD’s Singapore bus business (19% of revenue) made a small operating profit of S$3.2m (only 1.8% EBIT margin and 3% of group EBIT) in 1Q14. If its operating margins eventually mirror those of Australian and UK bus operators, which hover at 10-17%, CD’s bus EBIT margin as a whole could shift up to 10.5% in FY16. We are assuming 7% less capex for FY15 and 17% less for FY16, with asset disposals of c.S$80m in FY16. All these could lift its FY15-16 EPS, with a major impact from FY17 onwards.
What You Should Do
This shift to a cost-plus model, though not overwhelming for our estimates, has other implications. It would alter the cash outlays of the group, potentially propelling: 1) its overseas forays; and 2) dividend payouts. We believe that CD’s overseas ventures yield higher profit margins for the group than its local operations, as management intends to raise overseas revenue contributions to 60% of group revenue in 5-7 years’ time, from 40% currently. YTD net-cash inflows continue to enhance its balance sheet. We think that CD’s cash-flow-generation prowess and predictable capex give it room to increase gearing for M&As and/or commit to higher dividend payouts. We maintain our Add rating.
SATS – OCBC
4QFY14 results disappoint
- 4QFY14 results below forecasts
- Expect weakness in aviation industry to spill over
- Maintain HOLD
4QFY14 results below expectations
SATS’s 4QFY14 results were below our expectations. Revenue declined 3.2% YoY to S$434.6m, or 7.9% below our forecast. Correspondingly, PATMI dropped 7.8% to S$42.6m, which is 5.8% below our estimate. PAT from overseas associates/JV for 4QFY14 was 46.5% lower at S$9.9m, mainly due to lower cargo volumes and higher staff costs. FY14 revenue dropped by 1.8% to S$1.8b. Food Solutions saw 5.2% revenue decline to S$1.1b, mainly due to: 1) weaker TFK performance from JPY translation losses, and 2) Quantas’ move to Dubai from Changi Airport. These were partially mitigated by a 4.5% revenue increase in Gateway Services to S$678.1m as more accounts were secured. FY14 PATMI came in 2.4% lower at S$180.4m. A final dividend of 8 S-cents was declared, bringing FY14 dividend to 13 S-cents, or 81% payout ratio. Management guided that such payout levels would be sustained.
Shifting expenses away from labour
As labour is the biggest expense item (48% of total expenditure in 4QFY14) and will only increase with wage inflation and statutory levies, management intends to invest more in technology. However, we think this proposition will likely only see success in markets where labour is relatively expensive (e.g. Singapore, Hong Kong and Japan). Hence, the impact is likely to be limited in the near future.
Caught in weak aviation industry
Management thinks PT CAS acquisition will create synergies and provide access to high-growth Indonesian market. They also plan to leverage on their existing relations with airlines and cruise operators to create connectivity for their clients, during which SATS will benefit too. However, we think the aviation industry headwinds will be the larger force in SATS’ near- to mid- term outlook. As overcapacity plagues passenger and cargo carriers, SATS’ end clients, we think the rates and volume for SATS will inevitably suffer as well, though not as cyclical as its end clients.
Based on 20x FY15F EPS, we derive a lower FV of S$3.23 (previous: S$3.35) and maintain HOLD.
SMRT – OCBC
Clearer skies ahead
- Fare business in the red
- Awaiting rail financing framework updates
- Bump up FV but maintain HOLD
More positive outlook following policy change
Operating profits for SMRT’s fare business (Bus, LRT and MRT) has been on the downtrend since FY09. This even slipped into the red in FY14, with an operating loss of S$25.0m registered, versus an operating profit of S$32.3m in FY13. The main drag came from its Bus operations, which recorded an operating loss of S$28.4m, while its Train business also experienced a 91.6% plunge in operating profit to just S$5.5m in FY14. We believe the transition of the public bus industry towards a “Government contracting model” will help to alleviate the pressures for the operators such as SMRT, as the revenue risk will now fall under the Government. This new model will allow SMRT to return to profitability for its bus operations in FY17, based on our estimates.
Rail financing framework could be implemented next
Following the implementation of the “Government contracting model” for buses, we believe there are now stronger expectations for updates from the Government on the rail financing framework. Assuming LTA does intend to own the rail infrastructure and operating assets (as was the case for Downtown Line), SMRT would stand to benefit more than ComfortDelGro as the latter does not carry any rail assets on its balance sheet. Based on our estimates, the net book value of SMRT’s rail assets is worth ~S$1b. If the sale of these assets back to the Government does eventually materialise, it would strongly bolster SMRT’s balance sheet. We have not factored in this scenario in our model.
Maintain HOLD
Switching our focus back to the new bus contracting model, we retain our FY15-16 forecasts but raise our FY17, FY18 and FY19 PATMI projections by 7.9%, 13.4% and 12.3%, respectively. This bumps up our fair value estimate from S$1.25 to S$1.40. Given SMRT’s robust share price run-up in recent weeks, we believe these positives have been priced in. Hence, we maintain HOLD on SMRT.
ComfortDelgro – OCBC
Key beneficiary of policy change
- Local bus operations a drag
- Good position to win tenders
- Preferred pick within sector
Core Singapore bus operations loss making since FY11
ComfortDelGro’s (CDG) core Singapore bus operations (operated via its 75%-owned subsidiary SBS Transit) has been a drag to its financial performance, raking in losses ranging from S$6-15m per year since FY11. During its recent 1Q14 results, CDG once again reported an operational loss of S$4.7m for its local bus business (excluding advertising and rental income), although this was an improvement from the S$5.4m loss suffered in 1Q13. The main issue is the lack of a commensurate increase in fare adjustments (last increase came in 2011 prior to the recent 3.2% increase implemented on 6 Apr 2014) despite heightened operating requirements from a growing population.
Brighter days ahead
Following LTA’s decision to implement a “Government gross cost contracting model”, we expect more significant improvements in its bus operations ahead, although the financial impact will only be felt in 2H16. As one of the Government’s objectives is to inject more competition into the industry, CDG comes under risk of losing its market share (~75%) since ~20% of existing buses will be put up for competitive tender in 2H14 (implementation will only take place in 2H16). Nevertheless, we believe CDG’s strong knowledge of the local operating environment and experience in operating a gross cost contracting model for its UK and Australia bus businesses will put it in a good stead to clinch the upcoming tenders.
Maintain BUY
CDG generated an operating margin of 8.4% and 19.2% for its UK and Australia bus businesses in FY13, respectively. LTA said that it has studied the London and Australian bus contracting models over the past two years, and hence we believe CDG will use these two countries as a benchmark, especially its UK operations, when it submits its tenders. Despite keeping our FY14-15 forecasts intact, we raise our FY16-18 PATMI projections by 4-12%, based on an 8% operating margin assumption for its Singapore bus operations. Consequently, our DDM-derived fair value is raised from S$2.30 to S$2.56. Maintain BUY. CDG remains as our preferred pick within the land transport sector.