Author: tfwee
ComfortDelgro – DMG
Hurt by Energy Costs, But Valuation Attractive
High crude oil prices will mean increased energy and fuel costs for CD. WTI crude oil price has risen from an average of US$72.4/bbl in 2007 to US$111.1/bbl in 1H08, or an increase of 53%. It even exceeded US$140/bbl briefly at some point in Jul 08, before moderating slightly to the US$130 level. We have increased our forecast of 2008 CD energy and fuel costs by 27% to S$320m, giving a YoY increase of 48%. This will lower CD earnings.
Rail ridership growth is in the mid-teens. For the first five months of 2008, SBS Transit’s (subsidiary of CD) rail ridership recorded a 15% YoY expansion. We attribute this to two main reasons :
• Growing population in the north-eastern part of Singapore – SBS Transit operates the North-east Line, which links commuters from the north-eastern part of Singapore to the city in the south.
• Dec 07 taxi fare hike – there was a knee jerk reaction whereby commuters switched from taxis to buses and rails in the initial months.
Bus ridership also rose moderately. SBS Transit bus ridership rose a moderate 6% YoY for the first five months of 2008. Though this is weaker than the rail ridership increase, it is stronger than the 4.3% bus ridership growth recorded in 2007.
Fare hike adds to revenue expansion. Collectively, Singapore bus and rail accounts for 16% of CD 2007 operating profit, and ridership growth will drive revenue expansion. Another positive is the mid-Jul 08 Public Transport Council announcement of a maximum fare hike of 3% for 2008 – our analysis shows that a 1% rise in fares will raise CD net profit by 1.8%. Overall, however, the effects of firm energy costs are more severe, and we have therefore lowered our core earnings forecast.
One-time gain from restructuring. In mid-Jun 08, CD announced that it will increase its stake in Cabcharge Australia through a share swap agreement. With this agreement, the following key changes will take place:
• CD’s stake in Cabcharge will increase from 5.0% to 7.46%;
• CD will transfer 16% of its shares in subsidiary CityFleet UK to Cabcharge – CD will thereafter retain a 51% stake in CityFleet while Cabcharge will hold a 49% stake.
An exceptional gain of S$26.5m (tax-free) will result from this transaction.
Target price cut to S$1.85. We are cutting our core 2008 net profit forecast by 14% to S$191.6m. Inclusive of the one-time gains, our 2008 net profit forecast is S$218.1m. Our 2009 net profit forecast has similarly been reduced. Our target price for CD, which is derived from sum-of-the-parts valuation, is being cut from S$2.00 to S$1.85. Despite this, we maintain BUY on CD, given its very attractive 2009 dividend yield of 7%.
STEng – DBS
Secured $128m shipbuilding order
Story: ST Marine announced that it has secured a contract to build and outfit a Diving Support Vessel for a foreign customer. Construction will start in Janaury 2009, delivery scheduled for mid 2010. The 107m vessel will support the client’s diving operations in the subsea sector for the oil and gas industry.
Point: This contract is not expected to have any significant impact on earnings, which accounts for only 1.4% of the group’s order book of S$9.2bn. ST Marine accounts for 17% of group sales and 15% of group PBT. In 1Q08, the Marine sector saw a 10% dip in PBT as the frigate contract is near completion and demand for shipbuilding activities reduced in the US. We expect ST Marine to post a 10% drop in PBT in 2008, this unit has lagged behind Singapore shipyards in securing shipbuilding and offshore contracts.
Relevance: The stock declined 15% to a low of S$2.49 after our downgrade to Fully Valued due to a) exposure to the ailing US aviation industry – major US airlines are reportedly cutting capacity by 10% to 18% b) exposure to the weak US economy (via Aerospace, Marine and iDirect) which accounts for 32%of group sales and c) weakening US$. Every 1% drop in the US$ will cause sales to decline by S$13m and affect PBT by S$1.6m. With the stock price just 6% from our target price of S$2.80(pegged to 15x on FY09 earnings), and the stock supported by dividend yield of 6.9%, we upgrade the stock to HOLD from FULLY VALUED. We prefer SIA Engineering (BUY, TP$4.49), which has a captive earnings base (70% of sales from SIA), and its earnings primarily from the Asian Aerospace industry. SIA Engineering is trading at 13.8x(FY08F) and 12.7x(FY09F), dividend yield of 5.6% and the stock is currently trading cum final dividend of 16cts(net yield of4.5%) – ex-date on 22 July 2008.
SPH – UOBKH
A trading opportunity that’s worth a bet
Share price weakened following 2QFY08 results announcement. Singapore Press Holdings’ (SPH) has fallen to S$4.07, a 12-month low, following its recently released disappointing results that showed SPH’s newspaper advertising revenue growth slowed significantly from 10.5% yoy in 2QFY08 to 4.2% yoy in 3QFY08. While SPH’s newspaper business is seeing slowing growth, earnings contributions from its Sky@eleven residential property development and expansion of the Paragon shopping mall at Orchard road should buffer SPH’s earnings in FY08 to FY10.
A trading opportunity that’s worth a bet. With dividend yield at close to 7%, we reckon there is limited downside in share price. We advise investors to look forward to the final dividend that will be announced in 4QFY08 results (to be released in mid-October). We are forecasting a final tax-exempt DPS of 20 S cts (an interim DPS of 8.0 S cts was paid following 2QFY08 results), which translates into a net yield of 4.9%, an attractive return for an investment period of three months. Traditionally, SPH’s share price sees a rally in the one month leading up to the announcement of the company’s final results. With the current share price at 12-month low, we reckon it is timely to accumulate the stock for a play on the final dividend payout. Our earnings forecasts and target price (based on sum-ofthe- parts valuation) of S$4.70 remains unchanged.
STEng – UOBKH
Closure of runway at Seletar will impact FY09’s earnings
Business Times has reported that Selatar runway will be redeveloped in November for a period of 18 months. The runway will be closed for 14 hours a day and there will be flight restrictions during this period. The move is part of a redevelopment plans to extend the runway to allow for a wide aircraft types to access the Selatar Aerospace Park.
Impact
ST Aerospace operates a Hangar at Selatar with a capacity for 13 narrow body aircraft and performs Boeing 757 conversions and other aircraft maintenance works. The company has clarified that some of the conversion and maintenance works will be shifted to Paya lebar and Changi hangars, while C130 military transport related works could be moved to Selatar. Even so, we believe that utilization rate at Selatar could fall in 2009 and that the other bases might not be able to fully take up the slack.
We estimate that Singapore operations accounted for about $600-650m in revenue in FY07. Given that works on the runway will only commence in November, there would be limited impact on FY08. However, FY09, could see at least see a 10% decline in revenue from Singapore operations. We have adjusted our FY09 net profit to reflect that but maintain our Hold recommendation for now.
SingTel – OCBC
Testing support
– SingTel has been on a decline since Oct 07 and is currently testing the support at the long-term uptrend line that connects the higher lows between Mar 07 and Jan 08.
– The price consolidation at the uptrend line could result in a mild rebound. Given the positive divergence displayed by the RSI and the oversold position of the stochastic indicator, we can expect a near-term rebound to the resistance level of S$3.60 – 3.68.
– However given the weak volume on days where bullish candlestick formations occurred over the previous trading week, and the downwards trending 50-, 100- and 200-day moving averages, we feel the upside is capped at this stage.
– After the mild rebound, we expect SingTel to re-test the support at the uptrend line. If this support fails to hold, we could witness the price slide towards the support at S$3.16.