Author: tfwee
SPH – CIMB
Holding steady
• Post-luncheon takeaways. We hosted a post-results luncheon for 17 institutional clients last Friday. SPH’s CFO, Mr Tony Mallek, addressed several issues which were of interest to clients: 1) ad demand recovery; 2) newsprint prices; 3) revenue recognition of Sky@eleven; 4) investment portfolio, and 5) the potential sale of SPH’s Paragon and M1 stakes.
• Media earnings will take time to bounce back. From discussions with management, we believe that ad demand may have bottomed out. However, a recovery is still months away. Although overall demand visibility is unchanged, SPH feels that advertisers, including property developers, are more ready to advertise.
• Positives from pick-up in property market. The latest revaluation of Paragon by Knight Frank was S$1.98bn, slightly below 2008’s value of S$2.00bn, vs. our valuation of S$1.43bn. As major risks related to its properties have eased, we believe SPH’s share price should do well.
• Outperform. Our earnings estimates have been adjusted by -1.8% to +6.3% for FY09-11, to factor in a shift in revenue recognition for Sky@eleven from FY09 to FY10, and lower staff costs. Our media earnings assumptions are intact. Our sum-ofthe- parts target price has been raised to S$3.99 from S$3.52, boosted by the revaluation of Paragon at S$1.98bn vs. our previous estimate of S$1.43bn.
SingTel – OCBC
Defensive with growth potential
Targeting wider football audience. SingTel recently unveiled its pricing plans for the upcoming UEFA Champions League, Europa League and Serie A matches next season. Offered via three platforms – on mioTV, online and on mobile, the sign-ups will cost S$15.90/month for access to all three platforms for its subscribers; it also has separate plans for individual platforms should subscribers opt not to take up the all-in-one package. And it has not forgotten about non-subscribers – they can pay S$13/month to watch these matches online or just S$6 per live match. We think the multi-platform approach is great as it enables SingTel to tap the whole market of football fans – well beyond its current mioTV subscriber base of 100k.
Defensive earnings still matter. On the economic front, there are increasing signs that the global recession has probably past its worst point, but the consensus is that the pace of the economic recovery is still expected to remain splotchy. As such, there could still be several quarters of uncertain corporate earnings for most companies. On the other hand, SingTel’s suite of services is likely to remain quite resilient as consumers nowadays have deemed them to be near-essential or even a necessity. SingTel itself has guided for stable FY10 performance, with both Singapore and Australia turning in low single-digit revenue growth.
Growth potential from regional associates. Should there be a fasterthan- expected pick up in the economic recovery, we believe that emerging markets in Asia would be the ones who will benefit the most. We further believe that this would translate into faster growth for SingTel’s regional associates, effectively adding a “recovery angle” to its investment thesis. Another potential positive would be associate Bharti’s much-talked about merger with South Africa’s MTN; this would allow SingTel to extend its reach beyond Asia and with well-established partners. Other catalysts would include possible M&As in the region.
Raising fair value to S$3.49. On the recent leadership change at rival StarHub, we do not believe it will affect SingTel much – while it is the de facto leader in the Singapore market, its importance is likely softened by its potential regional expansion. In light of the firmer regional currencies, we have bumped up our FY10 and FY11 estimates slightly; the recent rebound in the global stock markets has also increased our SOTP fair value from S$3.18 to S$3.49. Coupled with an expected 3.9% dividend yield for this year, we maintain our BUY rating.
SMRT – AmFraser
First overseas foray in transport services
• SMRT Corp Ltd has signed a new agreement to buy a 49% stake in Shenzhen ZONA Transportation Group Co Ltd (ZONA) for S$68.4mil (320 million yuan). This purchase price is 25% lower than that in an earlier agreement signed in September 2008.
• The other 51% stake in ZONA is held by National Express Transportation Group Co Ltd.
Completion of the deal depends on conditional precendents to be met by ZONA, as well as
approvals from relevant authorities in China.
• ZONA is a key transport provider in Shenzhen, Guangdong Province. Its total fleet of 803 buses offering public services also extends to Huizhou in Guangdong. ZONA also runs 142 chartered and tourist coaches, 78 long haul coaches, 260 leased cars as well as 830 taxis in Shenzhen.
• We view the deal as positive for SMRT, marking SMRT’s first overseas foray in transport
services. ZONA provides SMRT an avenue to tap further opportunities in the vast China market
through National Express, which is SMRT’s partner in ZONA. National Express has nationwide
bus licences and currently provides extensive intercity bus services in 67 cities in China.
• In terms of financials, SMRT is not disclosing much details until the deal is completed. But suffice to say, ZONA is currently in the black, and while accretive to SMRT’s earnings in FY10, will not be material.
• However, SMRT is guiding that ZONA is expected to contribute significantly in the longer term upon reaching a steady state in its operational expansion. By this, we reckon ZONA could
account for a 10% earnings contribution in five years time, at a minimum.
• Through a 33.5%-associate, ZONA has been awarded the sole public bus operations in the
BoaAnn district (where the international airport is located) in Shenzhen. Much of SMRT’s
purchase price will go towards capex for fleet expansion for this purpose.
• In the near-term, SMRT has spelt out profit targets for ZONA in the deal for (YE March) FY10 and FY11. Falling short of these targets, SMRT will be entitled to additional proportions of distributable profits based on a pre-defined formula.
• SMRT’s purchase consideration for ZONA works out to a price-to-book valuation of 1.7x for
ZONA, cheaper than SMRT’s price-to-book of 3.9x. This is based on ZONA’s net asset value of
376.7 million yuan (S$80.5mil) for its FY ending Dec-2008.
• We maintain our BUY rating on SMRT, which is trading at 17% discount to fair value of S$2.11/ share. While we currently maintain our numbers, we expect the ZONA deal to provide an upside when completed.
SMRT – CIMB
Deal revived for Shenzhen Zona investment
New sale & purchase agreement
Further to announcements made on 30 Sep 08 and 23 Jan 09, SMRT has unveiled a new sale and purchase agreement to acquire from Shenzhen Zoto Investment a 49% equity interest in Shenzhen Zona Transportation Group, a leading land transport company in Shenzhen. The purchase consideration of Rmb320m (S$68.4m) will be satisfied by wholly-owned subsidiary, SMRT Hong Kong Limited, in US$ cash equivalent. When completed, the purchase will count as a significant overseas investment for SMRT.
To recap, Zona owns 33.5% of one of only three bus operating companies in Shenzhen. Zona operates public buses, charter and tourist buses, long-haul coaches and taxi services. It also offers car rental & leasing services, and motor vehicle repairs. Its fleet comprises 803 buses, 142 charter and tourist buses, 78 long-haul coaches, 830 taxis, and 260 leased cars in the Shenzhen region. The group comprises 10 subsidiaries and three associated companies. Following the acquisition, Zona will become an associated company of SMRT.
Another Chinese company, the National Express Transportation Group, holds the remaining 51% of Zona. National Express was the first road passenger transportation company to provide extensive intercity bus services in 67 cities in China. Its other businesses include car leasing & rental, and charter & tourist bus services. It also develops and operates bus terminals.
Profit guarantee. Should Zona fail to meet certain profit targets for FY2010 and FY2011, SMRT will be entitled to additional amounts of distributable profits in Zona, in addition to distributable profits proportionate to SMRT’s stake in Zona.
Purchase consideration. Based on audited consolidated accounts for the financial year ended 31 Dec 08, Shenzhen Zona’s net asset value is Rmb376.7m (S$80.5m), represented by negative net tangible assets of Rmb48.0m (S$10.3m) and net intangible assets of Rmb424.7m (S$90.7m). Net intangible assets comprise mainly taxi operating licences acquired through open bids.
Comments
Details remain scant. The completion of the deal is subject to the satisfaction of certain conditions, including approval from the relevant Chinese authorities. No information has been given on funding or valuation. However, we again highlight that the intangible asset portion of the deal at Rmb424.7m appears excessive, probably due to a short supply of taxi licences in China and hence the premium pricing. We believe the situation in China is probably similar to Singapore, where taxi operators need to bid for certificates of entitlement (COEs). Notably, the new purchase consideration is 25.6% lower than the previous agreement, although it also corresponds to a 22% lower net asset value.
Impact based on assumptions. Despite the lack of information, we view this acquisition positively, given the growth potential of China’s public transportation sector. We understand from SMRT that Zona is profitable. If we take the average ROA of SMRT (FY09 ROA 10.8%) and ComfortDelgro (FY08 ROA 6.0%) (i.e. 8.4%) and apply that to Zona’s net asset value of S$80.5m, Zona’s pretax profit may be in the region of S$6.8m. Equity accounting SMRT’s 49% stake would result in associate income of S$3.4m, or a positive impact of 1.8% on SMRT’s FY10 pretax profit.
Valuation and recommendation
Maintain Neutral. We are keeping our forecasts unchanged as the deal appears to have a limited impact on the group’s business in the near term. We maintain our DCFderived target price of S$1.77 (WACC 9.6%). Dividend yield of 4.4% is mediocre and the stock is unlikely to outperform the market.