Taxiing to Another Profitable Quarter

Decent 2Q2012 results; Taxis lead again. ComfortDelGro (CDG) reported a NPATMI of SGD65.0m for 2Q2012, an 8.5% increase YoY. Although profits were boosted by a SGD7m increase in Automotive Engineering Services profit, the Taxi business continued to contribute most significantly to the bottom-line (34.7% of operating profit). An interim dividend of SG 2.9 cts was declared, 7.4% higher YoY.

Broad-based revenue growth. CDG’s 2Q2012 financial performance was notable because revenue growth was recorded across almost every business segment. Out of CDG’s core transport segments, Taxi revenue led the way with a 9% increase YoY to ~SGD280m.

Buses a drag, but expectations are low. Of some concern is the Singapore Bus segment, which saw a 65% YoY decrease in operating profit to SGD1.7m, kept afloat with help from advertising and rental revenue. While expectations remain low for the bus business on higher costs, a positive catalyst remains a favourable review of the public transport fare framework by early 2013.

Strength in diversity; Outlook largely positive. 41% of revenue and 45% of operating profit were contributed by CDG’s overseas businesses. Once again, this geographical diversity of the group’s business model allowed CDG to post decent results despite challenges faced by the local public transport operators. Management also guided towards a largely positive revenue outlook, with cost management cited as a key point of focus for the group.

CDG preferred in Land Transport sector, maintain BUY. We roll forward our 16x PER valuation to FY2013 EPS, increasing our Target Price to SGD1.94. We maintain our BUY recommendation based on CDG’s resilient earnings, complemented by its geographically diversified business, both of which support steady, growing dividend payouts. Investors buying in within this week will enjoy the interim dividend declared of SG 2.9 cts, payable on 31 Aug 2012.

Taxiing to Another Profitable Quarter

Decent 2Q2012 results; Taxis lead again. ComfortDelGro (CDG) reported a NPATMI of SGD65.0m for 2Q2012, an 8.5% increase YoY. Although profits were boosted by a SGD7m increase in Automotive Engineering Services profit, the Taxi business continued to contribute most significantly to the bottom-line (34.7% of operating profit). An interim dividend of SG 2.9 cts was declared, 7.4% higher YoY.

Broad-based revenue growth. CDG’s 2Q2012 financial performance was notable because revenue growth was recorded across almost every business segment. Out of CDG’s core transport segments, Taxi revenue led the way with a 9% increase YoY to ~SGD280m.

Buses a drag, but expectations are low. Of some concern is the Singapore Bus segment, which saw a 65% YoY decrease in operating profit to SGD1.7m, kept afloat with help from advertising and rental revenue. While expectations remain low for the bus business on higher costs, a positive catalyst remains a favourable review of the public transport fare framework by early 2013.

Strength in diversity; Outlook largely positive. 41% of revenue and 45% of operating profit were contributed by CDG’s overseas businesses. Once again, this geographical diversity of the group’s business model allowed CDG to post decent results despite challenges faced by the local public transport operators. Management also guided towards a largely positive revenue outlook, with cost management cited as a key point of focus for the group.

CDG preferred in Land Transport sector, maintain BUY. We roll forward our 16x PER valuation to FY2013 EPS, increasing our Target Price to SGD1.94. We maintain our BUY recommendation based on CDG’s resilient earnings, complemented by its geographically diversified business, both of which support steady, growing dividend payouts. Investors buying in within this week will enjoy the interim dividend declared of SG 2.9 cts, payable on 31 Aug 2012.

SBS Transit to add 1,000 more buses for S$433m

Additional buses are part of fleet renewal programme, no changes to capex. SBST has announced that they will be adding 1,000 new buses from Jan 2013 to 2015 at a cost of S$433m. This announcement does not come as a surprise as the additions to the fleet are part of CD’s fleet renewal programme which started in 2006. Our capex assumption of S$500m for FY12 has factored in this increase in bus fleet. We think near term earnings impact could be minimal as current bus operation losses for CD accounts for about 1.5% of overall EBIT. Moreover, this scheme will be rolled out over a span of a few years therefore any earnings impact is expected to be spread out. Maintain BUY on CD, with DCF derived TP of S$1.75.

26% of new fleet funded through BSEP. SBST has announced that they will be adding 1,000 new buses from Jan 2013 to 2015 at a cost of S$433m. SBST has also commented that close to 90% of its bus fleet will be new by 2015, and its fleet size is expected to increase by about 13% to 3,400 buses, which will be its largest to date. Out of the 1,000 new buses, 260 of them will be funded under the Bus Services Enhancement Programme (BSEP), while SBST will fund the remaining 740.

Recall the BSEP announced during Singapore Budget. During the Singapore Budget in Feb 2012, it was announced that the government will increase public bus fleet by 800 buses over the next five years, and of the total 800 buses, 550 (69%) will be funded by the government while the remaining 250 (31%) will be provided by the public transport operators.

Overseas ops continue to support growth

1Q12 results in-line with our expectations. ComfortDelGro’s (CD) 1Q12 PATMI came in within our expectations at S$54m (-5% QoQ, +7% YoY) on the back of higher revenue of S$855m (-4% QoQ; +7% YoY) with operating margins flat at 10.9% (versus 10.8% EBIT margin for both 4Q11 and 1Q11 period). 1Q12 PATMI made up 21.3% of our full year estimate. Amidst this difficult period for domestic bus and rail operators that are facing cost pressures, we continue to favour CD who has displayed strength in its overseas business, with 1Q12 overseas EBIT up 27% YoY to S$46m and contributing 49% to total EBIT. Maintain BUY with TP of S$1.75 based on DCF (WACC: 9.3%; TGR: 1.5%).

Growth in bus business came from overseas. 1Q12 Singapore (SG) bus EBIT fell 63% YoY to S$2.8m. Performance remained lacklustre as high fuel, staff, and repair and maintenance costs continue to compress margins. CD has commented that 40% of its FY12 fuel costs for SG and UK have been hedged. Despite SG bus ridership growth of 4.2% YoY in 1Q12, we continue to foresee a difficult domestic bus operating environment should cost pressures persist while average fares remain depressed. On the other hand we remain positive on CD’s overseas bus operations in which 1Q12 EBIT grew 41% YoY to S$30m.

DTL costs start creeping in, but not the key concern for rail. 1Q12 rail EBIT fell 49% YoY to S$3.9m due to higher repair and maintenance, and electricity costs. Stage 1 of Downtown Line (DTL) is expected to be completed by 4Q13, and CD has since hired additional 40-50 staff for DTL. Headcount for DTL is expected to increase throughout the year and is targeted to hit additional c.180-200 staff before DTL commences operations. However, DTL staff cost increases are not a major concern for us given that the new hires will largely be lower level staff. Moreover rail operations accounted for just 7% of overall FY11 EBIT.

Valuations attractive. At FY12 P/E of 12x, CD remains relatively more attractive than SMRT’s 16x FY13 P/E (FYE Mar). CD’s widespread overseas network allows it better overseas growth prospects which we view as a strong advantage.

A strong finish to the year!

Company Overview

SATS Ltd is a provider of Airport Services & Food Solutions with a dominant presence in Singapore’s Changi Airport. The Group also has a network of JVs across Asia and holds a majority stake in TFK Corp, an inflight catering business based in Japan.

• Stronger than expected end to the year

• B/S still below optimal capital structure, paving the way for higher dividend distributions in the future

• Final & Special DPS of 21.0cents

• Maintain Buy with revised TP of S$2.80

What is the news?

SATS announced a 10.7% decline in net income for the year, mainly due to the lack of contributions from Daniels Group that was divested in the year. After adjusting for the effects of one off items, underlying profits from continuing operations declined by 4.3%. EBITDA margin declined by 2.3ppt as a result of slight margin compression at its core business in Singapore and lower profitability at TFK Corp. SATS announced special dividend of 15.0cents and final dividend of 6.0cents, taking full year payout to 26.0cents per share.

How do we view this?

SATS’s result for FY12 was stronger than our expectations, mainly due to lower than expected staff cost incurred in 4QFY12. Even after accounting for the special dividend payout, SATS is still expected to have a healthy balance sheet with a net cash position. The company’s capital structure would also be significantly below management’s long term net gearing target of 30%. Hence, we believe that SATS have the capacity to pay and would likely increase its long term dividend payouts, in the absence of suitable M&A opportunities.

Investment Actions?

We maintain our Buy recommendation on SATS and revised our target price to S$2.80 as we roll forward our valuation basis and account for the special dividend payout. At the current price, SATS offers a yield of >10% over the next 12 months.