ComfortDelgro – OSK DMG
Positive On London Bus Acquisition
ComfortDelGro (CD) announced that it is acquiring part of FirstGroup’s London bus business for GBP57.5m (SGD109m). The purchase price implies an EV/EBITDA of 5.2x while CD currently trades at 6.1x FY13 EV/EBITDA. We are positive on the acquisition, and raise FY13/14 earnings by 2.9%/5.5%. Maintain BUY with higher TP of SGD2.20 (from SGD2.10 previously) based on DCF (WACC:9.0%; TGR: 2.5%).
Acquisition offers good value. We think the acquisition is value accretive to CD given that the purchase was made at 5.2x EV/EBITDA, cheaper than CD’s FY13 EV/EBITDA of 6.1x. Though CD’s UK/Ireland bus business is commanding lower operating margins of 7.8% compared to its Australia bus business’ 19%, management notes that this acquisition was opportunistic given improving bus operations in the UK.
A larger share of UK bus pie. Following this acquisition, CD’s UK bus market share would increase by 7ppt to 19%, sharing a joint second position with Arriva. Go-Ahead currently leads the UK bus market with a 24% market share.
Development of overseas business the way forward. As the domestic land transport market for rail and bus operators in Singapore remain challenging, we favour the growth potential of CD’s overseas businesses which accounts for 46% of operating profit and commands higher operating margins of 13.2% (versus 10% for Singapore). Management is targeting for overseas profit contribution to hit the 50% level. This London bus acquisition follows the Australia bus acquisition of Deanes Transit Group announced in early Aug 2012.
CD still offers value at current price level. At FY13 P/E of 15.5x, CD remains more attractive than SMRT’s 22.0x FY14 P/E (FYE Mar). We like CD for its widespread overseas network which allows it better overseas growth prospects – something we view as a strong advantage given the challenging domestic land transport market.
MIIF – AmFraser
Divesting its crown jewel TBC
Divestment of crown jewel Taiwan Broadband Communications (TBC). Macquarie International Infrastructure Fund (MIIF) has proposed the divestment of its 47.5% stake in TBC to a new SGX‐ST listed business trust Asian Pay Television Trust (APTT). According to MIIF, APPT has obtained a letter of eligibility‐to‐list from SGX and is targeting an initial public offering (IPO) by end May pending shareholders’ approval. Under the proposed divestment, shareholders could elect to receive their proportionate share of the MIIF APPT units or elect to receive their entitlement in cash based on APPT’s IPO price.
Equity listing of TBC more value‐enhancing for Unitholders. MIIF’s decision to pursue an equity listing for TBC is an opportunistic move amid investors’ avid hunting for yields. Over the past 18 months, MIIF has received unsolicited trade offers for TBC, which were below the minimum valuation of S$469.5mil. The minimum valuation for TBC is set at 95% of its book value and has taken into consideration all transaction costs in relation to the IPO listing.
Shareholders who wish to invest in APTT could remain vested in MIIF and receive their proportional share of APTT units. TBC’s yield is estimated to be around 9.3%, which is enticing considering the average 5‐6% yields among S‐REITs and business trusts at present. A fair value yield of 8% will imply potential upside of 16% respectively for APTT’s Unitholders, assuming that the IPO is priced at book.
Downgrade to HOLD on limited capital upside. Alternatively, for investors who do not wish to take a stake in APTT, we believe the recent appreciation in MIIF’s share price could present an opportunity for Unitholders to sell into strength and switch into other high‐yield plays with better prospects for growth. Our top pick under our coverage is Hutchison Port Holdings Trust (BUY, FV: $0.955) that boasts a forward yield of 7.2‐8.1%. Moreover, we note that there remain uncertainties surrounding the divestiture plans for the remaining assets (remaining divestments could take between 12‐18 months).
We lower our fair value to S$0.590 after taking into account MIIF’s distributions in Q113 and the expenses incurred in relation to its proposed divestiture of TBC. This represents a potential capital upside of only 1.4% over its current share price.
According to MIIF, it will maintain its policy of distributing its free cash flow to its Unitholders semi‐annually. We project its FY14 forward yield at 9.2% following its divestment of TBC, and this translates into a total return of 10.6%.
SMRT – MayBank Kim Eng
Ending the Year with a Whimper
Loss guidance follows wage hike – dividend cuts again? The previously unimaginable has happened. SMRT is expecting its first ever quarterly loss in its history for 4QFY3/13. Escalating operating costs and a SGD17m impairment in goodwill in its associate, Shenzhen ZONA, are the primary causes of the loss. We are expecting the PATMI loss to come in at ~SGD2m for the quarter, which still points to profitability at a core level excluding the effects of the impairment. However we expect final dividends to be cut as a result of this announcement. We were among the earliest to downgrade SMRT to a SELL in early 2012. This loss guidance validates our sustained SELL call, and we are reiterating it with a reduced, Street-low target price of SGD1.19.
A fallen dividend angel. SMRT has been a dividend darling in the past, with stable and growing earnings providing shareholders with a steady stream of dividends to look forward to. However those days of stability and certainty look to be coming to an end, as our final dividend forecast for FY3/13 is correspondingly cut by 30% to SG 3.5 cts /share
Posturing possibility, but immaterial to our call. We see a possibility of SMRT lumping all its bad news in a single quarter to posture for a favourable fare review outcome. The method in which public transport fares are decided is currently under review, and land transport companies like SMRT could be attempting to signal its poor financial position should the revised fare formula not equitably account for its rising costs. However, this does not change our SELL call.
SELL call reinforced – fare review lifeline still not in sight. In light of such firm guidance on the challenges ahead for land transport operators like SMRT, we are slashing our earnings forecasts by 25% for FY3/13 and ~10% for FY3/14-15. Our target price is reduced to SGD1.19, as we maintain our valuation peg to 15x FY3/14 PER, a full standard deviation below mean. SELL SMRT – we see no reason to own a stock where earnings continue to be hampered by a postponement in an equitable fare review formula and rising operational costs, which in turn translate to lower dividend yields (~3%) for shareholders.
StarHub – DBSV
Outperformance leaves limited upside potential
• Negotiations for English Premier League (EPL) rights underway; need to stem decline in pay TV customer base
• Any potential rise in annual DPS to 22Scts would imply only a 5% yield.
• The stock has rallied 17% since our upgrade on 7 Nov, 2012. Downgrade to HOLD on valuation grounds.
Need to defend pay TV customer base. StarHub is negotiating with the Premier League for EPL rights for the 2013-16 seasons on a non-exclusive basis. As per our analysis, StarHub has benefitted at least S$20m annually due to the absence of EPL rights over the last three years. However, StarHub lost 9K pay TV customers in 2012 and in order to defend its hubbing proposition, StarHub needs to spend more on content in our view.
Even a higher 22 Scts annual DPS would translate to only a 5% yield. Current dividend yield of 4.6% does not seem attractive compared to 5%-6% yield offered by some of the Thai and Malaysian telcos. Potential auction of spectrum in mid 2013 and negotiations for EPL rights are the key events before management could raise dividends. Post these events, the annual DPS could potentially be raised to match our projected EPS of 22 Scts in 2013. Prior to 2012, StarHub paid out higher DPS than EPS as it did not have to pay any cash tax due to certain group losses, which is not the case now.
Downgrade to HOLD. The stock has risen 17% since our upgrade on 7 Nov, 2012, and has exceeded our TP of S$4.30, based on DCF (WACC 6.5%, terminal growth 0%). Positives are priced in.
StarHub – DBSV
Outperformance leaves limited upside potential
• Negotiations for English Premier League (EPL) rights underway; need to stem decline in pay TV customer base
• Any potential rise in annual DPS to 22Scts would imply only a 5% yield.
• The stock has rallied 17% since our upgrade on 7 Nov, 2012. Downgrade to HOLD on valuation grounds.
Need to defend pay TV customer base. StarHub is negotiating with the Premier League for EPL rights for the 2013-16 seasons on a non-exclusive basis. As per our analysis, StarHub has benefitted at least S$20m annually due to the absence of EPL rights over the last three years. However, StarHub lost 9K pay TV customers in 2012 and in order to defend its hubbing proposition, StarHub needs to spend more on content in our view.
Even a higher 22 Scts annual DPS would translate to only a 5% yield. Current dividend yield of 4.6% does not seem attractive compared to 5%-6% yield offered by some of the Thai and Malaysian telcos. Potential auction of spectrum in mid 2013 and negotiations for EPL rights are the key events before management could raise dividends. Post these events, the annual DPS could potentially be raised to match our projected EPS of 22 Scts in 2013. Prior to 2012, StarHub paid out higher DPS than EPS as it did not have to pay any cash tax due to certain group losses, which is not the case now.
Downgrade to HOLD. The stock has risen 17% since our upgrade on 7 Nov, 2012, and has exceeded our TP of S$4.30, based on DCF (WACC 6.5%, terminal growth 0%). Positives are priced in.