SMRT – OCBC
MARKET INACTIVITY AHEAD OF FY12 RESULTS
•FY12 results likely to remain weak
•But weakness has already been priced in
•Attractive entry point for dividend play remains
Mass selling did not materialize
Following our last report on SMRT after its 3Q12 results, market activity on the counter has been somewhat muted. Strong selling pressure as anticipated by more than half of the street failed to materialize with the counter trading tightly range-bound for slightly more than two months. During this period, SMRT has also kept to a lower profile with the announcement of work completion from its Internal Investigation Team as the only major development.
Preview of FY12 results
Ahead of the upcoming earnings release at the end of the month, we continue to stress that SMRT is likely to see an upswing in fuel costs following the run-up in prices as well as the additional train runs commissioned in the face of higher ridership and public pressure. Coupled with higher staff costs related to seasonal merit increments and additional headcount to meet service requirements, we are likely to see the weakest quarterly performance for FY12. In terms of fall-out from the Dec 2011 service disruptions, we do not expect any incremental costs at thus juncture as the more important COI inquiry has yet to be completed.
Margin pressures but dividend play remains
While SMRT’s FY12 results are likely to stay uninspiring, the counter’s attractiveness as a dividend play remains its key selling point, which SMRT’s management has maintained and reiterated its commitment to maintain its dividend payout policy. Although its prospects going forward will be challenging – COI findings, no fare increments, SMRT’s “customer “base is still growing. Ridership levels continue to grow especially with support from the current trend in COE prices while rental and advertising yields are naturally competitive given the high foot traffic locations of their stations. With this backdrop and earnings support and stabilization in SMRT’s price, we continue to call for an attractive entry point for SMRT. Maintain BUY at an unchanged fair value estimate of S$2.04.
SMRT – OCBC
MARKET INACTIVITY AHEAD OF FY12 RESULTS
•FY12 results likely to remain weak
•But weakness has already been priced in
•Attractive entry point for dividend play remains
Mass selling did not materialize
Following our last report on SMRT after its 3Q12 results, market activity on the counter has been somewhat muted. Strong selling pressure as anticipated by more than half of the street failed to materialize with the counter trading tightly range-bound for slightly more than two months. During this period, SMRT has also kept to a lower profile with the announcement of work completion from its Internal Investigation Team as the only major development.
Preview of FY12 results
Ahead of the upcoming earnings release at the end of the month, we continue to stress that SMRT is likely to see an upswing in fuel costs following the run-up in prices as well as the additional train runs commissioned in the face of higher ridership and public pressure. Coupled with higher staff costs related to seasonal merit increments and additional headcount to meet service requirements, we are likely to see the weakest quarterly performance for FY12. In terms of fall-out from the Dec 2011 service disruptions, we do not expect any incremental costs at thus juncture as the more important COI inquiry has yet to be completed.
Margin pressures but dividend play remains
While SMRT’s FY12 results are likely to stay uninspiring, the counter’s attractiveness as a dividend play remains its key selling point, which SMRT’s management has maintained and reiterated its commitment to maintain its dividend payout policy. Although its prospects going forward will be challenging – COI findings, no fare increments, SMRT’s “customer “base is still growing. Ridership levels continue to grow especially with support from the current trend in COE prices while rental and advertising yields are naturally competitive given the high foot traffic locations of their stations. With this backdrop and earnings support and stabilization in SMRT’s price, we continue to call for an attractive entry point for SMRT. Maintain BUY at an unchanged fair value estimate of S$2.04.
ComfortDelgro – Lim and Tan
NOTABLE SHARE TRANSACTIONS
• Silchester Int’l, a value-fund manager, sold 21.4 mln shares “over a few different dates”, reducing holding to 123.893 mln shares or 5.92%.
• Silchester has been selling CD shares since Aug ’10, totaling 89.62 mln shares since.
• CD shares have been trading in a broad range of $1.30-1.65 for more than 3 years.
• The public transportation sector merits at best a HOLD recommendation.
Land Transport – Kim Eng
Forging ahead along the bus route
Pair trade opportunity. The heat issuing from the massive MRT disruptions last December has hardly dissipated when commuters are again getting hot under the collar over the sheer deluge of tax dollars being deployed to solve a problem created by operators and who now seem to be benefiting from the government’s intervention. From recent sector events, we believe that ComfortDelgro (Buy, TP $1.85) rather than SMRT (Sell, TP $1.41) will be the overall winner and this presents a unique pair trade opportunity to gain from both a 20% upside to ComfortDelgro (long) and 19% downside to SMRT (short).
Hybrid system the best model. Under Budget 2012, the government will set aside $1.1b under the Bus Services Enhancement Programme (BSEP) to fund a significant expansion of bus capacity in response to rail woes. This is the latest intervention in a long series to improve a public transport system that has proven poor in self-regulation. But even before the latest MRT breakdowns and overcrowding that prompted this move, the government’s hand is already obvious in a number of areas, most notably, control of rail capacity expansion and central planning of bus routes. If indeed the government is needed to continually intervene in private sector matters, why not just take it over wholesale? In our view, the hybrid system is perhaps the best model possible under the circumstances.
ComfortDelgro the clear winner. The BSEP and other initiatives are clearly directed at promoting bus ridership. Putting more buses on the road is a quicker fix compared to adding new rail lines. We believe this move is a boon for ComfortDelgro as the market leader in bus operations. However, an expanded fleet will mean stiff competition for bus captains, and we think that SMRT may get the short end of the stick. There is also the consideration of wage negotiations with labour unions that must be adroitly handled. From a longer-term perspective, one can argue for a consolidation in the public transport market, in which case we think ComfortDelgro would be the preferred operator. But this matter would first require a rethink of the government’s sacred cow policy of having at least two operators in every market.
Buy ComfortDelgro, avoid SMRT. We reiterate our preference for ComfortDelgro over SMRT, and believe that it justifies a higher 16x PER valuation based on recent initiatives to improve bus ridership. Its geographically diverse business also offers greater earnings resiliency and more upside potential versus SMRT’s all-domestic model.
SingPost – Lim and Tan
• The stock has reacted positively to recent news of (a) strong demand for new office space coming up in various parts of the country, including Paya Lebar ($1800 psf for Guthrie‘s development), close to its Post Centre.; (b) successful launch of the $350 mln 4.25% senior perpetual cumulative securities.
• In the process, the stock appears to have ended the technical downtrend that began after it topped up at $1.24 in Oct ’10 from a low of 63.5 cents a year before.
• Key point to note is that full potential of Post Centre has not been tapped. And we are not talking of conversion to residential use, which Sing Post cannot do, as the Post Centre is zoned commercial.
• Of the almost 1.5 mln sf space at Post Centre, 300,000 sf represents office, and the balance retail and industrial.
• We believe in the hands of “experts”, there is much that can be done to enhance shareholders value. (car show rooms?)
• At current price, Sing Post’s market cap is “only” $1970 mln, or simplistically $1330 psf.
• Until then, shareholders should be happy with the “sustainable” 6.1% yield, another strong reason to go for the ordinary shares rather than the 4.25% perpetual securities. (6.25 cents a share for the last 5 years.)