Aviation Services – Phillip
Aviation Services
Results commentary. Profits declined for SATS due to the loss on disposal of Daniels Group & cost pressures suffered at its core business. SIAEC recorded the higest level of sales in recent history and had strong contributions from its Joint Ventures. Despite the reversal of sales due to the terminated ROPAX contract, ST Engineering performed better than expected with significant margin improvements.
Maintain Overweight. Our Strategist kept his Overweight rating on the Aviation Services sector. Record fleet delivery into the region suggests favorable long term outlook. The current low interest rates in the market could also favor these high yielding stocks under our coverage.
Valuations. Surplus cash post divestment of Daniels Group supports our non-consensus view that SATS could pay out a special dividend at its full year results announcement. While SATS currently trades at the top end of its historical P/E trading range, we believe that this ignores the cash surplus in the company and expected earnings recovery in FY13E. At 16X Forward P/E, SIAEC’s valuation is in line with historical averages. STE currently trades below its historical average P/E multiples.
Land Transport – Phillip
Land Transport
Results commentary. Operating losses of S$5mn for SBST’s bus business, sequential decline in average fares & operating losses at its bus business in China resulted in the lower than expected earnings for CDG. While SMRT’s profits declined significantly in the quarter, the margin pressure felt was inline with our expectations.
Capacity Expansion. Singapore’s Transport Minister updated on plans for the public transport system during the Ministry’s Committee of Supply (COS) debate (See: Transportation Sector Update, dated 8 March 2012). Initiatives to ease congestion and improve service quality for the public transport sector imply that more capacity would be injected into the Bus & Rail network over the next few years. For the Bus network, the government would setup a S$1.1bn Bus Service Enhancement Fund to fund the purchase of 550 buses. The Public Transport Operators (PTOs) would fund another 250 buses, representing total fleet growth of 800 buses (c.20% of current fleet) over the next 5 years. Congestion on the Rail network would also be eased with a 40-70% increase in train fleet across various parts of the network.
No Fare adjustment in 2012. There would be no fare adjustments in 2012. Singapore’s public transport fares are reviewed annually with the maximum allowable fare increase set by a predetermined formula (0.5*ΔCPI+0.5*ΔWI-1.5%). With capacity expansion and rising operating costs, we believe that keeping transport fares unchanged would result in margin compression for the PTOs.
We prefer CDG to SMRT. With Singapore’s fare based business accounting for more than half of the Group’s profits and 77% its sales, SMRT has a significant exposure to the new measures implemented. CDG would be less affected due to the diversity of its global operations. For CDG, exposure to Singapore’s fare based business is much less material at only a fifth of its sales and 3% of profits. When comparing valuations on a Forward P/E basis, CDG’s stock price is much more attractive at 13X as compared to SMRT’s 20X. We maintain our Buy recommendation on CDG and Sell on SMRT.
SingPost – Kim Eng
Issuer of excellent pedigree
Potential for higher payout, reiterate Buy. SingPost’s recent issue of $350m in perpetual securities is superior to other issues as it commands the highest debt rating in the market and its 4.25% coupon rate is also the lowest. We see this as an opportune time to remind investors of the company’s financial strength and the fundamental stability of its core mail business. Reiterate Buy on SingPost for its very attractive dividend yield of 6.4%, which we believe is almost guaranteed, based on its history of very stable earnings, even before counting any potential upside from special dividends. Our target price is slightly reduced to $1.05 as we roll forward our valuation basis to FY Mar13F.
Not at shareholders’ expense. The $350m senior perpetual cumulative securities, or Perps, pay a 4.25% coupon, which is higher than SingPost’s overall cost of debt of 3.13-3.5%. With the Perps, the group’s interest expense is expected to double to $26m. Nonetheless, management’s dividend commitment of 6.25 cents per share is intact. In fact, there may be room for dividend upside as SingPost may not use up all the additional funds for acquisitions. And even as the company continues to face cost pressures, our earnings sensitive analysis shows that pre-tax income can withstand a decline of 20% before the payout ratio begins to look too generous on paper.
Time to flex financial muscle? To recap, SingPost has not even used up half the $200m it raised in March 2010 for acquisitions. The additional $350m raised will give the group substantial firepower to gun for bigger acquisitions, if not offer a higher dividend payout or even buy back its own shares that are giving a higher yield than its coupon rate.
Balancing optimal gearing ratio and ROE. Management is comfortable with a gearing level of up to 2x. With Perps being classified as equity, SingPost’s net gearing thus falls from 0.5x as of FY11 to $224m net cash including the Perps. This implies significant debt headroom not only for expansion, but also in support of our argument for higher dividend payouts to optimise its gearing ratio and ROE.
Dividend provides valuation support. We roll forward the basis of our target price to FY Mar13F, using a historical average PER of 14x to arrive at a target price of $1.05, slightly reduced from $1.09 previously. While SingPost continues to face cost pressure, its dividend payout should provide valuation support. Buy for a total return of 15%.
Yield Stocks – AmFraser
DIVIDEND YIELD
We think investing in high yield stocks is a way to protect and grow wealth, particularly in an inflationary yet uncertain environment. When the market dips or corrects, yields rise on lower prices, which is an opportune time to invest. Should the market remain flat thereafter, investors have dividend returns to fall back on even when there is no capital appreciation.
We shortlisted stocks based on three criteria: 1) more than 7% dividend yield, 2) more than $150mil market capitalization and 3) trading volume in the past 30‐days of more than 100k shares. Macquarie International Infrastructure Fund ($0.570, BUY), on which we have a buy rating, topped the list with 9.6% yield.
Accordingly, we examined each stock to determine 1) the consistency of the dividend payouts in the past three years; and 2) its ability to maintain earnings. Out of 15 high yield stocks, Second Chance Properties ($0.365, UNRATED), Sim Lian Group ($0.605 , UNRATED) and QAF ($0.670, UNRATED) have the strongest combination in terms of consistency in dividend payout and earnings growth.
Second Chance Properties is trading at 8.8% dividend yield and 5.6x T12M P/E. It has a reasonable gearing of 0.37x, with bulk of its assets in retail properties in Singapore. It has a growing DPS of 15.0% CAGR over FY07‐11, backed by strong and stable cash flow from operations where they achieved S$9.0‐S$12.0mil every year in the past five financial years.
Sim Lian Group is trading at 7.9% yield, 2.6x FY11P/E and 0.9x P/B. Balance sheet has strengthened over the years, with net gearing ratio dropping from 3.3x in FY08 to 1.1x in FY11. The company recorded 110% YoY jump in earnings in 1HFY12 to $139m.
QAF is trading at 7.5% dividend yield, 5.8x T12M P/E and 0.9x P/B. Their growth in DPS over the past 5 FYs has been exponential, with CAGR of 19%. With a strong current ratio of 1.5x and strong cash flow from opera
SMRT – Phillip
No fare adjustment this year
Company Overview
SMRT is a multi-modal land transport operator with exposures to various modes of operations, including rail, bus & taxi services. A significant part of its profits are generated from its ancillary businesses, such as advertising & rental of commercial spaces.
• No fare adjustments for 2012
• Under existing framework, capacity injection into the rail network would lead to mounting “Off Balance Sheet Liabilities
• Cut estimates by 8.4%/2.8% for FY13/14E
• Maintain Sell with revised target price of S$1.33
What is the news?
Singapore’s Transport Minister updated on plans for the public transport system during the Ministry’s Committee of Supply (COS) debate. (See: Transportation Sector Update, dated 8 March 2012) The key implication for SMRT is that there would be no fare revisions for 2012, implying that public transport fares for 2013 would be kept unchanged from current levels. Rail capacity would expand with more trains to be gradually injected into the system. Bus capacity would increase with the government retrieving its share of fare revenue from the 550 buses paid for by them.
How do we view this?
We reviewed our earnings forecasts to account for unchanged fares in 2013 (previous: +2.3%), but lifted fare adjustments in 2014 to 4.1% (2.3%+1.8%= 4.1%). Our fare adjustment for 2014 is on the premise that a substantial fare increase would be allowed, due to unchanged fares in 2013. With more trains to be injected into the system, we believe that a switch to the new rail financing framework is necessary for SMRT. If SMRT stays on its existing rail financing framework, the company’s “Off Balance Sheet Liabilities” could increase substantially and will be a major drag on future cash flows.
Investment Actions?
We kept our estimates for FY12E unchanged, but cut estimates by 8.4%/2.8% for FY13/14E. After adjusting our estimates, SMRT is currently trading at near historical peak multiples of 20X FY13E EPS. With the challenging
operating outlook, likely impairment charges to its bus business and uncertainties over implications of the Committee of Inquiry (COI) into Dec 2011’s disruptions, we believe that such pricey valuations are not justified. Maintain Sell, with TP lowered to S$1.33.