ComfortDelgro – Phillip
No fare adjustment this year
Company Overview
ComfortDelGro Corporation (CDG) is a land transport conglomerate with businesses across various business segments and geography. The bus and taxi businesses are the largest profit contributors for the Group.
• No fare adjustments for 2012
• Lost of bus revenue share to fleet introduced by government
• Cut estimates by 0.5%/2.6% for FY12/13E
• Maintain Buy with revised TP of S$1.65
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 CDG 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. Being the largest bus operator in Singapore, CDG’s subsidiary SBST would suffer from bus revenue share erosion to the 550 buses introduced by the government. With the new Quality of Service (QOS) standards requiring that bus loading be reduced from the current 95% to 85%, we believe that SBST’s bus business could sink deeper into the red.
Investment Actions?
We tweaked our forecasts down with the revisions made to our estimates for CDG’s public transport business in Singapore. However, with its geographical diversification, CDG is less affected by the changes in policy implemented in Singapore. We maintain our Buy recommendation with revised target price of S$1.65.
STEng – BT
ST Kinetics braces itself for fallout from India
It’s official now and the fallout could be far-reaching.
Singapore Technologies (ST) Kinetics confirmed that it had received a formal order from the Indian defence agency blacklisting it from defence deals with the government of India for the next decade.
Legal documents reveal that the land systems company may also face potential damage settlement and criminal charges.
The Singapore company has already indicated that it would take legal steps in India to clear its name.
ST Kinetics had maintained, until recently, that ‘there were no official statements or notifications from the Indian authorities’ on an alleged blacklisting of the company from doing business with the India’s defence procurement agency, the Ordnance Factory Board (OFB).
But the company yesterday said ‘it has since received an Order dated 5 March 2012 from the OFB ordering: (a) the cancellation of all agreements with ST Kinetics, specifically a Non-Disclosure Agreement signed on 11 August 2008 with the OFB; and (b) that ST Kinetics be debarred from entering into any contract with the OFB for a period of 10 years’.
Last year, ST Kinetics had approached the Delhi High Court after receiving a show-cause notice on why it should not be barred from doing business with the Indian government. The court said that ‘the notice (by OFB) proposes to take action against the petitioner (ST Kinetics)’ which entails ‘cancellation of the Non-Disclosure Agreement; debarring the petitioner from entering into a contract with Government of India for a period of ten years, and; recovering from the petitioner the loss sustained by the Ordnance Factory Board due to cancellation of the agreement.’
ST Kinetics confirmed yesterday that the non-disclosure agreement has been cancelled and it has been blacklisted by the Indian government for 10 years. It remains to be seen if this would now lead to any damages incurred by the company.
The court order, dated May 11, 2011, also specified that the alleged conduct of corruption ST Kinetics was suspected of is deemed as criminal.
‘The alleged conduct of the petitioner (ST Kinetics), in the present case, however, if believed to be true, is a criminal conduct,’ the judge ruled.
The company was dragged into the case following a report by the Comptroller and Auditor-General of India (CAGI), which outlined the behaviour of the former director-general of OFB, Sudipta Ghosh, who is at the heart of the case, and his involvement with ST Kinetics and six other defence companies ranging from India, Israel, Russia and Switzerland.
ST Kinetics had an agreement with Mr Ghosh’s agency to supply 50,000 Singapore Assault Rifles (SAR) 21 carbines to the Indian home affairs ministry (MHA). Mr Ghosh claimed that ST Kinetics would co-produce the weapons with an Indian partner. No such arrangement existed, the report said.
Mr Ghosh recommended that MHA purchase the weapons even though they had failed one of the two trials they were put through, the report added.
Nevertheless the court order states that both parties had ‘entered into a Non-Disclosure Agreement (NDA) on 30 July, 2008 / 11 August, 2008 … as a preliminary step to explore the possibility of supply of the required Arms and Ammunition by the petitioner (ST Kinetics) to the respondent (OFB)’.
ST Kinetics’ senior counsel in Delhi had petitioned against OFB taking the three actions listed in the show-cause notice on the grounds that there is breach of the NDA by the Singapore company as he argues that this has yet to be decided by arbitration proceedings.
The judgment in the court order rejected this notion though as it separated the NDA from any alleged corruption practice. ‘During the course of execution of a contract with the Government, if a party is alleged to have indulged in a corrupt practice, the said conduct may not only lead to the termination of the contract, which would be an action taken in terms of the contract, but would also entitle the Government to take action against such a party … This alleged conduct falls outside the realm of the contractual obligations of the parties.’
Transport – BT
Public transport should stay a private matter: Tuck Yew
Transport Minister Lui Tuck Yew yesterday defended the country’s model of privately run public transport operators in Parliament. ‘Our current model leaves the operations of trains and buses to commercial entities as we believe the long term public interest is best served this way.
‘The profit incentive drives the operators towards higher efficiency and productivity, which keeps costs as low as possible . . . Otherwise, if the system is inefficiently run, the public will ultimately pay for the higher operating costs, either through higher fares, or greater government subsidies.’
The public transport model has come under scrutiny ever since a $1.1 billion package was announced by the government to supplement the existing privately run bus fleet with 550 buses. The package covers the purchase of the buses and their net operating costs for 10 years.
SBS Transit will get about two-thirds of this allocation, while SMRT Buses will get one-third. The two operators will add 250 buses of their own and the total of 800 buses will represent a 20 per cent increase in capacity.
Some 70 per cent of the additions will be made within the first three years.
Even as Mr Lui cited the privately driven success stories of the MTR in Hong Kong and London Buses, he pointed out the need for the government to ‘take control of key areas’ which include planning rail lines and bus routes, as well as deciding on ‘timely capacity injection to meet ridership growth’.
Transport researcher Lee Der Horng from the National University of Singapore told BT that there was an argument for both the private and nationalised models.
But where Singapore is concerned, the government’s selective intervention now is justified, he said. ‘Based on the government’s efficiency that has been exhibited, we should be able to further increase the government’s involvement in public transport,’ Prof Lee said.
Government involvement has increased somewhat in recent years. The hybrid of asset ownership by the government and operations by a private firm was first introduced for trains on the Downtown Line with SBS Transit as its operator. SBS Transit, which also operates the North East Line (NEL), will add 60 weekly train trips to the NEL from March 19, it was announced yesterday.
This hybrid system might soon spread to buses. ‘We will need to similarly relook the bus financing framework and decide . . . how best to introduce contestability,’ Mr Lui said yesterday.
While the government shells out the $1.1 billion for the additional buses, the operators will be expected to hold up their end of the bargain. Mr Lui said that the operators would be held to service levels for the entire fleet that will go beyond what is required by the Public Transport Council (PTC).
For example, 95 per cent of all feeder services will have to operate within 10-minute scheduled intervals or better during peak periods, up from the current 90 per cent that PTC guidelines dictate.
These requirements, however, will not be enshrined as the PTC’s Quality of Service standards for now.
As a more aggressive way to make operators pull up their socks, the government should consider setting up a separate body to operate the 550 buses, Prof Lee suggested. ‘It will be like a third operator with a different choice and the other two operators will feel the pinch of competition.’
This hike in service standards follows a drop in customer satisfaction about public transport for the second year in a row. The survey for 2011 – carried out in October after fares were adjusted but before the train service disruptions – saw overall satisfaction drop 1.9 percentage points to 90.3 per cent, the Land Transport Authority said yesterday.
On the upside, 69.1 per cent of people believe that public transport had improved from the year before.
This year, some solace will come from the absence of fare adjustments to public transport, according to Mr Lui. Instead, the current fare formula will be reviewed this year but implemented in 2013. PTC member Richard Magnus will head the review committee.
The new fare formula in 2013 could take into account the fact that fare adjustments were not made in 2012, Mr Lui said.
HealthCare – OCBC
BACK IN THE LIMELIGHT?
•Growth trend continues
•Possible sector re-rating from high profile IPOs
•Biosensors Int’l remains our top pick
4QCY11 results review
Under our Healthcare sector coverage for the recently concluded 4QCY11 results period, Raffles Medical Group (RMG) reported results which were in line with our expectations, while Biosensors International Group’s (BIG) core earnings came in slightly below our estimates. Both companies continued to showcase healthy growth trends, although BIG’s financials were boosted by the consolidation of JW Medical Systems. For RMG, we also like its high earnings quality and opine that it is sustainable, backed by its strong operating cashflow generating ability and robust industry fundamentals.
New listings could rekindle hype in sector
Media reports have recently highlighted Fortis Healthcare’s plans to list a US$400m business trust on SGX in 2Q12, following its decision to postpone the IPO of Religare Healthcare Trust last year due to unfavourable market conditions1. Another anticipated IPO could come from Khazanah Nasional’s listing of Integrated Healthcare Holdings (IHH) in 2H12, with a dual listing in Singapore and Malaysia a possibility. This could potentially raise proceeds of US$3b2. As a recap, Parkway Holdings (now part of IHH) was privatised in 2010 at ~37x trailing PER (based on EPS before exceptional items). Should this IPO materialise at similar, if not higher valuations, it might provide an impetus for a re-rating of the sector.
Maintain OVERWEIGHT on Healthcare sector
In our opinion, RMG [BUY; FV: S$2.66] would likely benefit the most in the event of a sector re-rating under the aforementioned circumstances, given its leading position as a quality private healthcare service provider. We reiterate our OVERWEIGHT rating on the Healthcare sector, underpinned by well-entrenched fundamentals such as growing affluence in the region and an aging population. Meanwhile, BIG [BUY; FV: S$1.95] remains our top pick in the sector. We see its recent share price weakness as a good buying opportunity.
STEng – OCBC
KINETICS BLACKLISTED IN INDIA
•ST Kinetics blacklisted in India
•STE maintains innocence
•No financial impact
India’s bribery scandal
ST Engineering (STE) yesterday morning halted trading of its shares and also put out an announcement in response to a bribery scandal in India. According to an Aviation Week story dated 5 Mar 2012, the Indian Ministry of Defence (MoD) has blacklisted six defence firms, including STE’s subsidiary ST Kinetics (STK), from doing business in India over the next 10 years. The MoD’s decision was based on evidence related to illegal gratification to officials, including Sudipto Ghosh, the former Director General of India’s Ordnance Factory Board (OFB).
STE maintains innocence
In its announcement yesterday, STE maintains it is a law-abiding group and will now seek legal advice so as to clear its name of any shenanigan. Furthermore, despite media reports of the blacklisting, STK has not received any official notification from the Indian authorities on this matter. In fact, in all the previous court hearings and affidavits filed, the MoD repeatedly said STK was only temporarily suspended, but not blacklisted, as an arms vendor to India. The court hearings were the result of three petitions STE filed with the Delhi High Court in Mar 2011 to seek clarification on the alleged blacklisting.
No financial impact
According to STE, STK has never won any defence contract or exported defence sales to India. STE also understands that developing defence sales to India will be a long process and has not included any expected sales to India’s MoD in its FY12 guidance. Thus, the group expects this blacklisting to have no financial impact on the group’s financial performance and maintains its FY12 guidance.
Maintain BUY
Since this matter has no financial impact on STE, coupled with STE’s vigorous insistence of its innocence, we maintain our BUY rating and fair value estimate of S$3.32/share on STE.