STEng – OCBC
Right on track
Small but meaningful acquisition. Singapore Technologies Engineering Ltd (STE) announced on 20 Sep 2011 that its American subsidiary Vision Technologies Aerospace Inc. agreed to wholly acquire DRB Aviation Consultants, Inc. (DRB Aviation) for US$1.45m (~S$1.75m). Apart from strengthening STE’s cabin interior engineering capability, DRB Aviation is a Federal Aviation Administration (FAA – the American aviation authority) designee in issuing minor Supplementary Type Certificates (STCs) for avionics and interiors projects. While it is possible for STE to develop this FAA designation in-house, management reckons this acquisition is both faster and more cost effective. Alterations to an aircraft’s certified layout require an approved STC and STE used to outsource STC certification of its aviation cabin engineering projects. With this acquisition,
the STC certification process could be done within the STE Group.
S$68m contract win from MINDEF. STE announced on 13 Sep 2011 that its subsidiary ST Kinetics won a S$68m contract from the Singapore Ministry of Defence (MINDEF) to supply its new generation of Spider Light Strike Vehicles (Spider LSV). Delivery is expected to take place over 2013-14. While the contract value is small relative to the size of a conglomerate like STE, this contract win illustrates STE’s ability to continue developing new products.
CPIB investigations. STE announced on 12 Sep 2011, that Patrick Lee, the CFO of the holding company of the group’s American business interests, Vision Technologies Systems, Inc. (VT Systems), was arrested by Singapore’s Corrupt Practices Investigation Bureau (CPIB). Lee was not charged in court, subsequently released on bail and granted permission by the CPIB to leave Singapore. STE believes this is in relation to certain transactions that happened when Lee was the financial controller at ST Marine. Since then, Lee has taken a leave of absence while the CPIB’s investigations and STE’s internal inquiry continue. STE Group’s financial controller Raphael Chin has been appointed as acting CFO of VT Systems. Management believes this arrangement will not have any material impact on the operations of the STE Group.
Maintain BUY. Since our last report on 9 Sep 2011, the FTSE Straits Times Index has fallen 5.5% to 2,701 points. During the same time, STE displayed its defensive nature as its share price only fell slightly by 0.3%.. Given STE’s strong order book of S$10.8b, its 90% dividend payout ratio and that recent news developments do not have a material impact on STE’s resilient earnings, we retain our fair value estimate of S$3.37 per share. As the fair value still represents 14.6% upside to our fair value, we maintain our BUY call.
ComfortDelgro – DMG
DTL: short-term pain, long-term gain
Some pain before the gain in DTL profitability; lowering TP. Though we are positive on CD’s award of the DTL in the long run, we believe it will incur initial start up losses. We expect DTL to be loss making up to 2019, before turning profitable. We reduce our FY13 earnings forecast by 5%, and lower our DCF derived TP to S$1.70 (from S$1.81 previously). Maintain BUY. We continue to favour CD over SMRT for its more attractive valuation with FY12 P/E of 11.3x, as well as its overseas growth potential.
Recall that NEL took three years to breakeven. We believe it is normal for a train operator to incur losses during its initial running phase. NEL opened in 2003 but only became profitable in 2006. We expect ridership for DTL to take time to reach steady state, while additional staff may have to be trained before actual operations commence. CD will also have to pay a license charge which will add on to cost. These will be negative for earnings at the start.
Overall positive on operations. Expecting DTL to be profitable once operations stabilise. A key positive for DTL is its over 150k sqft of GFA, which is more than 4 times NEL’s. Rental income for NEL formed a significant 18% of CD’s FY10 rail operating profit so we expect rental from DTL to be a key contributor to rail profitability going forward as well. Jan – Aug 11 ridership growth for bus and rail continues to be strong at 6.7% and 14.8% YoY respectively.
DTL a booster to future earnings, but lower value in the short term. We lower our DCF derived TP (WACC 9.4%, terminal growth rate 1.5%) to S$1.70 as we factor in initial years of operation losses from DTL stages 1 – 3. However, we are positive on profit contribution for DTL in the longer term. CD has also indicated that it will maintain its dividend payout ratio of at least 50% of earnings. We continue to like CD for its (1) attractive valuations, trading at FY12 P/E of 11.3x (versus SMRT’s CY12 P/E of 16.0x), and (2) its overseas growth potential.
SMRT – BT
Analysts expect bumpy ride for SMRT
OCBC says higher operating expenses are expected to eat into its FY12 income
AS 12 more stations on the Circle Line open on Oct 8, analysts will also be watching if the boost in ridership meets expectations for SMRT Corporation.
Within the next six to nine months, the ridership is expected to increase from an average of 180,000 to about 400,000 commuters, with 28 stations fully accessible as part of the $8 billion network project.
‘Currently, the Circle Line’s daily ridership remains stagnant at about 180,000 on average (or over 200,000 during peak hours), which is still a way to go from the group’s projected break-even ridership of 350,000 per day,’ said Nomura in a recent report.
The lower-than-expected growth in ridership along the Circle Line compares with the 6.4 per cent year-on-year rise in overall rail ridership at the group’s three main lines in August, Nomura noted.
But the brokerage said this reflects more the fact that the North-South and East-West mass rapid lines continue to experience strong ridership growth.
The news of the full Circle Line operation – excluding an extension at two existing stations that will be completed in the first quarter of 2012 – provides ‘temporary reprieve from otherwise negative publicity’, OCBC Investment Research said in a client note.
And there has been a lot of bad news for the transport operator of late.
Last Tuesday, a power trip stalled train services on the entire Circle Line during the morning rush hour, with about 26,600 commuters affected by the four- hour breakdown.
Transport Minister Lui Tuck Yew has called for a thorough investigation and said SMRT would be penalised if found to be at fault.
Then, last month, a north-bound SMRT train that had been spray-painted with graffiti was found – making this the second case of vandalism and security breach in two years.
SMRT is also fighting a lawsuit by the family of a Thai teenager who had lost both her legs after falling onto the tracks at the Ang Mo Kio MRT station in April.
OCBC said that higher operating expenses are expected to eat into SMRT’s fiscal 2012 earnings, which should come in lower than its earnings for fiscal 2011.
‘With the six to nine month lead-time required to ramp-up and stabilise ridership levels, we view the Circle Line’s operating profit contribution to be negative for FY12.’
By Nomura’s estimates, the Circle Line should contribute pre-tax losses of $20 million this year, which should shrink to $3 million next year.
Still, OCBC is sanguine, saying that SMRT could benefit from electricity prices heading lower due to the poor economic outlook, and more opportunities in the rental space and advertising area. It kept its ‘buy’ rating on the stock and a fair value of $2.04.
Nomura held a ‘neutral’ rating on the stock and a target price of $2.05.
It said the stock’s valuation of 20 times its fiscal 2012 earnings is ‘demanding’ though SMRT’s dividend yield of 4.8 per cent stays attractive.
Nomura has a ‘buy’ rating on competitor ComfortDelGro, saying its valuations are more compelling.
Shares of SMRT lost one-and-a-half cents to end at $1.76 on Friday.
SMRT – BT
Analysts expect bumpy ride for SMRT
OCBC says higher operating expenses are expected to eat into its FY12 income
AS 12 more stations on the Circle Line open on Oct 8, analysts will also be watching if the boost in ridership meets expectations for SMRT Corporation.
Within the next six to nine months, the ridership is expected to increase from an average of 180,000 to about 400,000 commuters, with 28 stations fully accessible as part of the $8 billion network project.
‘Currently, the Circle Line’s daily ridership remains stagnant at about 180,000 on average (or over 200,000 during peak hours), which is still a way to go from the group’s projected break-even ridership of 350,000 per day,’ said Nomura in a recent report.
The lower-than-expected growth in ridership along the Circle Line compares with the 6.4 per cent year-on-year rise in overall rail ridership at the group’s three main lines in August, Nomura noted.
But the brokerage said this reflects more the fact that the North-South and East-West mass rapid lines continue to experience strong ridership growth.
The news of the full Circle Line operation – excluding an extension at two existing stations that will be completed in the first quarter of 2012 – provides ‘temporary reprieve from otherwise negative publicity’, OCBC Investment Research said in a client note.
And there has been a lot of bad news for the transport operator of late.
Last Tuesday, a power trip stalled train services on the entire Circle Line during the morning rush hour, with about 26,600 commuters affected by the four- hour breakdown.
Transport Minister Lui Tuck Yew has called for a thorough investigation and said SMRT would be penalised if found to be at fault.
Then, last month, a north-bound SMRT train that had been spray-painted with graffiti was found – making this the second case of vandalism and security breach in two years.
SMRT is also fighting a lawsuit by the family of a Thai teenager who had lost both her legs after falling onto the tracks at the Ang Mo Kio MRT station in April.
OCBC said that higher operating expenses are expected to eat into SMRT’s fiscal 2012 earnings, which should come in lower than its earnings for fiscal 2011.
‘With the six to nine month lead-time required to ramp-up and stabilise ridership levels, we view the Circle Line’s operating profit contribution to be negative for FY12.’
By Nomura’s estimates, the Circle Line should contribute pre-tax losses of $20 million this year, which should shrink to $3 million next year.
Still, OCBC is sanguine, saying that SMRT could benefit from electricity prices heading lower due to the poor economic outlook, and more opportunities in the rental space and advertising area. It kept its ‘buy’ rating on the stock and a fair value of $2.04.
Nomura held a ‘neutral’ rating on the stock and a target price of $2.05.
It said the stock’s valuation of 20 times its fiscal 2012 earnings is ‘demanding’ though SMRT’s dividend yield of 4.8 per cent stays attractive.
Nomura has a ‘buy’ rating on competitor ComfortDelGro, saying its valuations are more compelling.
Shares of SMRT lost one-and-a-half cents to end at $1.76 on Friday.
TELCOs – CIMB
StarHub connects with Vodafone
Switching partners
A day after M1 disclosed its decision not to renew its 8-year partnership with Vodafone after this year, StarHub announced that it is tying up with Vodafone beginning 1 Jan 12. We are mildly positive as StarHub should benefit from: 1) roaming traffic funnelled by Vodafone to StarHub’s network; 2) preferential rates for StarHub’s users roaming overseas; and 3) more multinational-corporation customers in Singapore for StarHub through Vodafone’s global accounts. While details are scanty, we believe the positives will be partially offset by fees charged by Vodafone for the benefits it brings along, similar to what were imposed on M1. Also, the impact on M1’s earnings from its decision not to renew its partnership could be less than our original estimate of 5-10%, because the loss of revenue may be compensated by the cessation of fees payable to Vodafone. No changes to our earnings estimates or target prices. SingTel remains our top Singapore telco pick, followed by StarHub.
The news
A day after M1 revealed its decision not to renew its 8-year partnership with Vodafone when it ends this year, StarHub announced that it is tying up with Vodafone beginning 1 Jan 12. The partnership will encompass inbound and outbound roaming, as well as providing Vodafone’s enterprise customers with mobile services in Singapore. StarHub said this collaboration would enable it to penetrate the local enterprise mobile market with Vodafone’s enhanced roaming experience.
Comments
Small positive for StarHub. We are mildly positive on this news, based on what we know. StarHub should gain from inbound roamers from Vodafone’s users and Vodafone’s partner networks as well as MNC customers in Singapore that are part of Vodafone’s global accounts. However, the benefits should be partially offset by fees charged by Vodafone for channelling traffic and business to StarHub, akin to those levied on its current partner, M1.
Small negative for M1. We earlier estimated a 5-10% dent on M1’s core net profit from the cessation of its partnership with Vodafone but now gather from M1 that the impact on its earnings could be negligible. We understand that the loss of inbound roaming traffic should be partially compensated by the cessation fees that M1 currently pays to Vodafone.
Valuation and recommendation
No changes to our numbers. We maintain our earnings forecasts and target prices for StarHub and M1 and look forward to more details of the impact on each during the next results season. SingTel (Outperform) is our top telco pick in Singapore, followed by StarHub (Outperform). We maintain our OVERWEIGHT on the sector given the telcos’ resilient earnings and cash flows that support attractive and steady dividends.