ComfortDelgro – Phillip
Latent potential with overseas venture
•Strong potential with CDG’s venture overseas
•Limited exposure to energy price increase
•NEL should continue to perform well; stronger than expected overseas performance is the wild card
•We revised our PATMI estimates upwards for FY11E by 5.6% and introduce FY12/13E estimates
•Maintain Buy following a change of analyst with revised target price of S$2.01
INVESTMENT MERITS:
Global diversification. We believe that CDG’s efforts to grow its businesses beyond Singapore could lead to significant earnings growth in the future. It also reduces their dependency on the Singapore market, which has a limited scope for land transport growth.
NEL likely to do well. CDG’s rail system serves the populous areas in the North-East of Singapore. We expect continued population growth to increase ridership for their rail business.
Limited exposure to energy price increase. Exposure to energy cost is a typical concern of investing into transportation businesses. However, we believe that CDG is less exposed to potential energy price increase than its peers due to their diversified businesses and varied business models.
Licenses & Operating rights protect competitive position. We observed sustainable profitability at some of CDG’s overseas subsidiaries, which we believe could be attributable to a protected competitive position.
KEY CHALLENGES:
Singapore Bus. We expect CDG’s bus business to be affected by the growth of rail network in Singapore. Plans to extend Singapore’s rail network to 270km by 2020 is likely to result in significant cannibalization of ridership from bus operations. With a 75% market share, we foresee long term challenges for CDG’s public bus operations in Singapore. CCL’s full opening at the end of 2011 will be the near term headwind for the company.
M & A. CDG aims to derive 70% of its revenue from overseas in the long run. While we are supportive of its venture overseas, we believe that there are inherent challenges and risks in growing their businesses overseas.
Key Risks. Regulatory; Forex; M & A.
Valuation. The current market price values the stock at 14X T12M EPS, which is at the lower end of the stock’s historical trading range. Due to our expectations of robust growth in the near future, we opine that the stock deserves an above average valuation. We used a blended valuation model of DCF (COE: 8.2%, terminal g: 1%) and P/E (17X FY11e PATMI) to arrive at our target price of S$2.01. With an upside of 33.4% to the last trading price, we maintain our Buy call on CDG with a revised target price.
STEng – BT
Minimal impact from LDA termination move
Termination notice for Ropax. ST Engineering (STE) announced that its marine arm – ST Marine (STM) – has received a notice of termination from Louis Dreyfus Armateurs (LDA) regarding the shipbuilding contract for the Roll-on/Roll-off Passenger ferry (Ropax); LDA is alleging that there is a delay in the delivery of the S$179m vessel. As a recap, LDA placed the order (worth S$168m then before add-ons) in Jul 2007, with construction to start in 1H08 and delivery in 1H10; the 4,000-dwt Ropax ferry measures about 161m long and 25.6m wide, and will operate in the English Channel for day and night crossing. LDA also alleges that there is a deficiency in the deadweight capacity.
No material impact on financials. In the event that the notice is valid, STM is required to refund the milestone payments made by LDA (amounting to S$129m plus interest); but STM maintains that under the contract, its total liability is capped at 10% of the contract price. In any case, STM has referred the matter to its legal advisers; STE also does not expect the contract termination to have any material impact on its NTA or EPS for FY11. In any case, we note that the milestone payments (excluding interest and damages) are just 2.2% of STE’s FY10 revenue, and we also understand that the group has been making provisions for this particular vessel since missing the stated delivery date.
Sell or lease vessel when completed. Meanwhile, we understand that the group is going ahead with the completion of this vessel; hence even if the contract is terminated, STE has the option of either reselling it in the secondary market or chartering it out to third party operators. However, as the Ropax may be highly customized, there is a slight risk that STE may need to refit the vessel or face a longer time before it can find a suitable buyer or charterer. But from recent transaction reports from shipbrokers, we understand that the demand for RoRo (Roll-on/Roll-off) vessels remains relatively buoyant.
Maintain BUY. Currently, it is still early days to assess if STE/STM has to pay damages etc, hence we hold off adjusting our FY11 estimates; our worst case scenario could see a <5% impact on FY11F pre-tax profit. We are still positive on the group’s overall prospects, defensive nature and do not believe that this incident will affect its strong payout (around 90% of core earnings) ability; hence we maintain our BUY rating and S$3.71 fair value (21x FY11F EPS).
STEng – BT
ST Engg shares unhit by bid to end deal
LDA notice to end $179m contract referred to lawyers
THE market yesterday shrugged off news that Louis Dreyfus Armateurs (LDA) has given notice to terminate a $179 million contract with the marine arm of Singapore Technologies Engineering (ST Engg).
ST Engg shares hit an intra-day high of $3.14 before closing at $3.13, one cent up from Friday’s closing.
On Saturday, ST Engg announced that ST Marine had received a notice of termination from LDA dated March 17 relating to a shipping contract for a roll-on/roll-off passenger ferry (Ropax).
The Ropax contract – which was inked in July 2007 – was for a price of about $179 million (inclusive of variable options).
According to ST Engg, in the notice served by LDA, it was ‘alleged that there is a delay in the delivery of the Ropax vessel’.
‘They further allege that even if the vessel is tendered for delivery there will be deficiency in the deadweight capacity of the Ropax vessel,’ said ST Engg.
The notice states that LDA is ‘fully prepared to continue to fulfil its obligations under the contract’ in the event that it is not entitled to terminate the contract. However, it added that LDA ‘will become entitled in due course to terminate the contract by reason of deficiency in the deadweight capacity’.
If the notice is valid, ST Marine will be required to refund milestone payments amounting to $129 million plus interest. LDA may also pursue claims in damages.
ST Marine has referred the matter to its legal advisers, ST Engg said, adding: ‘If liable for damages, ST Marine’s position is that under the terms of the contract, its total liabilities for damages are capped at 10 per cent of the contract price.’
ST Engg said that ‘the termination of the contract is not expected to have any material impact on the consolidated net tangible assets per share and earnings per share of ST Engineering for the current financial year’.
RBS analyst Gina Kim said in a research report: ‘Although the company is saying that they expect no material impact on the earnings per share, we believe the negative impact on sentiment may be significant.’
The investment house said that the accumulated milestone plus damages claims can amount to $150 million – which is equivalent to 24 per cent of estimated pre-tax profits in 2011. A UBS estimate put a ‘high’ estimate of the potential charges at 5.5 per cent of estimated net profit for 2011.
However, RBS and UBS have maintained their ‘buy’ and ‘neutral’ ratings respectively. ‘We believe that ST Engg’s dividend payout of 90 per cent is secure despite this turn of events,’ said UBS analyst Cheryl Lee.
RBS added that ‘the relatively good news is that the contract termination value is worth only 1.3 per cent of orderbook and 1.6 per cent of market cap’.
When contacted by BT, ST Engg spokeswoman Sharolyn Choy said she was unable to comment on the lawsuit as it was being reviewed by ST Marine’s lawyers, but confirmed that the lawsuit was a first for ST Marine.
STEng – BT
ST Engg shares unhit by bid to end deal
LDA notice to end $179m contract referred to lawyers
THE market yesterday shrugged off news that Louis Dreyfus Armateurs (LDA) has given notice to terminate a $179 million contract with the marine arm of Singapore Technologies Engineering (ST Engg).
ST Engg shares hit an intra-day high of $3.14 before closing at $3.13, one cent up from Friday’s closing.
On Saturday, ST Engg announced that ST Marine had received a notice of termination from LDA dated March 17 relating to a shipping contract for a roll-on/roll-off passenger ferry (Ropax).
The Ropax contract – which was inked in July 2007 – was for a price of about $179 million (inclusive of variable options).
According to ST Engg, in the notice served by LDA, it was ‘alleged that there is a delay in the delivery of the Ropax vessel’.
‘They further allege that even if the vessel is tendered for delivery there will be deficiency in the deadweight capacity of the Ropax vessel,’ said ST Engg.
The notice states that LDA is ‘fully prepared to continue to fulfil its obligations under the contract’ in the event that it is not entitled to terminate the contract. However, it added that LDA ‘will become entitled in due course to terminate the contract by reason of deficiency in the deadweight capacity’.
If the notice is valid, ST Marine will be required to refund milestone payments amounting to $129 million plus interest. LDA may also pursue claims in damages.
ST Marine has referred the matter to its legal advisers, ST Engg said, adding: ‘If liable for damages, ST Marine’s position is that under the terms of the contract, its total liabilities for damages are capped at 10 per cent of the contract price.’
ST Engg said that ‘the termination of the contract is not expected to have any material impact on the consolidated net tangible assets per share and earnings per share of ST Engineering for the current financial year’.
RBS analyst Gina Kim said in a research report: ‘Although the company is saying that they expect no material impact on the earnings per share, we believe the negative impact on sentiment may be significant.’
The investment house said that the accumulated milestone plus damages claims can amount to $150 million – which is equivalent to 24 per cent of estimated pre-tax profits in 2011. A UBS estimate put a ‘high’ estimate of the potential charges at 5.5 per cent of estimated net profit for 2011.
However, RBS and UBS have maintained their ‘buy’ and ‘neutral’ ratings respectively. ‘We believe that ST Engg’s dividend payout of 90 per cent is secure despite this turn of events,’ said UBS analyst Cheryl Lee.
RBS added that ‘the relatively good news is that the contract termination value is worth only 1.3 per cent of orderbook and 1.6 per cent of market cap’.
When contacted by BT, ST Engg spokeswoman Sharolyn Choy said she was unable to comment on the lawsuit as it was being reviewed by ST Marine’s lawyers, but confirmed that the lawsuit was a first for ST Marine.
TELCOs – BT
Cracks surfacing at the telco fort?
Japan’s disaster is shaking even stocks that used to help shelter investors from market turbulence
AN ebbing tide lowers all boats and this time around, even telecommunications counters that have helped shelter investors from past market turbulence appear to be reeling from aftershocks of the devastating earthquake which hit Japan last week.
Singapore Telecommunications, which is traditionally seen as a defensive play, also fell victim to the global market sell-down this week with its shares tumbling to a nine-month low of $2.85 yesterday.
‘Surprisingly, a number of incumbent telcos have been weak across the region despite the broader market volatility,’ said Sachin Gupta, a senior analyst at Nomura Securities.
Investors appear to be spooked by SingTel’s overseas exposure as global economies continue to be rocked by the uncertain fallout from Japan’s worst natural disaster in nearly 100 years.
The Republic’s largest operator derives 74 per cent of its Ebitda (earnings before interest, tax, depreciation and amortisation) from its Australian subsidiary Optus and its six mobile associates across the region.
‘SingTel is facing some uncertainties, especially on regulations in India and rising competition in the Australian market,’ Mr Gupta explained.
‘The sheer exposure of the group (SingTel) to overseas markets makes the stock susceptible to external volatility,’ said OSK Research’s telecommunications analyst Jeffrey Tan, adding that investors could also be worried about a potential loss in roaming revenue as traveller numbers start to dwindle.
‘SingTel has the largest pool of foreign shareholders and investors so it would be reasonable to expect the stock to suffer a bigger sell-down on the back of prevailing concerns in the region,’ he told BT.
Selling pressure also gripped SingTel’s US counterparts including AT&T, Verizon and Sprint Nextel this week. In the region, shares of Australian telco Telstra fell 0.38 per cent to close at A$2.64 yesterday.
The exception to the rule appears to be telcos with high and sustainable dividend yields, Nomura’s Mr Gupta noted.
Singapore’s smallest operator M1 is one such counter that is favoured by most market watchers. The company’s proposed cash payout of 17.5 cents per share for 2010 translates to a sizeable yield of 7 per cent.
M1 shares held steady for most of this week but edged down one cent to $2.38 yesterday. Both Nomura and OSK have a ‘buy’ rating on this counter.
StarHub received mixed ratings from analysts, with Nomura giving it ‘reduce’ call while OSK rates it as ‘neutral’. StarHub shares closed unchanged at $2.61 yesterday.
While Singapore’s second-largest operator is viewed to have a lower ceiling for growth compared to M1 this year, StarHub’s domestic focus and dividend yield should help limit its share price downside, analysts say.
Meanwhile, OCBC Research has a ‘buy’ call on all three local operators.
‘While we continue to like the telcos for their yields and defensive earnings, we do not see any big growth drivers for them this year and hence our sector call is neutral,’ said OCBC research analyst Carey Wong.