STEng – BT
ST Engineering’s Q2 net profit rises 14% to $124m
SINGAPORE Technologies Engineering’s net profit rose 14.1 per cent year on year to $124 million in the second quarter, boosted by sharply higher revenue from the sale of land vehicles and equipment.
Its land systems division, which makes specialised military and industrial vehicles, contributed most to the increase in net profit, due to higher project deliveries and vehicle sales.
Its Q2 net profit of $124 million was 33.5 per cent higher than in Q1. For the first half of the year, ST Engineering’s net profit was $216.8 million, up 11.8 per cent year on year.
The group, whose businesses include aircraft repair, shipbuilding, and electronics and weapons manufacturing, had $11.3 billion in outstanding customer orders at end-June. And it expects $2.2 billion of these to be delivered in the current H2.
Part of ST Engineering’s sales come from supplying the Singapore Armed Forces and other military customers. Commercial sales made up 60 per cent, or $913 million, of its Q2 turnover.
Temasek Holdings has a 50.5 per cent stake in the company, comprising a direct holding of 49.6 per cent and smaller stakes held by Temasek-linked companies such as DBS Group and Keppel Corporation.
ST Engineering’s Q2 earnings per share came in at 4.11 cents, up from 3.62 cents a year back and 3.08 cents in Q1 this year. Its share price ended unchanged at $3.26 yesterday, before the earnings announcement.
The group expects 2010 full-year turnover and pre-tax profit to be higher than last year barring unforeseen circumstances, ST Engineering president and chief executive Tan Pheng Hock said in a statement. An interim dividend of three cents a share has been declared, unchanged from the payout a year back.
Turnover at two of ST Engineering’s four main business segments – aerospace and marine – was little changed in Q2 compared with a year ago, at $501 million and $246 million, respectively. A third segment, electronics, reported a 10 per cent drop in turnover to $314 million, due to lower-value project milestone completions during the quarter. But a sharp rise in turnover from the land systems division to $407 million – up 52 per cent from a year ago – boosted the group’s overall turnover 8 per cent year on year to $1.52 billion.
Pre-tax profit rose at all four main business segments in Q2, compared with Q1 and a year ago. The group expects profits to rise in the second half of the year for the aerospace and marine divisions compared with H1. It expects profit to be lower for the land systems segment and little changed for the electronics division.
SMRT – AmFraser
A second round of disappointment
• SMRT Corp Ltd results surprised the market on the downside: in addition to net profit fall of 21% YoY to $38.2mil in 1QFY11, management now guides “the profitability of FY2010 may not be maintained.”
• As we were at the low-end of the full-year forecast range with FY11F EPS at 10.3 cents representing 4% YoY fall, we are comfortable maintaining our estimates. We also maintain our Fair Value at $1.99
and HOLD rating.
• SMRT’s fare business – i.e. train and bus operations which account for 78% of operating revenue
– saw sharply lower operating profit. Operating margins for MRT plunged to 21% from 32% year ago, while bus business went into operating loss of $0.8 mil, compared to $1.2mil in 1QFY10.
• MRT daily ridership growth of 13% YoY to 1,589 in 1QFY11 and 8% YoY to 833 for bus, gives little encouragement against unavoidable cost pressures. While 1QFY11 margins improved from the first round of nasty surprise in 4QFY10, managment guides that “the new Circle Line will continue to operate at a significant loss over the next 12 months.” Circle Line 1,2 and 3, reached daily ridership of 145,000, but this still falls far short of projected 200,000.
• Ramped up requirements for line CCL 1 and 2 since April 2010 opening, and preparation for CCL 4 and 5 (13 stations) opening in FY12, will ensure no let up in cost increases. At the same time, savings from Jobs Credit will cease from July 2010.
• In 1QFY11, staff costs rose 10% YoY due to 3% rise in headcount to 6,600, and made up 39% of total operating costs. At the same time, fuel costs jumped 29% YoY due to higher prices and consumption,
and accounted for 20% of total operating costs.
• After neutralized impact in 1QFY11 from fare cuts implemented on 1 April 2009, average MRT fare fell 1% YoY to 89.7 cents while that for bus fell 2% YoY to 65 cents. The new fare structure from July 2010 will be mildly positive, offsetting much of the end to a 3% temporary cut for April 2009 to June 2010.
• A buoyant economy continued to boost the segments of rental of commercial space and advertising. Combined, revenues rose 13%, and made up 10% of total operating revenues. SMRT’s lettable space expanded 8% YoY to 31,217 sq m with average occupancy rate ar 98.6%.
• Other disappointments: (1) Despite 3% rise in taxi revenue, operating profit dived 41% YoY due to higher repair and maintenance costs as well as increased hirer benefits paid out. (2) Client Nakheel PJSC is terminating its contract with SMRT for the operation and maintenance of Palm Jumeirah.
• Capex projection is now slightly tempered to S$150mil for FY11F, with $30-40mil allocated for taxi operations and about S$50mil for train.
SMRT – BT
Circle Line weighs heavy on SMRT
SHARES in SMRT Corp slipped 12 cents – or 5.4 per cent – in trading to close at $2.10 yesterday, after SMRT cautioned last week that it may not be able to maintain FY2010’s profitability for the current financial year ending March 31, 2011.
For the next 12 months, profitability is expected to be impacted by higher staff costs, volatility in energy prices and continuing losses for the Circle Line.
A DMG research report said: ‘We believe that Circle Line operations could remain a drag on earnings for FY11-12, considering that Stages 4-5 will only be completed in 2H11 (SMRT’s FY12), and may require a period of gestation to provide any possible accretion to SMRT’s bottom line.’
While ridership on the Circle Line has risen from an average daily ridership of 124,000 to nearly 145,000, the break-even target lies at about 200,000, analysts said.
The group has also recently switched from a transfer rebate system to a distance-based charging one, which may have a negative impact on fare revenue in the next 12 months.
For its fiscal first quarter ended June 30, SMRT registered a 20.7 per cent fall in net profit to $38.24 million, despite revenue rising 9 per cent to $235.34 million.
Analysts were upbeat on its retail business. ‘Advertising will benefit from the upcoming major events (such as Youth Olympic Games and Formula One) while rental will benefit from the addition of rental spaces from refurbished train stations and new Circle Line stations,’ Phillip Securities Research analyst Toh Wei Kiong wrote.
Citi Investment Research maintained a ‘sell’ on the stock, with a target price of $1.90 while Phillip maintained a ‘hold’, downgrading its fair value estimate from $2.36 to $2.18.
DMG called a ‘sell’ on SMRT with a target price of $2 and a ‘buy’ on ComfortDelGro (target price: $1.78), citing Comfort’s 15 x FY10 P/E, versus SMRT’S 20 x FY11 P/E multiple.
SMRT – Phillip
Tough Year Ahead
• 1Q11 revenue was up 9.0% y-y to S$235.3m, net profit down 20.7% y-y to S$38.2m
• 1Q11 results were slightly below our expectation
• Downgrade our price target to S$2.18 from S$2.36
• Maintain Hold rating as SMRT is fully valued at this point of time
1Q11 results were slightly below our expectation
1Q11 revenue was up 9.0% y-y to S$235.3m, while net profit was down 20.7% y-y to S$38.2m. 1Q11 revenue was slightly below our expectation due to much lower maintenance revenue while other segments were within our estimates. Operating expenses were within what we have forecasted and we expect operating expenses to increase 5.5% in FY11E. Operating profit and net profit were down 20.2% and 20.7% to S$46.1m and S$38.2m respectively, due mainly to higher operating expenses. We think that the performance for the previous year (1Q10) is quite exceptional due to the low costs operating environment and stimulus from the government.
Advertising and rental segment continue to support its bottomline
Both the advertising and rental businesses continue to do well benefitting strongly from the improving economy, contributing about 38% to 1Q11 operating profit. These 2 segments with its high operating margin of 66% and 78% are likely to do well for the rest of the year. Advertising will benefit from the upcoming major events while rental will benefit from the addition of rental spaces from refurbished train stations and new circle line stations.
Outlook and estimates for the rest of FY11
We are lowering our revenue and net profit estimates by 2.2% and 6.8% respectively, to reflect the challenging operating environment and lower revenue from its maintenance arm. Circle Line daily ridership of 145,000 was way below the breakeven target of 200,000, and is expected to operate at a significant loss until stage 4 & 5 opens in 2011. Average fares could also be impacted by the implementation of distance fares from July’10.
Valuation and Recommendation
We are maintaining our Hold recommendation and cutting our fair value estimate to S$2.18 to reflect the below than expected ridership for Circle Line and lower revenue from its maintenance arm. SMRT will likely be impacted by higher electricity and labour costs for the rest of the year with an improving economy. SMRT is currently trading at 19.9X FY11E earnings, which is 19.8% higher than its historical average of 16.6X. We think that the share price for SMRT is fully valued at this moment, and we are advising investors to stay on the sidelines until we see an improvement in the performance of circle line. We derived our fair value using the DCF model and the model is based on a risk free rate of 2.78% and 1% terminal growth.
We are maintaining our Hold rating and downgrading our fair value estimate to S$2.18 from S$2.36.
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SMRT – Lim and Tan
Just As Well
• Net profit fell worse than expected 20.7% in Q1 ended Jun ’10 to $38.24 mln (or a more moderate 7% if year ago’s $7 mln exceptional item were excluded), as higher costs (largely related to the opening of Phase 3 of the Circle Line) could not be matched by rail ridership on the new line, which came to 145,000 average a day, vs management’s expectation of up to 200,000 a day.
• What is also likely to dampen enthusiasm in the stock, which hit an all-time high of $2.33 (on Jul 5 ’10), is management’s warning of more of the same in the remaining quarters of the current fiscal year ending Mar ’11. Management does not expect profit for ye Mar ’11 to match the previous fiscal year’s $162.9 mln. The key reason again is the Circle Line. (Note: 5 stations on the Circle Line commenced operations on 28/5/09, followed by 11 on 17/4/10. The remaining 13 stations will open next year.)
• We do not however expect this to affect the dividend payment, which was raised by 0.75 cent to 8.75 cents per share for ye Mar ’10, costing $128.97 mln and representing 79% payout, vs 72% for ye Mar ’09.
• At $2.22, yield would be 3.9%, which should provide some cushion as the share price heads lower in the near term.
• We recommend BUY on Weakness. At say $2, yield would be 4.4%.