SMRT – DBSV
Curse of the Circle
• 1Q11 plunged 21% yoy; below expectations due to higher costs despite higher ridership
• FY11F cut by 6.5%; expect street to cut more given optimistic estimates
• Market overlooked near term humps with shares trading close to peak PE of 21x. Maintain Fully Valued, TP cut to S$1.88
1Q11 plunged 21% yoy, below expectations; FY11F cut by 6.5%. 1Q11 results came in below our expectation (6% below consensus on our original FY11F forecasts). We have cut FY11/12F earnings further by 6.5%/4.0% on higher operating costs, coupled with slower-than-expected ramp up in Circle Line (CCL) ridership growth. We believe street estimates may be lowered by a larger magnitude given higher estimates.
Revenue +9%; expenses up by a higher +13% = PBIT down 20%. 1Q11 revenue grew 9% yoy to S$235.3m on higher MRT/bus ridership, rental revenue, partially offset by lower revenue from Palm Jumeriah Monorail. Expenses grew by a higher 13% on staff costs (+10%), electricity & diesel (+29%) and others (+19%). EBIT margins dipped 7.2ppt to 19.6%.
CCL ridership of 145k/day is below target of 200k/day; losses to continue. Average ridership on Circle Line is c.145k/day with the commencement of Stage 1&2 from 17 Apr, but this is below the 200k/day ridership originally expected. Management expects the line “to operate at a significant loss over the next 12 months”, despite expectations of improving ridership.
Reiterate Fully Valued, TP cut to S$1.88. We believe that the counter is overvalued. While the long-term prospect for rail in Singapore is positive, we believe the market has overlooked near term humps, with SMRT trading at peak PE of c.21x. Our TP is adjusted down to S$1.88 on lower earnings, based on the average valuation using 15x PE ( FY11F) and DCF. We reiterate our Fully Valued recommendation.
SMRT – CIMB
Circle Line ridership below expectations
• Below; maintain NEUTRAL. 1Q11 net profit slipped 20.7% yoy to S$38.2m, 13% below our forecast (22% of our FY11 estimate) and consensus estimate due to higher-than-expected operating expenses. To incorporate this, we have cut our FY11-13 earnings estimates by 7-12%. Our DCF-derived target price accordingly dips from S$2.35 to S$2.31 (WACC 9%, terminal growth 2%). Maintain NEUTRAL as we believe SMRT’s earnings will continue to be hurt by a 2.5% fare reduction and higher operating expenses. In line with expectations, no dividend was declared. We see re-rating catalysts from higher-than-expected Circle Line ridership and lower-than-expected electricity costs.
• EBIT fell 20.3% yoy. Revenue grew 9.0% yoy, with contributions from the Circle Line Stages 1 & 2, higher rental revenue and higher bus ridership, partially offset by lower revenue from Palm Jumeirah. Staff costs rose 9.8% yoy. Electricity and diesel expenses rose 28.8% yoy on costlier energy while repairs and maintenance went up 8.9% due to more scheduled repairs and maintenance for trains and taxis.
• Challenging outlook. We expect fare-based revenue to be affected by the 2.5% fare reduction effective Jul 10. Since the opening of Stages 1 & 2, Circle Line’s average daily ridership has risen from 124k to almost 145k. Still, this is below the 200k expectation. According to SMRT, the lower-than-expected ridership and rise in electricity costs will continue to affect the Line’s profitability. While SMRT expects Circle Line’s ridership to improve, it believes the Line will continue to operate at a significant loss over the next one year. Furthermore, staff and electricity costs are expected to be higher yoy. However, SMRT expects rental revenue to be higher yoy thanks to additional rental space.
SMRT – OCBC
1QFY11 bottomline disappoints
Below expectations. SMRT Corporation reported 1QFY11 revenue of S$235.3m (+9.0% YoY, +4.6% QoQ), driven mainly by higher MRT and bus ridership, contribution from Circle Line (CCL) Stages 1 and 2, and higher rental revenue. This is largely within our expectation of S$233.4m revenue for the quarter. However, other operating income (OOI) fell by a steeper-than expected 66.8% YoY (-48.6% QoQ) due to lower other maintenance and related income. Hence, while we have adequately factored in an increase in operating costs, as guided by management in its 4QFY10 results, PATMI of S$38.2m (-20.7% YoY, +68.8% QoQ) missed our earnings expectation of S$41.8m. The quarterly topline and bottomline formed 24.4% and 22.9% of our FY11F sales and PATMI forecasts respectively (24.0% and 21.5% of consensus).
Management warns of lower profitability in FY11. SMRT revealed that the average daily ridership from CCL since the opening of Stages 1 and 2 had risen to 124-145k, as compared to ~40k from Stage 3 alone. This is consistent with our projection of 135k, but lower than LTA’s expected ridership of 200k. Management warns that this shortfall in ridership, coupled with rising electricity costs, is likely to result in CCL operating at significant loss over the next 12 months. In addition, staff and related costs are expected to add further burden to its operations, due mainly to the absence of jobs credits (S$1.2m in reported quarter vs. S$4.4m in 1QFY10), increased headcount and higher CPF rates. The group also guided that OOI should normalize to ~S$20m for FY11 due to absence of one-off items in FY10 (which helped to lift its FY10 contribution to S$43.2m). Thus, while rental revenue is expected to be higher in FY11 with increased lettable retail space, management cautions that its profitability in FY11 may not be maintained.
Downgrade to HOLD. In light of the results and challenging outlook, we now ease our FY11F earnings by 8.2%. We also tweak our dividend assumptions and parameters of our DDM model to match our earnings revision and to reflect the stock’s higher systematic risk (cost of equity: 6.4%, terminal growth rate: 2% currently). This eases our fair value to S$2.16 from S$2.33 previously. While we are positive on SMRT’s growth story in the public transport sector space in the longer term, we believe the drag in its profitability is likely to limit its upside potential in share price in near term. At current level, we downgrade SMRT to HOLD on valuation grounds.
TELCOs – DBSV
iPad- lessons learnt from AT&T
• iPad’s microSIM is smaller than traditional SIM; New revenue stream for operators from iPad’s 3G-data plan.
• Potential could be 2-3% of revenue and 3-4% of earnings, plus for cellular players.
• M1 offers cheaper iPad plans with limited usage, a lesson learnt from AT&T. SingTel and StarHub offer premium plans with higher usage.
• We prefer SingTel & M1 to StarHub.
New revenue-stream for cellular players. iPad uses microSIM card, which is smaller than traditional SIM card. Arguably SIM card can be trimmed to a microSIM card but then it would become useless for smartphone ruling out interchangeability. As such, iPad owners would need to buy new 3G-data plan, which would be a new revenue stream for cellular players. We estimate 50K and 150K iPad households in 2010 and 2011, based on 5% and 15% household penetration rate in Singapore in 2010 & 2011 respectively. Assuming 80% of iPad users subscribe to 3G-data plan with average ARPU of S$25, we estimate iPad data revenue of S$18m in 2011F, about 2.5% of industry cellular revenue. With no device subsidy involved, we expect 70-80% of revenue to flow to the bottomline, contributing about 3-4% of cellular industry bottomline in 2011.
M1’s iPad plan targets light 3G-users, lesson learnt from AT&T. In terms of strategy, M1 seems to target light 3G-data users with cheaper plans, more appealing to the students. This is in contrast to SingTel and StarHub, who are targeting heavy-data users with premium plans. Plus there is no initial fee for M1 iPad plans in contrast to its competitors. This is also inline with AT&T’s experience where it stopped offering unlimited 3G-plans to its new iPad customers and offers maximum 2GB data limit (lower than M1’s 3GB) due to capacity constraints, most probably. AT&T realized that only 2% of people used more than 2GB, congesting the network for the rest 98%. In our view, iPad is like a notebook with more indoor (Wi-Fi) usage and consumers should be discouraged to use excessive 3G-data over Wi-Fi data. While M1 does offer unlimited data plan, we expect more traction for cheaper plans as consumers budget their iPad bills on top of smartphone bills. SingTel targets high-end users with 50GB of data limit while StarHub offers unlimited data under its iPad plans, which raises questions on the efficient use of 3G-network.
Pure cellular players should benefit more. We favor M1 as the chief beneficiary of iPad’s growth in Singapore. We continue to favor SingTel and M1 over StarHub. We like SingTel for strong Optus, recovering Bharti and attractive valuations. We like M1 for its ability to gain its market share, capital management potential and defensive 7% dividend yield. For StarHub, we are afraid that group equity may become negative, if it continues with 20 cents DPS till 2012
SingPost – DBSV
M&A could be the key catalyst
At a Glance
• Underlying net profit of S$37.3m (up 1% yoy) and quarterly DPS of 1.25 Scents were inline. Lower administrative costs offset the negatives.
• S$200m raised through note-issue in March, may be used for M&A to drive future earnings growth.
• To reflect growth potential through M&A, we switch to DDM based (Cost of equity 7.7%, growth rate 2%) TP of S$1.17.
Comment on Results
Lower administrative costs offset the negatives. Net underlying profit of S$37.3m (1% yoy, 2% qoq) was inline. We highlight that operating costs declined by 2% qoq despite 3% revenue growth qoq. This was achieved by bringing down administrative costs from S$18m in 4Q10 to S$14m in 1Q11, which also offset the impact of higher terminal dues and lower benefits from job credit scheme.
The key challenges for FY11F. (i) Adverse earnings impact (estimated S$3m) from higher terminal dues, although lower than initial estimate of over S$7m.(ii) S$5m reduction in job credit benefits in FY10F as the scheme expires in June 2010.
Potential M&A may drive growth. We like to remind investors that Singpost had issued S$200m 10-year note at fixed rate of 3.5% recently, which may be used towards regional acquisitions. Currently Singpost has invested about S$40m in higher yield financial instruments with average maturity of 2 years. In our view, Singpost is unlikely to deploy all of its funds for M&A in one shot. The company may utilize its funds in a gradual manner through a combination of financial instruments and M&A activity.
Recommendation
We do not see any risk to its dividends and recommend HOLD with DDM based revised TP of S$1.17.