SMRT – CIMB
Positives priced in
• Below; downgrade to NEUTRAL. FY3/10 net profit slipped 0.1% yoy to S$162.92m, 9.7% below our and consensus estimates. The underperformance was due to higher-than-expected operating expenses, mainly a result of higher-thanexpected repair and maintenance costs for its bus operations. It also announced a final dividend of 6.75 cents/share. We cut our FY11-12 earnings estimates by 7-8% to account for lower revenue, no thanks to lower average fares from July 2010 onwards and higher operating expenses. We also introduce our FY13 earnings estimates. Due to our earnings cut, our DCF-derived target price is reduced from S$2.41 (WACC 9%, terminal growth 2%) to S$2.35. We downgrade SMRT from Outperform to NEUTRAL as we believe that positives from the opening of Circle Line stages 1 & 2 have been priced in. The stock price has done well in Apr (+11%) and its dividend yields of 3-4% are no longer attractive relative to the S-REITs.
• EBIT rose 4.5% yoy. Despite fare reductions, revenue grew 1.8% yoy, thanks to contributions from the new Circle Line, higher rental revenue and higher overseas revenue. Staff costs rose 6.3% yoy while energy costs fell 12.3% yoy due mainly to lower diesel prices. Repair and maintenance costs rose by 19.4% yoy.
• Operational review. FY10 train revenue rose 1.4% yoy, thanks to higher average ridership (up 5.2% yoy) and contributions from Circle Line’s stage 3 (the first stage to open), offset by lower average fare for MRT. However, bus revenue fell 3.6% yoy on lower average fare. Taxi revenue was down 1% yoy due to a smaller average holding fleet. Rental revenue grew 13% yoy, driven by improved yields and increased rental space. As at Mar 2010, the total lettable space was 28,909 sq m. In FY11, SMRT will have more rental space coming from nine more stations (including six new ones).
• Operating expenses to be higher in 1Q11. SMRT expects 1Q11 revenue to be higher yoy due to the newly-opened Circle Line stages 1 & 2 and higher MRT and bus ridership. However, SMRT also guided for higher opex yoy due to higher energy costs and higher staff costs related to the Circle Line.
SMRT – Phillip
Disappointing Q to end the year
• Revenue for FY10 was 3.6% higher at S$938m, net profit up 0.1% to S$162.8m
• Results were disappointing, much lower than consensus estimates
• Declared final dividends of 6.75 cents, bringing FY10 total to 8.5 cents
• Downgrade our price target to S$2.36 to reflect higher operating costs for 2011
• Maintain Hold rating as potential upside is limited to 3.5% to our fair value
Results were disappointing
4Q10 revenues were up 3.7% y-y to S$225.1m, while net profit was down 41.4% y-y to S$22.7m. For FY2010 revenues came in at S$938.2m (+3.6% y-y), which was slightly ahead of our expectations of S$932 due mainly to higher riderships, higher rental revenues and fees from overseas projects. Operating expenses has taken its toll on SMRT as total operating expenses increase 10.1% y-y to S$206.6m due mainly to higher staff costs, higher maintenance and repair costs. This came as a surprise as FY2010 was supposed to result in lower operating costs due to the global recession. As a result, net profit edge up marginally to S$162.8m (+0.1% y-y).
Bright spot for FY2010
SMRT announced a final dividend of 6.75 cents bringing the total dividends for FY2010 to 8.5 cents, this is much higher than the 7.75 cents for FY2009. The dividend increase was on the back of flat earnings growth which means payout was much higher for 2010 and we are hopeful that the management will maintain the higher payout for FY2011.
Outlook and estimates for FY2011
We are forecasting revenues to increase by 7%to S$1.0 billion to reflect the higher earnings from higher ridership numbers, higher rental and advertisement. Train riderships are expected to grow as circle line stage 1 & 2 starts to contribute with LTA forecasting daily riderships to reach 200,000 eventually and average fares will likely edged up. We are expecting rental and advertising segment to grow strongly in 2011; the opening of Esplanade Exchange and various circle line stages coupled with the better economic outlook will generate more space and higher rates. Advertising will likely benefit from the upcoming Youth Olympics, World Cup and the opening of 2 integrated resorts. However the management guided that operating costs will be likely be higher with the increased headcount, higher electricity prices and cessation of the budget assistance package.
Valuation and Recommendation
We are maintaining our Hold recommendation but downgrading our fair value estimate to S$2.36 to reflect the higher operating costs environment for 2011. SMRT could be impacted by higher electricity prices, labour costs and higher repair costs, as its fleet of buses and trains gets older. SMRT is currently trading at 21.3X FY10 earnings, which is 22% higher than its historical average of 16.6X and close to its all time high of 22.2X, maintain Hold. 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$2.36 from S$2.42 representing a potential upside of 3.5% from the closing price.
SMRT – DMG
Trading at peak valuations; SELL
4QFY10 results below expectations. SMRT registered 4QFY10 net profit of S$22.7m, down 41.4% YoY (-42.2% QoQ), representing only 12.4% of our FY10 estimates. For FY10, net income growth was flat at S$163m. Earnings came in sharply below ours and streets’ expectations due to higher-than expected staff and maintenance costs. Management cautioned that staff costs are expected to be higher in FY11 as additional headcount of between 100-150 personnel is needed for CCL Stages 4-5. We reduce our FY11 net income by 9% to S$165m in view of higher operating costs. We maintain our TP at S$2.00 but downgrade our rating to SELL (from BUY) and sector to NEUTRAL (from OVERWEIGHT) on recent price rise. SMRT declared a final dividend of 6.75¢.
Rail ridership grew 9.7% in 1Q10 (SMRT’s 4QFY10). Between Jan-Mar 2010, SMRT’s daily rail ridership rose 9.7% YoY to 1.51m. We remain optimistic that ridership figures will remain positive this year on the back of strong economic and tourism growth. Stages 1-3 of the Circle Line was fully operational in April but has come short of the government’s daily ridership projections of 200,000 commuters. With the opening of the two integrated resorts, we expect rail ridership growth to register between 7-10% in 2010.
CCL is slated to be fully operational only in FY12 (2H2011). The functioning of Stages 1-3 will not be sufficient for SMRT to breakeven until the entire CCL becomes fully operational. Our channel checks have indicated that CCL Stages 4-5 will only be completed in 2H11 (SMRT’s FY12). A fully operational CCL could raise daily ridership to 500,000, thereby providing positive accretion to SMRT’s bottom line only from FY12 onwards. We believe SMRT will continue to come under significant cost pressures in FY11, offsetting any strong rail ridership expectations.
Trading at upper-end of its 14-22x P/E band; switch to ComfortDelGro. SMRT trades at an unappealing 21x FY11 P/E multiple, nearing its peak P/E multiple of 22x. We view risk-returns on the counter as unfavourable and recommend a pair trade with ComfortDelGro, which trades at an attractive 13x FY11 P/E. SELL SMRT (TP: S$2.00) and BUY ComfortDelGro (TP: S$1.78).
SingPost – DBSV
No surprises once again!
At a Glance
• Underlying net profit grew 12% y-o-y to S$36.5m, helped by S$1.4m forex gain and S$2.8m tax savings
• Declared 2.5 cents DPS, as expected.
• Potential investments should more than offset weakness due to higher terminal dues, in our view.
• Maintain HOLD and S$1.05 TP based on 6% target yield
Comment on Result
Net underlying profit of S$36.5m (+12% y-o-y, -7% q-o-q) exceeded our S$33m forecast because of (i) S$1.4m forex gain due to stronger regional currencies; and (ii) S$2.8m tax savings as Singpost had over-provided for taxes in previous years.
Business is on recovery path, but margins are under pressure. Revenue in all three business segments improved y-o-y, but operating margins were under pressure because of consolidation of (i) Quantium Solutions, which regional logistics business reaps lower margins, and (ii) smaller contribution from higher margin financial services.
Management on right track to face challenges ahead. Higher terminal dues could reduce Singpost’s earnings by up to 5%. Additionally, job-credit benefit would drop to S$2m in FY11F from S$7m in FY10F as the scheme will expire in June this year. However, Singpost did not include job-credit benefits in its underlying net profit. Recall that Singpost had issued S$200m 10-year notes at a fixed rate of 3.5% recently, whose proceeds could be utilized for regional acquisitions, in our view, to offset potentially weaker earnings.
Recommendation
We do not see any risk to its dividends and recommend to HOLD Singpost for the 6% yield.
SingPost – OCBC
FY10 results within expectations
Results within expectations. Singapore Post (SingPost) reported a 9.2% rise in revenue to S$525.5m and a 10.9% increase in net profit to S$165.0m in FY10, both within 4% of our full-year estimates. However, net profit was better than the street’s expectations (S$153m Bloomberg consensus). In 4QFY10, group revenue rose by 15.9% YoY due to improvements in all business segments (mail, logistics, retail), as well as inclusion of revenue of Quantium Solutions. Excluding Quantium’s consolidation, revenue rose by 3.8%. Rental and property-related income also grew by 5% to S$10.2m with higher rental income from the Singapore Post Centre and leasing of space at repurposed post office buildings.
Better outlook. The outlook for the group is now better with a pick up in business activities. SingPost’s earnings are directly dependent on the performance of the Singapore economy, with more than 95% of its profits coming from the island. Just last month, the official growth forecast of the economy was upgraded from 4.5-6.5% to 7-9% for 2010 after 1Q10 GDP expanded strongly by 13.1% YoY. However, SingPost maintains a “cautiously optimistic” outlook given the challenges facing the postal industry as a whole. The group is also looking to diversify its contributions from overseas markets to expand its non-mail business.
Seeking growth opportunities. The group said that it has been actively exploring investment and business opportunities in Singapore and the region. SingPost has a strong cash position of S$390m as at 31 Mar 2010, aided by its recent S$200m bond issuance, which the group will allocate between financing new investments (bulk of proceeds), anticipated capex and working capital requirements. The market is likely looking forward to expansion-related announcements but we do hope that any acquisition 1) is not made just for the sake of acquisition, 2) value-creation will happen, 3) new development leverages on the group’s core competencies and 4) avoid overpaying as with any acquisition.
Maintain BUY. The search for the CEO is still ongoing, but the group’s management has veterans in the relevant industries, which should keep operations running smoothly. Occupancy at the Singapore Post Centre also remains high at 98.6%. A dividend of S$0.025/share has been declared, bringing the full year payout to S$0.0625/share, same as FY09’s. With a total expected return of about 12% (including 5.7% expected dividend yield), we maintain our BUY rating on SingPost with a DCFbased fair value estimate of S$1.16.