SMRT – CIMB
Out of the dark tunnel
We raise SMRT’s FY17 EPS by 13% to incorporate its higher earnings sensitivity to the new government contracting model for buses, which lifts our DCF-based target price (WACC 7%). Other potential re-rating catalysts are better earnings from cost-control measures. We also suspect that this new bus model is a prelude to a rail financing model. Given further positive news flow expected, we upgrade the stock from Hold to Add.
What Happened
The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems). Implementation starts only in 2H16 (details overleaf).
What We Think
Better earnings, also cash flow and balance sheet. More details will be unveiled next week with the announcement of the first bus package. SMRT’s Singapore bus business in FY14 contributed S$217.8m in revenue (19% of total revenue) but lost S$28.4m at the operating level. If its operating margins eventually mirror those of bus operators in Australia and the UK, at 10-17%, SMRT’s bus EBIT margin as a whole can shift up to a conservative 7% in FY17 and 12% by FY18, in our estimation, from current negative territory. We are assuming reduced capex spending of 20% for FY16 and 47% for FY17 and asset disposals of c.S$25m in FY17. Net gearing should fall to 27% by then. FY17 EPS could be lifted by 13%, simply from larger revenue contributions and the elimination of bus operating losses.
What You Should Do
Upgrade to Add. Contrary to conventional thinking, we think that the bigger beneficiary should be SMRT, as it is the one with greater earnings sensitivity to the changes. Added to this is a new rail financing framework under discussion, with the earlier-than-expected move on the bus model serving as a prelude to the rail model. All these change our mind on the stock and we upgrade it to Add.
SATS – CIMB
Expensive caterers
We downgrade SATS to Reduce from Hold with a lower target price of S$2.95, still based on 16x CY15 P/E (5-year mean). Without a major breakthrough in transforming the group, we think that its near-term operations could remain challenging as both topline and margins could be under pressure. FY14 net profit missed our forecast by 11% and consensus by 6% due to weakness in food solutions (weak TFK and lesser meals served). Associates/JVs were also affected by high costs in Hong Kong and weak cargo volume. We cut our FY15-16 EPS by 12-14% and introduce FY17 forecasts. The longer-term outlook (beyond FY17) could be positive, driven by tourism in Singapore and growth in Changi Airport, but valuations (above 5-year mean) look stretched for now.
Weak topline
FY14 revenue slipped by 2% yoy to S$1.787bn, largely on a 5% drop in food solutions (62% of revenue). The key culprits were 1) an 18% drop in contribution from TFK (in line with the c.14% depreciation of ¥ vs. S$), and 2) lower meals produced (-6% yoy to 20.6m units) from the loss of Emirates’s European flights. This is mitigated by higher gateway services (+4.5% yoy) with more passengers and flights handled in Changi Airport. We now expect a 4% yoy rise in revenue in FY15, assuming TFK’s revenue has bottomed and the effects from Emirates’s flights will diminish. Note that TFK was profitable in FY14.
Can’t fight the high staff costs
Food solutions’s operating margin dropped to 12.9% from 13.6% in FY13 and that of gateway services shrank to 2% from 3% in FY13, driven by high staff costs. Overall staff costs rose 3% yoy to S$788m or 44% of total expenses. This pressure is likely to stay given its labour-intensive business model. Benefits from automation may work in its favour over the longer term but it takes time for these incentives to materialise.
Long-term story
SATS declared a final dividend of S$0.08 (total: S$0.13), lower than our expectation of S$0.15. Net cash stood strong at S$228m. SATS is a long-term stock to own but not now, as cost headwinds persist.
ComfortDelgro – CIMB
Positive steps forward
With our FY16 EPS raised by 2.3% as the first wave of the government’s contracting model for buses kicks in, we raise our DCF-based target price (7.1% WACC), to reflect its better earnings visibility beyond FY16. Reduced capex and overall improvements in its cash-flow profile and balance sheet should allow CD to boost its overseas growth and/or dividend payouts. We maintain our Add rating, with catalysts expected from the above.
What Happened
The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems). Implementation starts only in 2H16.
What We Think
Better earnings, also cash flow and balance sheet. More details will be out next week with the announcement of the first bus package. CD’s Singapore bus business (19% of revenue) made a small operating profit of S$3.2m (only 1.8% EBIT margin and 3% of group EBIT) in 1Q14. If its operating margins eventually mirror those of Australian and UK bus operators, which hover at 10-17%, CD’s bus EBIT margin as a whole could shift up to 10.5% in FY16. We are assuming 7% less capex for FY15 and 17% less for FY16, with asset disposals of c.S$80m in FY16. All these could lift its FY15-16 EPS, with a major impact from FY17 onwards.
What You Should Do
This shift to a cost-plus model, though not overwhelming for our estimates, has other implications. It would alter the cash outlays of the group, potentially propelling: 1) its overseas forays; and 2) dividend payouts. We believe that CD’s overseas ventures yield higher profit margins for the group than its local operations, as management intends to raise overseas revenue contributions to 60% of group revenue in 5-7 years’ time, from 40% currently. YTD net-cash inflows continue to enhance its balance sheet. We think that CD’s cash-flow-generation prowess and predictable capex give it room to increase gearing for M&As and/or commit to higher dividend payouts. We maintain our Add rating.
ComfortDelgro – CIMB
Positive steps forward
With our FY16 EPS raised by 2.3% as the first wave of the government’s contracting model for buses kicks in, we raise our DCF-based target price (7.1% WACC), to reflect its better earnings visibility beyond FY16. Reduced capex and overall improvements in its cash-flow profile and balance sheet should allow CD to boost its overseas growth and/or dividend payouts. We maintain our Add rating, with catalysts expected from the above.
What Happened
The government is revamping Singapore’s public bus industry to a “government contracting model”, starting 2H14. Under the new system, the government will own all bus infrastructure (depots, buses and systems). Implementation starts only in 2H16.
What We Think
Better earnings, also cash flow and balance sheet. More details will be out next week with the announcement of the first bus package. CD’s Singapore bus business (19% of revenue) made a small operating profit of S$3.2m (only 1.8% EBIT margin and 3% of group EBIT) in 1Q14. If its operating margins eventually mirror those of Australian and UK bus operators, which hover at 10-17%, CD’s bus EBIT margin as a whole could shift up to 10.5% in FY16. We are assuming 7% less capex for FY15 and 17% less for FY16, with asset disposals of c.S$80m in FY16. All these could lift its FY15-16 EPS, with a major impact from FY17 onwards.
What You Should Do
This shift to a cost-plus model, though not overwhelming for our estimates, has other implications. It would alter the cash outlays of the group, potentially propelling: 1) its overseas forays; and 2) dividend payouts. We believe that CD’s overseas ventures yield higher profit margins for the group than its local operations, as management intends to raise overseas revenue contributions to 60% of group revenue in 5-7 years’ time, from 40% currently. YTD net-cash inflows continue to enhance its balance sheet. We think that CD’s cash-flow-generation prowess and predictable capex give it room to increase gearing for M&As and/or commit to higher dividend payouts. We maintain our Add rating.
SATS – OCBC
4QFY14 results disappoint
- 4QFY14 results below forecasts
- Expect weakness in aviation industry to spill over
- Maintain HOLD
4QFY14 results below expectations
SATS’s 4QFY14 results were below our expectations. Revenue declined 3.2% YoY to S$434.6m, or 7.9% below our forecast. Correspondingly, PATMI dropped 7.8% to S$42.6m, which is 5.8% below our estimate. PAT from overseas associates/JV for 4QFY14 was 46.5% lower at S$9.9m, mainly due to lower cargo volumes and higher staff costs. FY14 revenue dropped by 1.8% to S$1.8b. Food Solutions saw 5.2% revenue decline to S$1.1b, mainly due to: 1) weaker TFK performance from JPY translation losses, and 2) Quantas’ move to Dubai from Changi Airport. These were partially mitigated by a 4.5% revenue increase in Gateway Services to S$678.1m as more accounts were secured. FY14 PATMI came in 2.4% lower at S$180.4m. A final dividend of 8 S-cents was declared, bringing FY14 dividend to 13 S-cents, or 81% payout ratio. Management guided that such payout levels would be sustained.
Shifting expenses away from labour
As labour is the biggest expense item (48% of total expenditure in 4QFY14) and will only increase with wage inflation and statutory levies, management intends to invest more in technology. However, we think this proposition will likely only see success in markets where labour is relatively expensive (e.g. Singapore, Hong Kong and Japan). Hence, the impact is likely to be limited in the near future.
Caught in weak aviation industry
Management thinks PT CAS acquisition will create synergies and provide access to high-growth Indonesian market. They also plan to leverage on their existing relations with airlines and cruise operators to create connectivity for their clients, during which SATS will benefit too. However, we think the aviation industry headwinds will be the larger force in SATS’ near- to mid- term outlook. As overcapacity plagues passenger and cargo carriers, SATS’ end clients, we think the rates and volume for SATS will inevitably suffer as well, though not as cyclical as its end clients.
Based on 20x FY15F EPS, we derive a lower FV of S$3.23 (previous: S$3.35) and maintain HOLD.