Land Transport – OSK DMG
Positive Paradigm Shift
The Land Transport Authority (LTA) introduced the new bus operating model last night. The details have yet to be finalized and financial impact remains uncertain at this point. We opine positively towards the move as it creates a sustainable operating environment. For the two local incumbent operators, we expect them to enjoy profit boost going forward, from year 2016 to 2020. We continue to favour ComfortDelGro.
A gradual transition. The cost-plus model will kick start when the operating licenses for the two existing operators expires on 31 Aug 2016. Initially, only about 20% of the buses would be tendered out publicly (tender open to foreign operators e.g. Veolia, Keolis) for a five year operating contract with two year extension possibility. The remaining 80% of buses will continue to be operated by the two incumbents under the new model (ie contractual price to be negotiated).
Going asset light. Under the new model, LTA will assume ownership of all the us operation assets. This implies that at certain point of time, LTA will buy over the existing assets from the two local operators. As of the end of 2013, ComfortDelGro’s bus operating assets were recorded at around SGD827m book value whereas SMRT’s was estimated at about SGD250m. However the lack of details makes it difficult to ascertain the actual financial impact. We think the positive impact on ComfortDelGro will be much larger than on SMRT.
Earnings boost for both operators. We expect both ComfortDelGro and SMRT to be better off from year 2016 to 2020 even if they were to lose the first open tender since they have been barely profitable under the existing model. In our opinion, the contractual price (to be negotiated) for this five-year grace period under the new operating model is likely to lift both incumbents’ EBIT margins closer to 8% which is the industry norm, in turn lifting their profits.
Upgrade sector rating to Neutral; Prefer ComfortDelGro. In view of this positive news we upgrade the sector rating from Underweight to Neutral and raise our fair value estimates for both ComfortDelGro and SMRT respectively to SGD2.60 and SGD1.17. However, we prefer the former for its strong track record of operating under the cost-plus model which potentially leads to higher chance of tender wins as well as better operating margins.
Land Transport – OSK DMG
Positive Paradigm Shift
The Land Transport Authority (LTA) introduced the new bus operating model last night. The details have yet to be finalized and financial impact remains uncertain at this point. We opine positively towards the move as it creates a sustainable operating environment. For the two local incumbent operators, we expect them to enjoy profit boost going forward, from year 2016 to 2020. We continue to favour ComfortDelGro.
A gradual transition. The cost-plus model will kick start when the operating licenses for the two existing operators expires on 31 Aug 2016. Initially, only about 20% of the buses would be tendered out publicly (tender open to foreign operators e.g. Veolia, Keolis) for a five year operating contract with two year extension possibility. The remaining 80% of buses will continue to be operated by the two incumbents under the new model (ie contractual price to be negotiated).
Going asset light. Under the new model, LTA will assume ownership of all the us operation assets. This implies that at certain point of time, LTA will buy over the existing assets from the two local operators. As of the end of 2013, ComfortDelGro’s bus operating assets were recorded at around SGD827m book value whereas SMRT’s was estimated at about SGD250m. However the lack of details makes it difficult to ascertain the actual financial impact. We think the positive impact on ComfortDelGro will be much larger than on SMRT.
Earnings boost for both operators. We expect both ComfortDelGro and SMRT to be better off from year 2016 to 2020 even if they were to lose the first open tender since they have been barely profitable under the existing model. In our opinion, the contractual price (to be negotiated) for this five-year grace period under the new operating model is likely to lift both incumbents’ EBIT margins closer to 8% which is the industry norm, in turn lifting their profits.
Upgrade sector rating to Neutral; Prefer ComfortDelGro. In view of this positive news we upgrade the sector rating from Underweight to Neutral and raise our fair value estimates for both ComfortDelGro and SMRT respectively to SGD2.60 and SGD1.17. However, we prefer the former for its strong track record of operating under the cost-plus model which potentially leads to higher chance of tender wins as well as better operating margins.
SingPost – CIMB
Post-dated potential
SingPost’s FY14 core net profit of S$145m met expectations at 100% of our forecast and 101% of the consensus number. Revenue growth was mainly driven by e-commerce and recent acquisitions, which helped to offset the decline in its traditional mail business. We maintain our Add rating, but trim our FY15-16 EPS forecasts to reflect higher costs. Our DCF-based target price rises to S$1.61 (WACC 7.3%) after rolling forward to FY15. Rising demand for low-cost e-commerce logistics solutions in Asia is a key catalyst. We also see upside potential from M&A activities as SingPost looks to expand its e-commerce logistics capabilities and network across the region.
Results highlights
4QFY14 revenue grew 5.9% yoy on the back of: 1) higher transhipment volumes, 2) growth in vPOST shipments, and 3) full recognition of contributions from Lock+Store and Famous Holdings, acquired in 4QFY13. Excluding the two acquisitions, organic revenue growth was 3% – slower than the run-rate of 6-9% in recent quarters due to seasonality and the sale of Clout Shoppe during the quarter. Core net profit declined marginally (-1.3% yoy) as a result of the higher restructuring and development costs (estimated S$15.5m, of which S$9m was for e-commerce and S$6.5m for the mail segment).
Ongoing e-commerce expansion
SingPost is showing promising signs of progress in the e-commerce space, with over 600 e-commerce customers now, double last year’s 300. SingPost is also rapidly expanding its overseas presence – Quantium Solutions (its primary vehicle for e-commerce logistics growth) recently set up a JV in Indonesia to provide warehousing and freight forwarding services, and Lock+Store will soon introduce its self-storage services in Malaysia. SingPost’s strong net cash position of S$170.3m (3QFY14: S$134.6m) leaves room for further acquisitions in the e-commerce logistics space, which can provide potential earnings uplift.
Maintain Add on post-transformation growth potential
SingPost declared a final DPS of 2.5 Scts, bringing total DPS to 6.25 Scts. This rewards investors with an attractive yield of 4.3% while waiting for earnings growth to come post-transformation. We think that SingPost is positioned to benefit from the rising demand for e-commerce logistics solutions in the region, given its low-cost advantage and full suite of services provided.
SingPost – OCBC
Still a good place to park your funds
- Healthy results
- Growth potential and good balance sheet
- 4.4% dividend yield
Healthy FY14 results
Singapore Post (SingPost) reported a 5.9% YoY rise in revenue to S$193.3m and a 17.7% increase in net profit to S$30.7m in 4QFY14, bringing full year net profit to S$143.1m, a 4.8% rise. Excluding one-offs, underlying net profit grew 2.9% to S$145.0m in FY14, 1.8% higher than our estimate. Full consolidation of new subsidiaries and growth in e-commerce related businesses offset declines in the traditional postal business; excluding contributions from acquisitions, SingPost recorded organic revenue growth of 3.0% in 4QFY14.
Growing surely and steadily
Revenue from the international mail segment increased 27% in FY14, contributed by strong growth in e-commerce package volumes. Though the group’s business transformation will still take time (and perhaps more acquisitions), its initiatives are starting to yield results. Backed by a strong balance sheet and stable operating cash flows from its core mail business, the group is able to enhance its logistics network and e-commerce capabilities to cater to the growing industry in the Asia Pacific region. In FY14, revenue from overseas accounted for 27.8% of total turnover (vs 19.1% in FY13), of which Logistics (mainly from the regional network of Quantium Solutions and freight forwarding business of Famous Holdings) made up 88.4% and Mail the remaining 11.6%.
Stock price may be supported as long as dividend yield remains decent
We switch our valuation to the free cash flows from equity method (cost of equity: 7%, terminal growth: 2%) to capture growth from the e-commerce business. As such, our fair value rises from S$1.32 to S$1.42. Besides positive growth prospects, SingPost’s stock has also been buoyed by investors seeking to park their funds in an environment awash with liquidity. Given its consistent dividend payout of 6.25 cents per year, we believe that investors may continue to seek refuge in the stock as long as the dividend yield remains decent. Indeed at current price, the forecast dividend yield is decent at 4.4%, and may be attractive to yield seekers. However, given the limited upside potential, maintain HOLD.
SingTel – CIMB
Putting the worst behind
Following SingTel’s FY3/14 results conference call, we think that growth will be driven by Singapore and its associates. Associate contribution should improve on stabilising currencies and improving fundamentals. Optus’s EBITDA should decline in FY15 due to its network gap with Telstra while Digital Life should continue to be earnings dilutive. As a result, we lower our FY15-17 EPS by 3-7% but raise our SOP-based target price by 5 Scts to S$4.10 on higher valuation for Globe and Bharti. SingTel remains an Add with continued earnings recovery as a potential catalyst.
What Happened
SingTel hosted a conference call following the release of its FY14 results. The main takeaways are: 1) It has no plans to raise prices for its 4G data service in Singapore for now; 2) Optus indicated it will continue to focus on 4G rollout, and on regional network rollout ahead of the receipt of 700MHz spectrum in Jan 2015; and 3) its new initiatives to drive Digital Life organically will dilute EBITDA in FY15. All this has been factored into its guidance.
What We Think
We expect SingTel Singapore‟s strategy of aggressively acquiring market share to continue. This strategy has yielded revenue growth, but it has come at the expense of short-term EBITDA margin. Having said that, EBITDA margin appears to have bottomed out in 3QFY14. The margin is also aided by lower device subsidies which is an industry phenomenon. We believe that there is further mobile subscriber and ARPU downside at Optus as it continues to narrow its network gap with Telstra. With its network rebuilding exercise and the use of 700MHz spectrum to expand regional coverage, we expect Optus to be on a stronger earnings path from FY16. Hence, we have lowered our FY15-17 EPS by 3-7%, largely to reflect lower revenue and EBITDA expectations for Optus. Despite this, we raise our SOP-based target price by 5 Scts to S$4.10 after factoring in a higher valuation for Bharti and Globe.
What You Should Do
We continue to like SingTel and retain its Add recommendation even after the stock has re-rated 7% since our upgrade in 13 Feb. The currencies of its key associates have stabilised (Figure 1) and the fundamentals of its associates are generally improving. A likely re-rating catalyst is the continued turnaround in its earnings. Key risks are competition in Australia from Telstra and Optus‟s execution of its network rollout.