Land Transport – MayBank Kim Eng
Imminent Changes To Bus Operating Model
Current bus model is not sustainable; Tender system a possibility. With stagnating bus fares and rising cost from inflationary pressure, the two existing operators have been running loss-making operations for years. Under a business model that is financially unviable, we believe that SMRT and SBS Transit, a subsidiary of ComfortDelGro, would be reluctant to renew their bus licences when they are due in 2016. Hence, a change to the bus model is imminent, in our view, in favour of a tender system to award packages of service contracts. We believe that the Land Transport Authority (LTA) is currently evaluating the merits of a tender system, as evident from the tender system used to award service contracts since the start of the year.
Tendering system would likely reverse losses – upside to profits. In the near term, switching to a tender system will be positive for the Public Transport Operators (PTO), as losses at their bus units will reverse. The future profitability of the bus business would depend on the bids placed during tenders. Our analysis suggests that our profit estimates for next year would be raised by 18-22%, if the PTOs retain their current market share and their bus units achieve a 10% margin under the new business model
Key negatives for PTOs under new system. It appears that under a tendering system, the PTOs will be able to reverse losses and turn profitable. So what is the catch? We caution that there are at least three areas that would be negative for the two existing operators under a tender system: heightened competition, higher cost to ensure better service standards and shorter service contracts.
Net effect should still be positive for existing PTOs. While competition from new entrants would pose a threat, we believe that existing operators would still have an edge over new entrants with their scale of operations. Even if the existing operators do concede market share, their profitability under a tender system would still be an improvement over their current loss-making operations.
Sticking with current calls: BUY CDG, SELL SMRT. While switching to a tender system is positive for both PTOs, we maintain our preference for CDG over SMRT. We believe that our forecasts for significantly higher gearing at SMRT over the next few years will be reflected in lower stock valuations. Furthermore, PER valuations for CDG are relatively more attractive under various bus margin scenarios on a tender system. Reiterate BUY CDG, SELL SMRT.
SPH – CIMB
Deflated dividend expectations
SPH’s FY13 dividends could fall short of FY12’s 24 cents due to weak ad revenue and the loss of 30% of its property earnings. But one should not be negative on SPH as the S$757m raised from SPH REIT should compensate if management successfully develops new retail malls.
We reduce FY13-15 EPS by 2-13% for weaker ad revenues and the 30% fall in property earnings following the injection of two assets into the REIT. SPH remains a Neutral as potential dividend headwinds are balanced by S$757m cash proceeds that management is looking to deploy. Our SOP target price falls due to the payout of the 18 ct special dividend and a lower value for the core media operations after the EPS cuts.
Regular dividends may be lower than FY12’s 24 cents
We think there is a strong possibility that FY13-14 dividends (excluding 18cts special dividend) could be cut if management does not raise the payout ratio. FY13 core earnings are likely to come in around 13% lower than FY12 because of weak advertising revenues. 9M13 is already 13% lower yoy and it is unlikely that the seasonally weak 4Q13 can make up for the shortfall.
Even if the climate for advertisers picks up in FY14, it may not be able to offset the fall in earnings from the loss of 30% property income to SPH REIT. Furthermore, interest expense is set to rise as the overall cost of borrowing increases after the REIT transaction. The debt taken on at SPH REIT costs 2.4% and is estimated to increase SPH’s overall funding cost from 2.1% to 2.3%.
S$757m war chest
Dividend headwinds are tempered by the large cash pile that management raised from SPH REIT. It will presumably use the cash to develop new retail malls, which management has a good track record in. Paragon achieved 7% rental CAGR in FY03-12. Furthermore, having a platform to recycle capital allows SPH to bid more aggressively for land sites, knowing that it has a ready buyer.
Staying Neutral
We are keeping our Neutral call. SPH still offers 5.1% yield even if dividends are cut to 21 cents. This compares favourably with FCT’s 6.1% and CMT’s 4.9%, with the added kicker of S$757m of net cash proceeds raised) for SPH compared
to 0.4x net gearing for FCT and CMT.
SIAEC – CIMB
Emerging value
SIA Engineering (SIE) is likely to benefit from stronger regional travel, spurred by weak currencies. The share price has pulled back by 11% from its peak in May, making it more attractive. We upgrade our rating to Outperform from neutral.
We roll over our valuations to CY15 and upgrade our target price to S$5.20, still based on blended P/E and DCF. SIE is one of the top 10 non-REIT, high-yield Singaporean plays that are in a net cash position and has sustainable earnings growth prospects. We raise our EPS by 2% in FY16 based on higher growth in the line maintenance business. The catalysts are better-than-expected earnings and dividends.
Weak currencies boost regional travel
We expect SIE to benefit from the increase in regional air travel, which will continue on the back of weak currencies. Passenger movements between Singapore and Bali-Denpasar, Sydney, Tokyo (among Changi’s top 10 cities) registered double-digit increases in Jul 2013, in line with the weakened currencies of these countries.
Flights handled in Changi can only go up
The number of flights handled in Changi rose by an encouraging 7% yoy to 934 flights per day in Jul 2013 after a tepid average monthly increase of 5% yoy since Jun 2012. The Civil Aviation Authority of Singapore (CAAS) estimates that Changi Airport will have the capacity to handle up to 430,000 flights p.a. (1,178 flights per day) in 2018, based on 5% p.a. flight volume growth. This suggests that there is 26% upside from the existing base volume and that SIE’s line maintenance business can only go up. We marginally increase our line maintenance sales growth estimates in FY15-16 to 6% from 4%.
Attractive dividend yields
SIE’s net cash at end-1Q14 stood at S$622m, which is a level that could lead to special dividends, as in FY06 and FY11 when net cash exceeded S$500m. However, we have conservatively assumed 90% dividend payout ratio and net dividend yield of 5% in FY14. If there are no major M&As by end-FY14 and net cash still hovers above S$500m, we believe that SIE will maintain its good track record of rewarding shareholders via special dividends. The average dividend payout ratio in FY06 and FY11 was 130%, or c.S$0.33/share, resulting in a dividend yield of 7%.
ComfortDelgro – MayBank Kim Eng
More Opportunities To Grow Down Under
Successful re-tender of Region 4 in Australia. New South Wales (NSW) Minister for Transport recently announced the award of new metropolitan bus service contracts. ComfortDelGro’s Australia bus unit CDCBus again won the contract to operate Region 4, which comprises the Blacktown, Rouse Hill, Castle Hill, Dural and Parramatta regions. This effectively removes investors’ earlier fears that CDG could lose the service contract to this route, which constitutes one-third of its bus operations in Australia and involves around 500 buses.
Scope for privatisation of bus routes in NSW. Sydney Metropolitan’s bus network is made up of 15 contract regions and managed by different operators. Contract Regions 6-9 are operated by the State Transit Authority (STA) while the other regions are run by Private Bus Operators (PBO). Though the state-run operations account for only four of the 15 contract regions, they chalked up 76% of the passenger journeys clocked in FY12. With the majority of the bus transport services still managed by the state, we believe there is significant scope for privatisation of bus routes in the future. This would represent a major revenue opportunity for private operators such as CDCBus.
NSW public transport pie to continue growing. According to the NSW Long Term Transport Master Plan, Sydney’s population is expected to increase by 30% to 5.6m in 2031, which would drive daily trips made to 21.2m from 16.2m currently, a rise of 31%. With the proportion of commuters using public transport to get to work projected to increase by 3% in 2031, we expect the public transport market in NSW to continue growing. The NSW government has also stressed the importance of Sydney’s bus network to its public transport infrastructure and aims to increase bus services to satisfy the growing demand for bus travel. Hence, with expansion of the bus service market, we see room for CDG to increase its presence in the region.
Attractive valuations beckon, maintain BUY. Following the recent market correction, valuations for CDG are now below its historical average multiples of 16x PER. With acquisition-led growth driving firm earnings over the coming quarters, we expect the stock’s valuation to trade higher and keep our TP unchanged at SGD2.33, pegged at 18x FY14F PER. Maintain BUY.
ComfortDelgro – MayBank Kim Eng
More Opportunities To Grow Down Under
Successful re-tender of Region 4 in Australia. New South Wales (NSW) Minister for Transport recently announced the award of new metropolitan bus service contracts. ComfortDelGro’s Australia bus unit CDCBus again won the contract to operate Region 4, which comprises the Blacktown, Rouse Hill, Castle Hill, Dural and Parramatta regions. This effectively removes investors’ earlier fears that CDG could lose the service contract to this route, which constitutes one-third of its bus operations in Australia and involves around 500 buses.
Scope for privatisation of bus routes in NSW. Sydney Metropolitan’s bus network is made up of 15 contract regions and managed by different operators. Contract Regions 6-9 are operated by the State Transit Authority (STA) while the other regions are run by Private Bus Operators (PBO). Though the state-run operations account for only four of the 15 contract regions, they chalked up 76% of the passenger journeys clocked in FY12. With the majority of the bus transport services still managed by the state, we believe there is significant scope for privatisation of bus routes in the future. This would represent a major revenue opportunity for private operators such as CDCBus.
NSW public transport pie to continue growing. According to the NSW Long Term Transport Master Plan, Sydney’s population is expected to increase by 30% to 5.6m in 2031, which would drive daily trips made to 21.2m from 16.2m currently, a rise of 31%. With the proportion of commuters using public transport to get to work projected to increase by 3% in 2031, we expect the public transport market in NSW to continue growing. The NSW government has also stressed the importance of Sydney’s bus network to its public transport infrastructure and aims to increase bus services to satisfy the growing demand for bus travel. Hence, with expansion of the bus service market, we see room for CDG to increase its presence in the region.
Attractive valuations beckon, maintain BUY. Following the recent market correction, valuations for CDG are now below its historical average multiples of 16x PER. With acquisition-led growth driving firm earnings over the coming quarters, we expect the stock’s valuation to trade higher and keep our TP unchanged at SGD2.33, pegged at 18x FY14F PER. Maintain BUY.