150114 insights singapore gets a smoother ride

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  • www.dbsvickers.com

    ed-TH / sa- YM

    Smoother ride on cheaper oil

    Market seemingly discounting positive effects of lower oil price for land transport operators

    Still expecting fare increases, though a tad lower Raised forecasts by 4%-9%. Turning positive again

    on CD (upgraded to BUY; TP: S$2.93) and SMRT (BUY, TP raised to S$1.90)

    Watch out for bus tender outcome and details for insights on potential changes

    Land transport plays lagging oil decline. With the recent fall in oil price to below US$50/bbl, the market seems to be unexcited of the positive effects on land transport operators. CD and SMRT are up by only 1% to 3%, though oil price has dropped by close to 50% in the past three months. Energy and fuel accounts for 9% to 14% of land transport operators costs. While we initially had reservations on the extent of the benefits noting the stronger USD and potentially lower fare increases, the further slump in oil should more than offset the mitigating factors. Raised forecasts by 4%-9%. We revised our oil price assumption to US$80/ 70 per bbl for 2015/2016. Correspondingly, we also adjusted for a stronger USD (vs SGD) and assumed a lower rate of fare increase to 2%, from 3%, in 2015. The resultant net impact is still positive and our forecasts are raised by 4% to 9% for FY15F/16F. Further declines in oil will provide further upside to our forecasts. We estimate that every US$5/bbl change in oil price could translate into 3% and 6% increase in earnings for CD (FY16F) and SMRT (FY17F) respectively, all else being constant. Preferred pick still SMRT for stronger earnings recovery; upgrade CD to BUY, TP raised to S$2.93. We upgrade CD to BUY, raised TP to S$2.93 on the back of higher net profit forecasts. We project earnings growth of 7%/15% in FY15F/16F. Our current top pick is still SMRT (BUY, TP: S$1.90) given our expectations for it to post strong earnings recovery in this FY, after three years of decline. In its upcoming 3Q15 results, we are projecting the Group to post a c.75% net profit growth to c.S$25m on the back of higher revenue and lower costs.

    STI : 3,341.07

    Analyst Andy SIM CFA +65 6682 3718 andysim@dbs.com

    STOCKS

    Source: DBS Bank ComfortDelgro : Major operator of taxi, bus and rail passenger transport services.

    SMRT : Primarily involved in operating the main MRT line in Singapore.

    Energy/Fuel as % of costs vs oil price assumptions

    8.5% 8.9%

    12.2% 11.7%

    7.0% 6.3%

    10.9% 9.7%

    105110

    80

    70

    0

    20

    40

    60

    80

    100

    120

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    25.0%

    2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016FCD (previous) SMRT (previous)CD (revised) SMRT (revised)Avg Oil price [RHS] (previous) Avg oil price (US$/bbl)

    E nergy/Fuel costs as % of revenue Avg oil price (US$/bbl)

    Source: DBS Banks estimates, Bloomberg Finance L.P., Company data

    DBS Group Research . Equity 14 Jan 2015

    Singapore Industry Focus

    Singapore Land Transport Refer to important disclosures at the end of this report

    Price Mkt Cap Target Price Performance (%)

    S$ US$m S$ 3 mth 12 mth Rating

    ComfortDelgro 2.55 4,089 2.93 2.4 26.5 BUY SMRT 1.57 1,791 1.90 3.0 33.3 BUY

  • Industry Focus

    Singapore Land Transport

    Page 2

    Smoother ride with cheaper oil 2015 expecting a well-oiled ride. 2014 was an exciting year for land transport counters, particularly in 2Q14 where there were announced changes to buses. But, as we noted in our earlier report on 30 June 2014, we argued that the positives then had been priced in; and we consequently downgraded CD to HOLD. Fast forward to 2015, we expect a smoother ride and have turned more positive on public transport operators, largely premised on the following: 1. Recent collapse of oil price, and thus revised up our EPS

    forecasts for CD and SMRT. Share price movements seem to disregard this positive impact;

    2. Expecting a fare increase, albeit smaller quantum; and, 3. Outcome of the Bulim bus contract, which should shed

    more light on the possible profitability of buses based on the Government Bus Contracting model

    Revising forecasts up by 4%-9% on lower oil price. With the recent further slump in oil price to below US$50/bbl, the market seems to be unexcited of the positive effects on land transport operators, judging by the share price performances. CD and SMRT are up by only 1% to 3%, though oil price has dropped by close to 50% in the past three months. While other transport-related companies have oil/energy as a higher cost component (e.g. airlines), energy and fuel still accounts for 9% to 14% of land transport operators costs.

    We revised our assumptions and raised our forecasts by 4% to 9% for land transport companies in Singapore. We expect the positive effects to flow through for land transport operators for 2015. If the low oil price is sustained, the benefits will be seen further out into 2016 or even 2017, based on our expectations. Upgrade CD to BUY, raise TP to S$2.93. We are upgrading CD to BUY, with a raised TP of S$2.93 on the back of 3.8%/8.6% increases on our FY15F/16F net profit forecasts. As such, we project an earnings growth of 7%/15% in FY15F/16F. The higher rate of growth in FY16F is on expectations that we should see lower energy/fuel costs as management locks in its costs, coupled with the expected changes in bus operations. The Government Bus Contracting model for public schedule buses is expected to take place from 2H16. Current preferred pick still SMRT with raised TP of S$1.90. We also raised our earnings forecasts for SMRT by 4.3%/7% for FY15F/16F on lower oil price assumptions, offset by a lower rate of fare increase. Our TP is raised to S$1.90. At this stage and in the near term, our preference is for SMRT due to: (i) a strong earnings recovery after three years of decline, and the upcoming 3Q15 results, expected on 29 Jan15, should continue to show a solid growth quantum as per 2Q15s results; and (ii) lower price of oil.

    Share prices of CD and SMRT stayed muted although oil price is down by c.50% in the past 3 months

    CD and SMRT up by 1-3% while oil price down

    by >46%

  • Industry Focus

    Singapore Land Transport

    Page 3

    Oil price: Lower oil price will benefit land transport operators Positive effects will flow through with slump in oil price; raising forecasts by 4%-9% on lower oil price assumption. Energy and electricity account for between 9% to 14% of CD and SMRTs costs. The recent slump in oil price and bringing it to multi-year lows will have a positive impact on land transport operators, based on our expectations. We have thus further lowered our cost assumptions for both operators, and are raising forecasts by 4%-9%. Our new oil price assumption is US$80 and US$70/bbl for 2015 and 2016 respectively. Effects offset by stronger USD; smaller quantum of fare increase expected. One could note that the quantum of net benefit to our estimates seems relatively muted, considering crude oil price has slumped by 50% over the last six months or so. This is due to: (i) the effects of a weaker SGD vs USD; and (ii) dialing back our expectations for a fare increase in 2015 to 2%, from 3% previously.

    Bottomline: Net positive, but land transport a laggard and market yet to price in lower oil price, in our view. The changes to our assumptions and net profit forecasts are reflected in the table below. The net impact is still positive for both CD and SMRT. Our current expectation is that SMRT would be in better stead to gain more (if oil price continues to stay low), given its higher percentage of energy costs to revenue. We also believe that CD has been more proactive in hedging its diesel requirements, while SMRT seem to have taken a more opportunistic stance in the hope of lower prices.

    Changes to oil price and fare increase assumptions, and resultant change to DBS net profit forecasts of CD and SMRT

    Previous New Comments Key changes to assumptions FY14F FY15F FY16F FY14F FY15F FY16F Oil price 100 105 110 90 80 70 Assumption is higher than current oil price as

    the land transport operators have hedged a portion of their requirements. Further downtrend in oil will have additional upside to earnings, assuming all else being constant.

    Fare increase 3% 3% 3% 3% 2% -1% Assume a 2% increase, a tad lower than the 2.8% max allowed for 2015, and a -1% decline for 2016

    Previous New Comments Net profit forecasts (S$m) FY14 FY15 FY16 FY14 FY15F FY16F

    CD 281 290 318 282 302 345 CD has hedged 70% of FY15F diesel (as per Nov14)

    % chg (previous to new) 0.3% 3.8% 8.6%

    SMRT* 93 111 127 97 119 127

    % chg (previous to new) 4.3% 7.0% 0.1%

    *SMRT equates to FYE Mar 15F/16F/17F Source: DBS Bank estimates

  • Industry Focus

    Singapore Land Transport

    Page 4

    CD Operating expenses breakdown (FYE Dec13) SMRT Operating expenses breakdown (FYE Mar14)

    Source: Company, DBS Bank Source: Company, DBS Bank

    Energy/Fuel costs as % of revenue for CD/ SMRT vis--vis yearly average oil price (US$/bbl)

    Source: DBS Bank, Bloomberg Finance L.P., Company

    Staff and related Costs

    37%

    Depreciation and

    amortisation10%

    Payment for contract

    services15%

    Material & consumables

    7%

    Energy and fuel costs

    9%

    Repairs and maintenance

    costs7%

    Road and diesel taxes

    4%

    Insurance and accident

    comp4% Others

    7%

    FY13 total operating expenses = S$3.3