OCBC Report 23 May 14

KEY IDEA Land Transport Sector: Another step towards sustainability LTA announced that it will restructure the public bus industry to a “Government contracting model” beginning from 2H14 (but implementation to take place only in 2H16). The key implication of this is that revenue risk will now fall under the Government instead of the public transport operators (PTOs). Only 20% of existing buses will be tendered out initially, while the remaining 80% of buses will continue to be operated by the incumbent operators. Overall, we believe this will enable the PTOs’ bus operations to return to profitability, and expect ComfortDelGro (CDG) to be a bigger beneficiary than SMRT. In light of these positive changes, we upgrade the land transport sector from Neutral to OVERWEIGHT. We maintain our BUY rating on CDG(FV lifted from S$2.30 to S$2.56) and HOLD rating on SMRT(FV lifted from S$1.25 to S$1.40). (Wong Teck Ching Andy) MORE REPORTS ComfortDelGro: Key beneficiary of policy change ComfortDelGro’s (CDG) core Singapore bus operations have raked in operational losses since FY11, due to a lack of a commensurate increase in fare adjustments despite heightened operating requirements. However, following LTA’s decision to implement a “Government gross cost contracting model”, we expect more significant improvements in its bus operations ahead, although the financial impact will only be felt in 2H16. While there is risk that CDG may lose some market share, we believe its strong knowledge of the local operating environment and experience in operating a gross cost contracting model for its UK and Australia bus businesses will put it in a good stead to clinch the upcoming tenders. Despite keeping our FY14-15 forecasts intact, we raise our FY16-18 PATMI projections by 4-12%, based on an 8% operating margin assumption for its Singapore bus operations. Consequently, our DDM-derived fair value is raised from S$2.30 to S$2.56. Maintain BUY. (Wong Teck Ching Andy) SMRT Corporation: Clearer skies ahead Operating profits for SMRT’s fare business (Bus, LRT and MRT) has been on the downtrend since FY09, with the main drag coming from its Bus operations. However, the transition of the public bus industry towards a “Government contracting model” will allow SMRT to return to profitability for its bus operations in FY17, based on our estimates. We retain our FY15-16 forecasts but raise our FY17, FY18 and FY19 PATMI projections by 7.9%, 13.4% and 12.3%, respectively. This bumps up our fair value estimate from S$1.25 to S$1.40. We believe there are now also stronger expectations for updates from the Government on the rail financing framework, with SMRT set to be a key beneficiary. However, given its robust share price run-up in recent weeks, we believe these positives have been priced in. Hence, we maintain HOLD on SMRT. (Wong Teck Ching Andy) SATS Ltd: 4QFY14 results disappoint SATS’s 4QFY14 results came in 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. FY14 revenue dropped by 1.8% to S$1.8b. Food Solutions revenue saw 5.2% 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. FY14 PATMI came in 2.4% lower at S$180.4m. While management sees growth through PT CAS, increasing connectivity and scaling up, we think the aviation industry headwinds will be the larger force in SATS’ near- to mid- term outlook. Based on 20x FY15F EPS, we derive a lower FV of S$3.23 (previous: S$3.35) and maintain HOLD. (Yap Kim Leng) City Developments Limited: Top bid at GLS tender for Yishun EC Yesterday evening, City Developments (CDL) was part of a consortium that put in the top bid of S$178.5m at a GLS tender for an EC site at Yishun Street 51 (Parcel A). The tender attracted six bidders in total, and CDL’s bid was 2.1% above the second highest bidder’s. The site has a land area of 17.9k sqm and a maximum GFA of 50.2k sqm, and we estimate breakeven and selling ASPs of S$525 psf and S$650 psf, respectively, for the EC condominium project with ~480 units. Overall, we see CDL’s bid to be a fairly decent price and note that the EC segment has been more resilient to headwinds in the domestic residential space. We opt to keep our fair value estimate of S$8.72 unchanged, pending the award of the site and more color from management. Maintain SELL. (Eli Lee)

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NEWS HEADLINES - US stocks built on advances from the previous session and closed modestly higher on Thu, with high-growth and small-cap companies leading gains. - Poor health in old age is the topmost concern among Singapore investors, followed by unaffordable healthcare costs, a survey by Manulife Financial has found. - JES International Holdings has snagged contracts to build and deliver six Ultramax bulk carriers plus five options to build a total of 30 similar carriers collectively worth US$974m. - KS Energy has secured drilling contracts worth more than US$60m as a result of contract extensions awarded to subsidiaries of its 80% owned unit, KS Drilling. - OKP Holdings' subsidiary secured a S$50.6m contract from PUB to construct a canal underneath the road and road-raising works at the Tanglin and Kim Seng Road areas. - Magnus Energy Group is the latest in the string of firms under a Commercial Affairs Department probe to be hit by the resignation of a key executive.