Navigating Singapore ~ Transport and airport services - Neutral
Land transport: largely stable outlook for 2017
- With SMRT having been privatised by Temasek in Oct 16, ComfortDelGro (Add) is the only liquid proxy to the Singapore land transport sector. Being a well diversified land transport play, we expect a largely stable 2017 for Comfort, although different sub-segments, including mainly bus (Singapore, UK and Australia), taxi (mainly Singapore and China) and rail (Singapore), are facing their respective opportunities and challenges.
Positive #1: Better bus margins and cash flows.
- FY17 will be the first full year of government contracting model (GCM, effective Sep 16). Due to the cost-indexing and asset-light nature of the GCM, we expect higher Singapore bus margins and improving bus operating cash flow in FY17 vs. FY16.
Positive #2: Rail’s better profit in 2H17.
- Comfort’s Singapore rail profitability will be a story of two halves – weak in 1H17 and better in 2H17 as Downtown Line (DTL) stage III is expected to commence operations in Sep 2017.
Positive #3: M&A hopes.
- We understand that management is currently in active negotiations on overseas acquisitions, which we believe are likely to be earnings- or value-accretive, in view of its past good M&A track record.
Negative #1: Adverse FX translation.
- Overseas bus revenue/profit could see a yoy decline in 1H17, purely due to the adverse FX translation from the weakened £ post Brexit referendum (UK bus formed c.20% of group EBIT in FY15). The continued yoy growth in the underlying business may only be seen in 2H17, when the yoy change in FX is less drastic.
Negative #2: Fiercer competition.
- The Land Transport Authority’s planned implementation of the Private Hire Car Driver Vocation Licence (PDVL) framework (expected by mid-2017), may not be positive for the taxi business, contrary to what the Street expects.
- The tightened policy could shrink the pool of prospective driver population for Uber and Grab, inducing them to up the ante against taxi operators to attract drivers by raising their incentives to drivers.
- SIA is a Hold despite challenging fundamentals as its share price is already trading below the historical trough P/BV of 0.9x, which is the basis for our target price.
Full service carriers are facing significant challenges
- In a low oil price environment, we would have expected airlines to be raking in big profits. Instead, the ultra-competitive environment and weakness in global premium travel demand have caused yields to drop continuously since Mar 2015, with no signs of a turnaround.
- Despite world-class products, both Cathay and SIA are facing the demand retrenchment from the finance industry, as well as the oil and gas sector.
Competition is not getting easier
- Asian FSC carriers are also experiencing significant LCC competition on short-haul routes, competition with the Gulf carriers to Europe, and competition with North Asian carriers on transpacific routes.
- Chinese carriers have recently added a lot of capacity to ANZ, hurting demand for one-stop services at HK or Singapore. The battle for market share and growth is hurting all carriers.
Strong US$ adds to the unpalatable brew
- The strong US$ is also hurting all Asian airlines, by virtue of the US$ liabilities of most carriers (with the exception of SIA which is in a net cash position), and because 60% of airline operating costs are denominated in US$.
- Finally, the weakness of the air cargo markets look likely to continue in an environment of low container shipping rates, weak global trade growth, and air freighter overcapacity Airport services SATS (Hold) has outperformed the FSSTI by 24% in 2016 as the market favoured defensive earners in a low-yield environment. SATS also reaped the benefits of margin expansion from the deconsolidation of its low-margin food distribution business.
- Going into 2017, we see risks of earnings disappointments if yoy growth in Changi is muted. Short-term volatility in the yen could also impact the translation of TFK’s contribution (16% of revenue).