Safety first on road to recovery
• Sector should generally see a mild rebound in profitability as demand slowly improves and with more downside than upside risk for fuel prices
• Prefer yield plays such as HPH Trust and CMH (Pacific) as the road to recovery is still fragile
• Our top picks are blue chip names : ComfortDelgro (TP S$2.19) for its consistent growth profile and SIA (TP S$11.40) for its value and potential to return cash
Container Shipping – HOLD NOL (TP S$1.10)
• Persistent over-capacity continues to hinder rate recovery. We do not believe that the P3 Alliance, if granted regulatory clearance, or the expansion of the G6 Alliance to Transpacific routes, will help rates to recover, as key players still focus on keeping their market share numbers intact. We expect earnings to improve slightly next year on the back of possible better consumption demand in the US and Europe, but maintain our HOLD call on NOL, with a TP of S$1.10 (1x FY14P/BV) as overall returns and profitability are unlikely to recover before 2015, given the influx of capacity still scheduled to enter the industry.
Land Transport: CD (BUY, TP S$2.19); SMRT (FV, TP S$1.08)
• ComfortDelgro better placed than SMRT. We prefer ComfortDelgro given its ability to deliver steady growth despite cost challenges, due to its geographical and business diversification within the transport sector. Whilst SMRT’s share price has corrected by >30% since Jan’13, we still remain cautious on its prospects given the cost challenges it faces, particularly on repair and maintenance and staff costs.
Airlines – SIA (BUY, TP S$11.40); Tiger Airways (FV, TP S$0.47)
• Yields remain under pressure but we like SIA for its value. While fuel costs have stayed fairly stable, yields for both SIA and Tiger Airways have been under pressure due to capacity growth outpacing demand growth in both the longhaul and LCC segments. We are cautious on Tigerair as it struggles to turnaround. We are more positive on SIA, which could see a mild recovery in its profit and more importantly, has the potential to reward shareholders given its net cash position of over S$4bn and strong track record of giving out goodies.
Infrastructure: BUY CMHP (TP S$1.20) & HPHT (TP US$0.80)
• Attractive yields on offer – > 9% for HPHT and 6% for CMHP. Infrastructure players such as HPHT and CMHP have considerably less risky earnings profiles than operators such as liners and carriers. At the same time, both these names offer attractive dividend yields with CMHP offering double-digit EPS growth into FY14 as well. For HPHT, we find valuations attractive at this level at over 9% prospective yield, which more than makes up for its perceived weaker longer-term growth prospects.
• High oil prices still a concern but less of a threat as a further increase seems unlikely. We expect fuel prices to be generally flattish over the next 2 years, and there could be a positive surprise for the sector if fuel prices actually start to ease off to relieve the high cost pressure that operators are facing.
We are more concerned over excess capacity amid a tepid demand environment. As operators continue to take delivery of new ships and aircraft, demand has generally been unable to keep pace with capacity increases in the transport sector. Even in the fastgrowing LCC space, aggressive expansion plans by various players to capture more market share also means load factors have not held up. Any unexpected demand shocks or sustained weakness (even mild) would impact the sector substantially, as it is still on the fragile road to recovery.
Valuations & Stock Picks
• Valuations are generally inexpensive from a P/BV perspective, though PE valuations look high as earnings are still on the road to recovery. Our preferred picks are stocks that offer a good combination of yield and/or steady earnings growth.
ComfortDelgro (BUY, TP S$2.19). We like the company for its ability to deliver steady growth despite cost challenges. We see this as a result of its geographical, business diversification and disciplined approach to pursue inorganic growth. While there are challenges in the Singapore public transport sector, the Group is fortunately buffered by its dominant presence in the taxi business, coupled with businesses in other geographical areas.
Singapore Airlines (BUY, TP S$11.40). Although SIA’s earnings are only expected to mildly recover in FY14 on slightly better demand and flattish fuel costs, we like the stock’s valuations as it is trading below book despite having c. 40% of its market cap in net cash (> S$4bn). Given its strong track record over the last decade of rewarding shareholders, we believe there is potential for the Group to pay out some of its excess cash to shareholders.
HPH Trust (BUY, TP US$0.80). Following a disappointing year in terms of earnings and DPU, we expect HPHT’s numbers to rebound in FY14 off a low base year, which was affected by the industrial strike in 1Q and one-off acquisition and integration costs on acquiring ACT in HK. HPHT currently offers an attractive prospective yield of > 9% for FY14, and should also declare a final DPU of HK 21cts come February.
CMH Pacific (BUY, TP S$1.20). CMHP offers a good combination of yield (6%) and growth (FY14 EPS +15%), with longer term prospects driven by continued traffic growth on its roads in China and potential acquisitions. Its balance sheet would be further strengthened by the completion of the sale of its NZ property business.
Publish date: 03/01/13