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Today’s Movers & Shakers: ComfortDelGro, China Minzhong, SATS, Neptune Orient Lines
Perspective | 15 May 2012
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By: Simeon Ang
Articles (125) Profile
By: Ong Qiuying
Articles (131) Profile

Price – $1.48
Target – $1.51

Revenue growth was broad based with profit weaker than expected in ComforDelGro’s (CDG) Singapore rail and bus businesses. Operating margins for its domestic rail operations fell to 10.4 percent from 21.5 percent in 1Q11. However, we feel that these developments do not warrant a shock to the market as earnings risk to public transport operators have been well documented. We anticipate that CDG’s rail and bus business operations will continue to disappoint in the coming quarters. We expect CDG to raise headcount ahead of the Downtown Line Stage 1 commencement in 2013. In light of this, rail operations could be affected by the absence of a fare hike as well as higher electricity prices in 2012. Market concerns over CDG’s domestic rail and bus operations are clearly evident in the low PE valuation and we feel this is rightly so. However, there could be some upside in terms of decent earnings from CDG’s domestic taxi operations as well as some overseas units like its Australian buses and China taxis. After taking the above into consideration, we feel that the poor domestic operating condition will limit any likelihood of a sustained rerating. Maintain NEUTRAL.
– UBS Investment (14 May)

China Minzhong Food Corporation
Price – $0.75
Target – $0.70

China Minzhong is being hammered by cost pressures as net profit for 3Q12 fell 8 percent year-on-year to Rmb241 million. This fell far short of our expectations by 14 percent and of the market by 20 percent. China Minzhong attributed the fall to the late winter arrival, which results in the sales of mushrooms rolling over into the April/May period. The firm also said rising costs hurt margins across its top and bottom lines. Depreciation expenses for the new industrial park and rising labour and raw material costs have combined to gross profit margins. At the same time, the firm experienced higher interest costs due to increase in funding for working capital needs. We believe that there is a case for lower to no growth for China Minzhong in FY13E/FY14E unless higher margin products (Black fungus and King oyster) can offset an overall performance slide. However, based on our analysis, given the limited capacity expansion for the two higher margin products, we estimate that contributions from these products will not be able to fully offset the higher cost base. We feel that the firm should look into new farmland expansion to drive incremental earnings growth, but are disappointed that these plans are nowhere in the firm’s pipelines. We believe that the recent results release will trigger a flood of consensus earnings downgrades. On our end, we trim our earnings estimates by a further 21 percent/31 percent for FY13E/FY14E respectively. Downgrade to UNDERWEIGHT.
– JP Morgan (14 May)

Price – $2.55
Target – $2.90

SATS’ FY12 adjusted net income of $167 million was 3 percent higher than our estimate of $161 million and in-line with the street. It announced a special dividend of $0.15 as part of the usage of proceeds from Daniels disposal, along with a final dividend of $0.06, bringing FY12’s total dividend to $0.26, or a payout of about 170 percent. Meanwhile, its TFK business in Japan was profitable for the third straight quarter. We feel that there is still room for improvement in TFK as the earnings are still not at pre-earthquake levels. However, cost pressures remain, dragged by staff expenses, up 24 percent year-on-year. Nevertheless, with the third ground handler yet to commence operations at Changi airport, SATS remains one of the duopoly and stands to benefit. This quarter, SATS had signed three contracts with Scoot for the full suite of airline servicing and its biggest contract win was Lufthansa’s ground handling contract, which has switched to SATS from dnata, indicating SATS’ superior scale and service standards. We reiterate BUY on SATS on its Asia-focused aviation story and relative insulation from oil-price spikes versus airlines.
– Nomura (14 May)

Neptune Orient Lines
Price – $1.04
Target – $1.55

Neptune Orient Lines’ (NOL) demand growth is expected to be 5 to 7 percent this year. Losses in the industry have been caused by higher fuel cost and overcapacity. 1Q results did not really reflect the rate increases the industry has enjoyed in March but this will be more evident in 2Q. However, despite the rate increases, management expects 2Q performance to be weak (which we interpret that they are struggling to break even) because of higher fuel costs but maintains a reasonable 3Q peak season. Nevertheless, we expect 2Q bottom line to be materially better than 1Q and 3Q peak to be better than 2Q. NOL also continues to have a US$500 million cost saving goal for 2012E. More than half will come from more efficient use of bunker. They achieved around US$100 million in 1Q, primarily from lower fuel consumption and improved operational costs. Bunker fuel cost also appears to be retreating, down 9 percent from the highs this year. NOL’s stock price has declined to levels not seen since December 2011 and it appears as if the market is not giving it any credit for the rate rises we have seen year to date. We think this is taking a too pessimistic view, hence, we maintain BUY.
– Deutsche Bank (14 May)

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

ComfortDelGro Corp  2.430 -0.01 -0.41%   
Business: [FY18 Turnover] Public transport services (71.2%), taxi (19.1%), others (9.7%).

Insight: May-19, 1Q19 revenue rose 7.8% to $947.3m, underpi... Read More
SATS  4.950 -0.02 -0.40%   
Business: Asia's leading provider of gateway services and food solutions. [FY19 Turnover] Food solutions (54.1%), gateway svcs (45.8%), others (0.1%).

Insight: May-19, FY19 revenue rose 6% to $1.8b driven by hi... Read More

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