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SI Research: 3 Homegrown Dividend Champions For The Next Decade

Don Low

Investors often view dividend stocks as assets that are ideal for retirees looking to generate passive income. While clearly they can be vehicles to serve such purpose, dividend stocks can also offer opportunities for capital growth.

In reality, companies that pay dividends may often have more firepower to capitalise on opportunities. As a result, quality dividend stocks actually tend to have the balance of lower risk, and over the long run, deliver greater stability in returns to investors.

In this issue, we look to three true blue, homegrown, dividend champions that we think investors should hold onto over the next decade.

SATS

Jewel Changi Airport has been the talk of the town over the past two weeks and we cannot help but to think of ways on how to ride on Singapore’s resolve to remain as the region’s de facto aviation hub. And then, SATS came to mind.

SATS is the chief provider in in-flight catering and ground-handling services at Singapore’s Changi airport.  With an outsized market share of about 80 percent in Singapore, SATS is destined to take full advantage of the growing throughput at Changi Airport.

There are several tailwinds carrying SATS over the next decade. For one, Terminal 4 which opened only in October 2017 has boosted the airport’s handling capacity by 16 million passengers per annum. The recently launched retail space of Jewel also would entice more travelers to use Changi Airport as an ideal transit point. Without even slowing down, preparations have already been made for the mega Terminal 5, which would boast the annual handling capacity by 50 million passengers. Construction is slated to begin just next year and by the time it is completed in 2030, Changi Airport’s capacity would reach 132 million passengers per annum!

These numbers tell of the potential for SATS. At the current share price of $5.23, SATS is trading hands at an undemanding valuation of 22.2 times price-to-earnings and a dividend yield of 3.4 percent.

SBS Transit

In August 2017, I wrote of the benefits of switching to the Bus Contracting Model for SBS Transit (SBS).  Back then, the stock was priced at just $2.66 per share. Today, the largest public bus operator in Singapore – with a market share of over 60 percent – is trading at $4.18 per share.

After the introduction of the Bus Contracting Model (BCM), the government followed up with the introduction of a similar framework for rail lines in Singapore dubbed the “New Rail Financing Framework”. The aim of the government was to free public transport operators of owning the assets as well as the heavy capital expenditure involved. Both of SBS rail lines – the Northeast Line and Sengkang and Punggol Light Rail Transit – have since been moved to the new operating framework.

Following years of tepid growth in its bottom line, effects of the switch to an asset-light model has started to materialise for SBS through its financial performance.

In FY18, SBS’ net profit almost doubled to $80.1 million, while revenue increased 16.1 percent to $1.4 billion. Most of the bottom line growth can be attributed to the transition to the BCM. Meanwhile, as the authorities took over the ownership of SBS’ public transport assets, SBS was able to strengthen its balance sheet by paring down its debt to a healthier level of 15 percent total debt-to-equity, compared to 51.7 percent in FY16. In addition, the move also freed up the cash flow involved in the cost of asset renewals, procurements and upgrades.

Apart from that, on macro-perspective, demand for public transport should outpace that for private cars following the government’s freeze on growth of vehicles in Singapore in October 2017. The push to go car-lite in land scarce Singapore would induce higher consumption and hence further expansion of Singapore’s public transport system. Furthermore, in the short term, SBS is slated to see contributions ramping up from the newly added Seletar and Bukit Merah Bus Packages.

At the current share price, the stock is only trading at just 16.1 times price-to-earnings and offers a yield of 3.1 percent. With a brighter outlook and a payout ratio of just 50 percent, there is no doubt that there is still room for growth for SBS.

Sheng Siong Group

For supermarket operators, success hinges on the company’s ability to buy more in bulk which leads to greater economies of scale. Homegrown Sheng Siong Group (Sheng Siong) has achieved just that, expanding from 34 stores in 2014 to 54 as of FY18. In addition, Sheng Siong has taken its first step into the Chinese market with the first overseas outlet in Kunming China in 2017.

In FY18, Sheng Siong’s revenue increased 7.4 percent to $890.9 million while gross profit rose proportionally higher by 9.6 percent to $238.4 million. This translates to a gross margin of 26.8 percent, representing an improvement from 26.2 percent a year ago. The group’s management attributed the lower input prices in FY18 to better buying prices, higher rebates from suppliers, improvement in efficiency in its central distribution centre and a higher mix of fresh than non-fresh offerings.

Despite that, FY18 net profit only inched up 1.4 percent to $70.8 million due to a refund of prior years’ taxes in FY17. Stripping that away, net profit in FY18 would have risen by 4.6 percent.

Nonetheless, between FY17 and FY18, Sheng Siong added 10 new stores to its Singapore’s operations and the further ramp up of the new stores is expected to underpin growth for the group. Meanwhile, Sheng Siong’s net cash pile continued to amass, rising from $73.4 million in FY17 to $87.2 million in FY18. The group has thus far managed to fund expansion internally without any debt.

At the current share price of $1.04, the stock trades at 22.3 times its earnings and offers a dividend yield of 3.3 percent.  Given the group’s experience in the supermarket business, a successful foray into China could spur a more aggressive pace for overseas expansion.