Negatives from rail disruption
- Yesterday evening’s rush hour disruption of SMRT’s North South Line and East West Line train services is possibly Singapore’s worst MRT breakdown to date.
- The service disruption will lead to the loss of rail revenue as well as potential fines on SMRT.
- We cut our FY3/16 core EPS forecast by 4.6% to incorporate the negative financial impact from the recent breakdown.
- We also trim our core earnings forecasts by 2.1% for FY17 and 1.8% for FY18 to reflect higher rail repair and maintenance expenses and provisions for possible incidences.
- We maintain our Reduce rating, with a lower DCF-based target price of S$1.53 (WACC: 6.5%).
- Disappointing rail profit could be a near-term de-rating catalyst.
What Happened
- It is estimated that over 250,000 commuters could have been affected. Service on the North South Line resumed at 10:35pm, three hours after the disruption which occurred after 7pm on 7 July. Service on East West Line resumed after 9:30pm. On the following day (8 Jul), train service started at 5:30am but with reduced speeds. As the engineers from the LTA and SMRT conduct further investigations and determined the cause of the power trip, free bus and rail services on the affected lines were provided, until 12 pm on 8 Jul.
What We Think
- We estimate that the breakdown on 7 Jul and free travel on 8 Jul could lower SMRT's 2QFY16 rail revenue by S$1.8m-3m or 1.8-3% of our FY16 net profit forecast of S$101m for SMRT.
- SMRT could be fined for the service disruption. In 2014, it was fined a total of S$1.6m for four rail disruptions in 2013-14. In 2012, it was fined S$1m for two massive breakdowns in Dec 2011. Given the scale of the recent breakdown, we think a fine of S$1.5m-2m is possible (1.5-2.0% of our FY16 net profit forecast of S$101m).
- The disruption underscores the need for SMRT to increase its repair and maintenance expenses for its ageing rail system. SMRT has already indicated such plans during its 4QFY15 financial results briefing.
What You Should Do
- Although a potential rail reform could be a re-rating catalyst in future, we believe the contract fees under the new rail model will include a varying term that depends on an operator’s performance, as suggested by the new bus model.
- SMRT’s rail operating margin could remain vulnerable to penalties, if it continues to fail to meet the required service standard.
- It remains a Reduce.
(Roy CHEN; William TNG, CFA)
Source: http://research.itradecimb.com/
