Two steps forward, one step back
- Risks on train service disruption materialise, undermining earnings recovery trajectory; downgrade to HOLD
- First major service disruption since Dec 2011; risks of higher opex arising from repair and maintenance
- Earnings visibility decreased
- Upside risks includes realization of rail reforms
Downgrade to HOLD, with revised TP of S$1.59.
- We expect the occurrence of the latest train disruption, which appears to be the most major one since Dec 2011, to pose downside risks to our cost assumptions.
- This undermines our earlier thesis of a strong earnings recovery on the back of stable cost structure, fare increases and longer-term potential of rail reforms.
- We therefore downgrade our recommendation to HOLD.
The first major disruption since Dec 2011.
- This latest disruption which lasted about 3.5 hours in the evening of 7 July 2015 bears a stark resemblance to the first breakdown that occurred back in Dec 2011. Though peppered with minor disruptions since then, this occurrence seems to be the most major one since Dec 2011, given that it involved both the NSL and EWL simultaneously and affected about 250k commuters.
- Unfortunately, this will cast unwanted attention on SMRT once again.
Factoring in hikes in R&M; estimate penalty of S$2.5m - $3.5m.
- Following the Dec 2011 incidences, repair and maintenance (R&M) costs were hiked to an average of 11.6% (of train, bus, taxi revenue) for FY13 to FY15, up from 9.2% (for FY07 to FY12).
- We raised our FY16F/17F R&M cost assumptions by 0.6ppt to 12.1%/11.9% (as % of revenue) from 11.5%/11.3% previously.
- In terms of financial penalty, if any, we believe it could be between S$2.5m and S$3.5m.
- We need to highlight that we are not attributing blame but instead, are assessing the potential financial impact arising from possible penalties, if any at all.
An unfortunate incident; revise forecasts down by 6%/9%.
- The occurrence of this unfortunate event will take a hit on confidence which, in our view, had been slowly creeping back.
- In our view, this event also lowers the earnings visibility and raises the risk premium for the counter.
- We have trimmed our FY16F/17F forecasts by 6%/ 9% and our TP is lowered to S$1.59.
- Upside risks to our call would include the potential rail reforms.
(Andy SIM CFA)
Source: http://www.dbsvickers.com/
