OCBC Investment Research 2015-07-15: SMRT Corporation: Still positive on longer term outlook. Reiterate BUY.

SMRT Corporation: Still positive on longer term outlook 

  • Severe disruption during peak hours 
  • Longer-term catalysts still intact 
  • Price decline overdone; reiterate BUY 

Expenses to increase as a result of massive disruption 

  • SMRT Corporation Ltd’s (SMRT) train services on both the entire North-South and East-West Lines (NSEWL) were disrupted for more than three hours on 7 Jul, affecting about 250,000 commuters. 
  • As announced by LTA yesterday, independent assessment by a team of consultants to identify the root cause of the disruption has commenced and is expected to be completed in Aug 15. 
  • In our view, we expect repairs and maintenance (R&M) costs as well as staff expenses to further increase as a result of this disruption, especially when SMRT has stated measures will be implemented to prevent a similar network-wide failure. 
  • LTA likely to fine SMRT for incident We also expect LTA to fine SMRT for the severe disruption. Based on the amendments to the Rapid Transit Systems Bill back in 2014, we note that SMRT could face a maximum fine of up to 10% of its annual fare revenue received from the operation of the affected rapid transit system, which is ~S$64.4m (FY15) in this case. 
  • However, we also note that the Transport Minister stated there is no need to call for Committee of Inquiry but to concentrate on addressing root cause instead. 
  • In our view, we think it is unlikely LTA will charge SMRT with the maximum fine as such large financial penalty may impede SMRT’s ability to resolve the root cause, doing more harm than good. 

Decline in share price overdone; reiterate BUY 

  • Recall that we had already, in Mar 15, factored for higher expenses and potential fines after a number of disruptions on SMRT’s rail network. However, given the severity of the most recent disruption, we increase our forecasts for R&M expenses and potential fines. 
  • Consequently, our FY16F/17F PATMI decline by 5.4%/5.1%. 
  • In expectation of higher cash needs over the near to medium-term, we lower our dividend pay-out assumptions for FY16F/17F from 55% to 50%. As such, our DDM-derived FV is now lower at S$1.75. 
  • In our view, SMRT’s longer-term catalysts driven by regulatory changes in Singapore’s bus and rail operating model remain intact. 
  • We think the relatively steep decline in SMRT’s share price post disruption is overdone; reiterate BUY on SMRT on positive longer-term outlook

(Eugene Chua)

Source: http://www.ocbcresearch.com/