System-wide disruption of NSEWL occurred during evening rush hour.
- Possibly the most serious breakdown to the backbone of Singapore's public transport network to date.
- Expect higher Opex for R&M activities.
- Maintain "Reduce" rating with lower target price of S$1.370. (Previous: S$1.540)
What is the news?
- Train services on the North-South and East-West Lines (NSEWL) ground to a halt last Tuesday evening during rush hour, due to power trips detected along the two lines. The root cause of the power trips still has not been definitively identified.
How do we view this
System-wide disruption likely to result in a serious fine.
- But we do not think that the maximum fine (10% of annual revenue) is warranted in this instance, on account that there were no fatalities, no damage to infrastructure or equipment, and service was again operating in about three hours.
- However, the fine for this disruption would probably be in excess of the previous cap of S$1 million.
- Using the most recent four fines meted out in July 2014 and the scale of those disruptions as benchmarks, we can only speculate that the fine for this single incident alone could range between S$3 million and S$7 million.
Preventive maintenance regime to continue to weigh on margins.
- Clearly, system reliability is not at the level SMRT would want it to be at. SMRT would have to step up on its preventive maintenance regime. This would result in higher Opex for Repair & Maintenance (R&M).
Focus on what is already known, to understand the minimum downside risk.
- Instead of speculating on how much the fine would be, investors should focus on what already is known –
- existing expenditure on Repair & Maintenance activities has proved to be inadequate and will inevitably increase,
- announcement by the Land Transport Authority (LTA) in January 2015 on the tightening of Operating Performance Standards (OPS) over the coming years, which will further drive costs up in order to meet the enhanced standards, and
- Transport Minister had said in a February 2015 Parliament sitting, that "we are likely to see a negative fare adjustment of about 1% for the next fare review exercise".
- Consequently, there could be a reduction in average fare coupled with higher costs, resulting in margin compression.
Train-business could potentially undermine Group profitability.
- We have been warning investors about the challenging outlook for SMRT's Train-business, which is the largest revenue contributor to the Group and had turned unprofitable in the most recent quarter (4Q FY15).
- For perspective on the sensitivity of the Train-business to the Group, a 1ppt reduction in Train-business EBIT margin would have reduced Group FY15 net profit by about 7%.
- The Market appears to be pricing-in the potential challenges ahead and the stock price for SMRT has under-performed the benchmark Straits Times Index over the last 12-months.
Investment Actions
- We have increased our estimates for R&M by about 10% and 15% from previous estimates for FY16 and FY17, respectively.
- We maintain our "Reduce" rating on SMRT, with lower target price of S$1.370. (Previous: S$1.540)
Note: SMRT shares will trade ex-dividend on 17 July; and SMRT will be announcing its 1Q FY16 financial results in late-July, hence stock rating and target price subject to review thereafter.
(Richard Leow, CFTe)
Source: http://www.poems.com.sg/
(Richard Leow, CFTe)
Source: http://www.poems.com.sg/
