Longer-term catalysts intact
1QFY16 disappoints
Expenses to remain high
No change to catalysts; reiterate BUY
Loss from train operations continues into 1QFY16
- SMRT Corporation Ltd’s (SMRT) 1QFY16 results were disappointing as PATMI declined 10.0% YoY to S$20.1m on the back of a 5.6% drop in operating profit to S$27.7m, even though revenue grew 7.8% to S$320.3m.
- 1QFY16 fare business revenue grew 6.0% YoY on higher ridership and average fares while revenue of non-fare business grew 12.7% driven mainly by taxi and rental segments.
- Despite revenue growth, rail operations incurred an S$5.7m operating loss in 1QFY16 compared to S$4.3m profit in 1QFY15, mainly due to higher repairs and maintenance (R&M) and staff expenses required to support the ageing network.
- Compared with S$5.5m operating loss in 1QFY15, bus operations recorded a profit of S$1.5m in 1QFY16 mainly due to higher revenue and lower diesel costs.
- 1QFY16 taxi operating profit grew 32.2% YoY to S$5.5m on larger fleet while rental operating profit rose 5.3% to S$21.1m with contribution from Kallang Wave Mall (KWM), but rental operating margin declined 13.4 ppt to 64.2%.
Expects near-term weakness with increase in expenses
- Management noted 1QFY16 R&M expenses level is likely to sustain for the next two to three years as renewal works on the ageing rail system takes place.
- Staff expenses, as highlighted previously, will continue to increase, mainly on engineers, technicians and bus captains.
- We expect these higher expenses to continue to be a drag on SMRT’s earnings, at least in the near-term, and also adjusted our forecasted margins for rental contribution from KWM.
- We are still positive over the longer-term as catalysts remain intact.
- We expect SMRT to benefit from the new bus government contracting model (GCM) and rail financing framework (RFF).
- We think SMRT’s bus operations will improve materially on better margin from 2QFY17 onwards under the new GCM.
- The expected absence of depreciation expenses should help as well.
- While RFF timeline is unclear, it is encouraging to note progress is being made.
Outlook in FY17 is better due to regulatory changes; reiterate BUY
- Incorporating 1QFY16 results, we further increase our operating expenses forecasts, which reduce our FY16/17F PATMI by 12.3/10.6%.
- Noting positive longer-term outlook driven by regulatory changes, we reiterate BUY, with a lower FV of S$1.70 (prev: S$1.75).
Analyst: Eugene Chua
Source: http://www.ocbcresearch.com/
