OCBC Investment 2015-08-03: SMRT Corporation - 1Q16 Results. Longer-term catalysts intact. Maintain BUY.

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/