RHB Securities 2015-08-24: SMRT Corporation - Share Price Weakness Could Prevail.


Share Price Weakness Could Prevail. 

  • SMRT’s share price has fallen 33% from its peak post a major disruption in train services and weak 1QFY16 (Mar) numbers. 
  • Downgrade to SELL with a SGD1.05 TP (from SGD1.72, 13% downside). 
  • We cut FY16F/17F EPS by 16%/22% to reflect the decline in public transport fares from Dec 2015, and lift rail maintenance costs. 
  • Negative investor sentiment, dismal FY16 growth and the low possibility of rail financing framework reforms anytime soon would drag its share price. 

 Weak rail to remain a drag. 

  • SMRT could continue to see increased cost pressure from maintenance of an aging rail network and a larger train fleet. Its rail division may continue to lose money until the reforms in rail financing are implemented. Positive contributions from its bus business, due to lower fuel costs, may not offset the weak rail operations. Its rail and bus units accounted for 50% and 20% of FY15 revenue respectively. 

 No benefit from recent decline in oil price. 

  • During its 1QFY16 analyst briefing, management stated that SMRT has fully hedged its diesel and electricity requirements for FY16. Therefore, we do not expect the company to gain from the recent sharp decline in oil prices. 

 Rail financing reforms not happening anytime soon. 

  • Given the weak and unsustainable rail operations, rail financing reforms will have to be implemented eventually. These reforms would improve the profitability of rail operations and free up capital through the transfer of rail assets to the Government. We do not expect rail reforms to be implemented anytime soon amidst pending government elections and ongoing bus reforms, which could keep regulators busy for next 12 months. 

 Downgrade to SELL. 

  • Our DCF-based SGD1.05 TP, based on a WACC of 7.4% and LT growth of 1%, assumes no implementation of rail reforms. Our TP implies 1.8x FY16 P/BV, which is the lowest level SMRT has ever traded at and 17.9x FY16 P/E, which is in line with its P/E during FY10-11 when SMRT delivered 0%-1.2% EPS growth. 

 Prefer ComfortDelGro (CD SP, NEUTRAL, TP: SGD2.86). 

  • A stronger balance sheet, diversified business exposure, stable management, and benefits from upcoming bus reforms makes ComfortDelGro our preferred sector exposure.

Shekhar Jaiswal | http://www.rhbgroub.com/ RHB Securities 2015-08-24
SELL Downgrade NEUTRAL 1.05 Down 1.72