1QFY16: Having Rail Troubles
- SMRT’s 1QFY16 net profit declined 10% yoy on the back of a tougher rail operating environment as the need for repair & maintenance works intensifies.
- For the second consecutive quarter, SMRT recorded an operating loss for its train operations and extended losses for its LRT business.
- In addition, heavy capex and weak free cash flow remain as concerns.
- Maintain HOLD with a lower DCF-based target price of S$1.25. Entry price: S$1.13.
RESULTS
Results below expectations.
- 1QFY16 revenue and net profit represent 24.4% and 18.3% of our full-year estimates respectively.
- Net profit came in S$7.4m lower than our estimate, mainly due to higher-than-expected staff and other operating expenses.
- Staff expenses were S$3.2m higher than our forecast on increased headcount and salary, while other operating expenses were S$2.9m above our estimate due to the full-quarter costs associated with Kallang Wave mall and higher contribution to the Public Transport Fund (PTF) as part of the conditions set in the fare adjustment in Apr 15.
Revenue increased 7.8% yoy to $320.3m due to broad-based revenue growth across most of the segments.
- However, total expenses outpaced revenue growth as operating and net margins declined 1.3ppt and 1.2ppt yoy respectively.
- Repair and maintenance (R&M) costs increased by S$5.5m (+19.6% yoy), mainly due to the increasing number of trains undergoing scheduled overhauls and an intensified maintenance regime, given the group’s ageing rail systems.
FY16 capex to remain high.
- We estimate capex of S$475m and S$450m for FY16 and FY17 respectively, mainly due to the upgrading of signalling and communication systems for trains as well as for purchases of buses and taxis.
No dividend was declared for 1QFY16.
STOCK IMPACT
In rail trouble.
- For the second consecutive quarter, SMRT recorded an operating loss for its train operations and extended losses for its LRT business.
- SMRT is likely to face a tougher rail operating environment in the near term as the need to increase R&M works intensify due to the ageing rail system.
- We expect R&M expenses to increase 8.0% yoy vs revenue growth of 5.6% yoy from the group’s fare segment in FY16.
In addition to higher R&M costs, we are expecting stiff fines for the massive service disruption which affected both the North-South and East-West MRT lines on 7 Jul 15.
- It was possibly the worst MRT breakdown Singapore had experienced and is estimated to have affected more than 250,000 commuters. Going by the scale of the breakdown and the time it occurred, we are estimating a maximum fine of S$30.7m for the train operator.
- We note that in the past, rail operators could be fined a maximum of S$1m for train disruptions, but the Land Transport Authority (LTA) has raised the cap to a percentage (10%) of an operator’s annual fare revenue for the affected line.
- Hence, if SMRT continues to fall short of quality standards, we expect the group’s rail segment to record heavier losses going forward.
Bus operations a bright spot.
- After 17 quarters of losses, SMRT recorded a second consecutive quarterly operating profit of $1.5m for its bus operations.
- We estimate bus revenue to grow 11.3% yoy to S$265m in FY16 on the back higher ridership, average fares and lower diesel costs.
Heightened staff and other operating expenses.
- We expect higher staff expenses in the near term as SMRT continues to employ engineers to carry out R&M works for its rails.
- We estimate 35% of 1QFY16 additional staff hires are engineers or R&M-related staff as compared to 15% a year ago.
- In addition, we are expecting greater other operating expenses associated with schemes introduced by LTA (including travel discounts) to incentivise commuters to shift their travel times away from peak hours.
EARNINGS REVISION/RISK
Reduce FY16 earnings estimates by 13% mainly due to higher other operating expenses and staff costs.
- In addition, as 1QFY16 earnings represented only 19.1% of consensus full-year estimate, we expect a slew of downgrades to follow as too much optimism was built into FY16 consensus earnings.
VALUATION/RECOMMENDATION
Maintain HOLD with a lower DCF-based target price of $1.25, implying 21.9x FY16F PE and dividend yield of 2.5%.
- We expect SMRT to re-rate should there be any further details offering clarity on railway restructuring.
- However, the restructuring is unlikely to take place in FY16. We continue to prefer ComfortDelGro for its overseas growth potential, diversification and cheaper valuations.
- Entry price: S$1.13.
SHARE PRICE CATALYST
- Shareholders’ accretion from new financing framework for the rail segment.
- Stronger-than-expected bus and rail ridership growth.
Analyst: Bennett Lee, CAIA; Andrew Chow, CFA
Source: http://research.uobkayhian.com/
