SMRT Corporation - CIMB Securities 2015-09-25: S$5.4m fine for July rail disruption

SMRT CORPORATION LTD S53.SI

SMRT Corporation S$5.4m fine for July rail disruption

LTA announced that SMRT is subject to a S$5.4m fine for the massive rail disruption in Jul; this is the highest in Singapore’s history.
LTA finds SMRT ‘fully responsible’ for incident due to inadequate maintenance.
We incorporate the additional S$3.9m fine in our FY16 earnings forecast, on top of the S$1.5m fine provision in our July 8 report.
No further impact to FY17-18 EPS as our earlier cuts have reflected the higher rail repair and maintenance expenses in the future.
Negative catalysts in the near term; keep Reduce call and target price of S$1.28.

The Land Transport Authority (LTA) announced that it intends to impose a financial penalty of S$5.4m on SMRT for the system-wide disruption on the North-South and East-West Lines (NSEWL) on 7 Jul 2015. The fine marks the highest in Singapore’s history.
To recap, SMRT was previously fined S$2m for two breakdowns in Dec 2011, and S$1.6m for four rail disruptions in 2013-2014. SMRT caught ‘fully responsible’ due to maintenance lapse LTA concluded that the incident could have been prevented if SMRT had rectified the tunnel water seepage as required by LTA’s Code of Practice for maintenance, under which the operator has to attend to any tunnel water dripping directly onto trackside equipment.
The authority added that it had asked SMRT to provide a detailed response and rectification programme to address the findings.

The fine of S$5.4m announced by the LTA was higher than our previous provision of S$1.5m in our 8 Jul report, hence we cut our FY16 net profit forecast by another S$3.9m to make full provisions for the fine.
There are no adjustments to our FY17 and FY18 earnings forecasts, for which to date we have had cuts totalling 10.6% and 8.5%, respectively, to reflect the higher rail repair and maintenance expenses.

Key de-rating catalysts in the near term include:
1. negative impact from the indicated fare cut of up to 1.9% by end-15;
2. protracted rail operating losses due to the elevated repair and maintenance expenses for the ageing rail system; and
3. possible ridership diversion from the Downtown Line stage II (operated by ComfortDelGro), which is slated to commence operations by end-15.

ComfortDelGro (Add, target price: S$3.39) is our top pick in the Singapore Land Transport sector for its good business diversification, strong balance sheet and overseas growth initiatives.
As at 30 Jun 15, ComfortDelGro has negligible net debt while SMRT has a high net gearing of 0.79x. ComfortDelGro’s 16.8x CY16 P/E is more compelling than SMRT’s 22.3x. Its implied CY15 dividend yield of 3.2% also trumps SMRT’s 2.2%.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-09-25

UOB Kay Hian Analyst Report REDUCE Maintain REDUCE 1.28 Same 1.28