SMRT Corporation - DBS Vickers 2015-09-04: Recent Drop Has Priced in Negatives.

SGinvestors.io

SMRT CORPORATION LTD S53.SI 

Recent Drop Has Priced In Negatives

Upgrade to HOLD, TP adjusted slightly to S$1.22; recent drop has priced in negatives. 

• We upgrade our recommendation to HOLD (from FULLY VALUED) with a adjusted TP of S$1.22. 
• Since the 7 July train disruption incident and our downgrade thereafter, SMRT's share price has dropped by c.24% in two months. We believe this could have more than factored in the negatives. That said, we believe the uncertainties with respect to potential fines or heightened costs could cap share price gains. 

Potential catalyst to emerge from new rail financing framework. 

• The strong surge in share price in 2014 was on expectations of the new Rail Financing Framework (RFF), and announcement of the bus contract model, coupled with an earnings turnaround. With share price back to near where it all began, this suggests that the market has negated those effects. 
• We believe the new RFF is still on the cards, though the details and timing are uncertain. This could provide support and a catalyst to share price. 

Share price has fallen close to 2014 lows. 

• We do not expect SMRT's share price to re-test the low seen in early 2014 as we project SMRT earnings to remain above FY14’s S$62m. While we expect repair and maintenance costs to increase, this should be mitigated by higher fares, increased ridership and lower energy costs. 
• In addition, we expect bus operations to turn in a better performance as it transits into the new Government Bus Contracting model. 

Valuation: 

• Our target price is adjusted to S$1.22, based on the average of our discounted cash flow (DCF) and price-earnings (PE) ratio valuation methodology. We peg our PE valuation at 15x FY16F/17F. Our DCF methodology is based on a weighted cost of capital of 5.8% and a terminal growth assumption of 1%. 

Key Risks to Our View: 

• Higher-than-expected operating costs or fines. Higher-than- expected costs, particularly from repair and maintenance, could undermine our forecasts and present downside risks.

Andy SIM CFA | http://www.dbsvickers.com/ DBS Securities 2015-09-04

HOLD Upgrade FULLY VALUED 1.22 Down 1.27