SMRT Corp Ltd - Phillip Securities Research 2015-10-01: More frequent audits to come

SMRT Corp Ltd - Phillip Securities Research 2015-10-01: More frequent audits to come @ SG ShareInvestor SMRT CORPORATION LTD S53.SI 

SMRT Corp Ltd - More frequent audits to come 

  • S$5.4 million fine is the highest ever, reflecting the severity of the disruption. 
  • LTA holds SMRT fully responsible for the disruption. 
  • LTA will be subjecting SMRT to more frequent audits. 

What is the news? 

  • SMRT Corp Ltd (SMRT) was fined S$5.4 million for the disruption to the North-South and East-West Lines (NSEWL) which occurred earlier this year on 7 July, during the evening rush hour. 
  • LTA had found a lapse in the maintenance procedure and concluded that the incident was preventable. LTA, holding SMRT fully responsible, has asked SMRT to review and improve their maintenance regime, and will be subjecting SMRT to more frequent audits. 

How do we view this? 

 Highest ever fine reflects the severity of the disruption. 

  • In an earlier report (13 July 2015) on SMRT, we guided that while a serious fine is to be expected, a maximum fine would be unwarranted. We used the most recent four fines meted out in July 2014 as benchmarks, and had derived an estimated range of between S$3 million and S$7 million for the fine. Given that the S$5.4 million fine falls in the middle of our estimated range, we think that the fine is reasonable and not excessive. 

 The fine is material at the Group level. 

  • The S$5.4 million fine represents a 6.6% impact to our previous FY16e NPAT of S$81.7 million, and we have incorporated the effect of the fine into our revised reported NPAT for FY16e, which now stands at S$76.3 million. 

 Inadequate maintenance regime comes under greater scrutiny with more frequent audits; Repair & Maintenance expense could continue to climb. 

  • LTA had found SMRT's maintenance regime inadequate, thus necessitating more frequent audits. R&M expenses could continue to climb if further lapses are uncovered, which have to be rectified. 

Investment Actions 

  • We maintain our "Reduce" rating on SMRT, with a new lower target price of S$1.16 (previous: S$1.32), as we raise our WACC to 6.1% from 5.8%.

Richard Leow CFTe Phillip Securities | 2015-10-01
Phillip Securities Analyst Report REDUCE Maintain REDUCE 1.16 Down 1.32