SMRT Corp Ltd - Phillip Securities 2015-10-30: Rail maintenance-related expenses set to rise

SMRT Corp Ltd - Phillip Securities 2015-10-30: Rail maintenance-related expenses set to rise SMRT CORPORATION LTD S53.SI 

SMRT Corp Ltd - Rail maintenance-related expenses set to rise

  • Steady performance from Non-Fare business. 
  • Cost pressures continue to weigh against Fare business. 
  • Management expects Rail maintenance-related expenses (MRE) to rise to 50% from 41% of Rail revenue. 

Analyst briefing key takeaways 

 Management expects Rail MRE to be up to 50% from 41% of Rail revenue. 

  • Management explained that MRE includes both Staff Cost and Repair & Maintenance components. Rail MRE is expected to be up to 50% of Rail revenue, due to the Tuas West Extension, ramp-up of staff headcount, additional trains, maintenance of an ageing rail network and meeting higher operational requirements. There will be 45 additional Kawasaki C151B trains for North-South East-West Line (NSEWL) by 2018 and this would require additional maintenance and operations crew. 

 Setting the record right with comparison between SMRT and Hong Kong's MTR. 

  • With reference to a Straits Times news article, Management shared some differences between SMRT and MTR. Specifically on how MTR takes on both the design-build operations and maintenance, whereas LTA and SMRT are collectively responsible for infrastructure and maintenance. Thus SMRT's share of expenses alone understates the actual expenses and investments made on Singapore's rail network compared to MTR. 

 Taxi landscape remains "in flux". 

  • SMRT's taxi fleet hire-out rate of c.98% is higher than the industry average of < 96%. Management has been engaging taxi hirers in order to maintain the hire-out rate. 
  • On the third-party apps front, the partnership with Hailo taxi app is "not measuring to earlier expectations". SMRT is assessing the challenges and looking at new opportunities. 

How do we view this? 

 Largest revenue contributor being squeezed from both ends; expect losses in Rail business to continue. 

  • Fare revenue growth from Rail business is expected to be modest y-o-y between FY16 and FY17, due to implementation of 1.9% fare reduction in December, offset by weaker ridership growth. We project a weaker ridership growth in FY17, due to cannibalisation from the opening of Downtown Line Stage 2 (DTL2). Meanwhile, rail MRE to surge to 50% of revenue by the end of this year. Rail losses are likely to continue, until rail reforms materialise. 2HFY16 will be weaker than 1HFY16, as an increase in MRE by 9ppts will translate to about S$29 mn in erosion of Rail EBIT in 2HFY16, by our estimate. Rail EBIT-loss in the remaining quarters, 3Q & 4Q FY16, will be in excess of S$10 million each, by our estimates. 

Investment Actions 

  • We cut our earnings forecast by 10%/FY16 and 4%/FY17 after implementing the 1.9% fare reduction and updating the elevated MRE expense. 
  • Consequently, our FY16 dividend assumption is lowered to 2.45 Cents, assuming the same payout of 54.4% as FY15. 
  • Downgrade to "Sell" rating from “Reduce, with a new lower target price of S$1.11 (previous: S$1.16).

Richard Leow Phillip Securities | http://www.poems.com.sg/ 2015-10-30
Phillip Securities SGX Stock Analyst Report SELL Downgrade HOLD 1.11 Down 1.16