SMRT Corporation - CIMB Research 2015-10-28: Saved by non-fare businesses

SMRT Corporation - CIMB Research 2015-10-28: Saved by non-fare businesses SMRT CORPORATION LTD S53.SI 

SMRT Corporation - Saved by non-fare businesses 

  • At 57% of our FY3/16 forecast, 1H core net profit is largely in line as we anticipate a weaker 2H due to fare cuts and ridership diversion from the DTL. 
  • Rail fare business remained in the red for the third consecutive quarter. 2Q bottomline (+1.9% yoy) was saved by stronger non-fare businesses and JVs. 
  • We will review current forecasts after the analyst briefing on the morning of 28 Oct. 

Lacklustre fare businesses 

  • SMRT’s fare revenue grew by 3.1% to S$235.5m in 2Q16 (2Q15: S$228.4m) on the back of ridership growth for both bus and rail. However, the overall fare businesses suffered an operating loss of S$1.4m in 2Q16 (2Q15: S$5.5m gain) as the operating expenses outpaced revenue growth. Rail reported an operating loss of S$4.0m in 2Q16 (2Q15: S$6.9m gain), marking a third consecutive quarterly loss. Bus reported an operating profit of S$2.6m (2Q15: S$1.4m loss), thanks to lower diesel cost. 

2Q bottomline saved by steady non-fare businesses and JVs 

  • Despite the deteriorating fare businesses, SMRT’s bottomline rose 1.9% yoy in 2Q, due mainly to the steady non-fare businesses. Advertising operating profit rose 43% to S$7.4m (2Q15: S$5.2m) with increased advertising on trains and buses; taxi operating profit rose 32% to S$4.5m (2Q15: S$3.4m) due to a larger and newer fleet. 2Q also saw higher contribution (+S$1.5m yoy) from the 49%-owned JV Shenzhen Zona (a bus operator in China). SMRT maintained interim DPS of 1.5 Scts for 1H16. 

Fare outlook remains challenging in 2H16 

  • SMRT guided for a continued challenging rail operating landscape in 2H. Operating expenses should continue to increase due to intensive maintenance and renewal programmes of the ageing network, and as the operator strives to meet the required service standards of the authority. The finalised 1.9% fare cut and the commencement of the DTL stage II operation by end-15 could also have a negative impact on SMRT’s fare businesses. 

Elevated net gearing, but not a big concern 

  • SMRT’s net gearing stayed high at 80% as at end-2Q16 (end-FY15: 77%). Its borrowings are predominantly long-term fixed rate notes bearing cheap interest cost of 1.2-3.1% (thanks to its government backing), and the group has sufficient operating cashflow to cover the interest payment. We believe an eventual rail reform towards asset-light would enable SMRT to retire all the debts associated. 

Our current forecasts are under review 

  • SMRT will host an analyst briefing on the morning of 28 Oct. Our EPS forecasts will be reviewed after the briefing. Our last target price of S$1.28 was based on FY3/16 DCF (WACC: 6.5%)

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-10-28
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 1.28 Same 1.28