SMRT CORPORATION LTD
S53.SI SMRT Corporation - Subdued outlook with widening rail losses
- Post-analyst briefing, we are more negative on SMRT’s FY17-18F earnings outlook due to the increasingly challenging landscape for rail.
- Management expects rail maintenance-related expenses (MRE) as a percentage of total rail revenue to continue rising from 41% in 2Q16 to c.50% by end-FY16.
- The LTA’s 1.9% fare cut (effective in Dec 2015) does not help; possible traffic diversion from the DTL stage II poses further downside risk to rail earnings.
- Cut FY17/18 EPS by 11.0%/7.1%. Maintain Reduce, with a lower DCF-based target price of S$1.22. Earnings disappointment would be a key de-rating catalyst.
Rising cost pressure from lifted rail maintenance regime
- Rail recorded an operating loss of S$4.0m in 2Q16, the third consecutive quarter of loss, after the S$5.3m operating loss in 1Q16. The slightly narrower loss in 2Q16 was only due to a temporary dip in MRE, which fell from S$76m in 1Q16 to S$71m in 2Q16.
- Management expects the rail MRE to increase in the coming quarters from 41% of rail revenue in 2Q16 to c.50% of rail revenue by end-FY16.
Expect subdued fare revenue in FY17 due to fare cut
- Apart from the intensifying cost pressure, SMRT’s fare businesses (both rail and bus) would be adversely affected by the Land Transport Authority’s (LTA) 1.9% fare cut (effective in Dec 2015). Recall that we have made full provisions for the entire 1.9% fare cut in our 4 Aug report. Given that SMRT’s financial year ends in Mar, we expect the fare cut to hit SMRT’s earnings in 4Q16 onwards.
Possible ridership diversion by DTL Stage II poses downside risk
- Connecting the Northwest and central regions of Singapore, the Downtown Line (DTL) Stage II (operated by SMRT’s competitor SBS Transit) is likely to divert some traffic load from the existing rail network when it commences operations in Dec 2015.
- Our current FY17F EPS assumes no yoy growth for SMRT rail ridership due to the diversion, in contrast to the 2.8% yoy growth that SMRT achieved in FY15 and 1H16.
- We estimate that every 1% decrease in rail ridership would lower our FY17F EPS by 4.8%.
Cut FY17/18 EPS by 11.0%/7.1% due to widening rail losses
- We expect the implementation of the new bus contracting model and the growing nonfare segment (led by rental and advertising businesses) to continue to support SMRT’s FY17 earnings. However, the potential outperformance of bus and non-fare businesses are likely to be largely offset by the weakness in rail. As a result, we forecast flat yoy net profit in FY17.
Maintain Reduce, with lower target price of S$1.22
- We maintain our Reduce call on SMRT, with a lower target price of S$1.22, based on FY16 DCF (WACC: 6.5%). Future earnings disappointment is a potential de-rating catalyst (our FY16/17 EPS forecasts are 10%/20% below consensus).
Roy CHEN
CIMB Securities
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William TNG CFA
CIMB Securities
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http://research.itradecimb.com/
2015-10-29
CIMB Securities
SGX Stock
Analyst Report
1.22
Down
1.22
