SMRT CORPORATION LTD
S53.SI
SMRT Corporation: Rail maintenance expenses set to increase further
2QFY16 helped by non-fare business
Maintenance costs a drag on growth ahead
Downgrade to HOLD on valuation grounds
2QFY16 performed slightly better than we expected
- SMRT Corporation’s (SMRT) 2QFY16 revenue increased 4.7% YoY to S$328.8m with growth across all business segments except for engineering services.
- Fare business saw a 3.1% YoY revenue growth in 2QFY16, driven by higher average ridership and fares but recorded operating loss of S$1.4m compared to S$5.5m profit a year ago. Train operations recorded S$2.8m operating loss in 2QFY16, dragged by higher rail maintenance-related expenses. 2QFY16 bus operations turned profitable to S$2.6m from S$1.4m loss a year ago, on higher revenue and lower diesel costs.
- Non-fare business registered strong growth as operating profit jumped 21.7% YoY to S$33.1m on the back of a 9.0% growth in revenue driven by taxi and rental segments.
- Consequently, 2QFY16 PATMI grew 1.9% YoY to S$25.7m but 1HFY16 PATMI declined 3.7% YoY to S$45.9m due to weak 1QFY16 results, and formed 32.1% and 57.3% of our FY16 forecast, respectively.
Rail maintenance-related costs to reach 50% of rail revenue
- Looking ahead, aside from executing its multiyear rail renewal programme (no change to originally planned budget), we expect rail maintenance-related expenses (including related depreciation and staff costs) to be a drag on SMRT’s earnings, at least for the next three years.
- For 2QFY16, rail maintenance-related expenses formed 41% of rail revenue and management expects further increase to 50% of rail revenue by 4QFY16. The key reasons being:
- revenue growth impacted by 1.9% fare cut from end-CY15,
- ramping up staff headcount in preparation of Tuas West Extension (four new stations) opening in CY16,
- increasing headcount required to support maintenance needs with delivery of 45 new trains between now and end CY16, and
- stepping up maintenance efforts to address troubling spots in the ageing networks.
Fairly valued based on fundamentals; downgrade to HOLD
- Incorporating 2QFY16 results and higher rail maintenance-related expenses, we reduce our FY16/17F PATMI by 16.3/9.5%. With the recent run-up in its share price, we downgrade SMRT to HOLD on valuation grounds, with a lower DDM-derived FV of S$1.43 (prev: S$1.45).
- Note that we have yet to factor in the impact of the potential rail reform.
Eugene Chua
OCBC Securities
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http://www.ocbcresearch.com/
2015-09-30
OCBC Securities
Analyst Report
1.43
Down
1.45
