SMRT Corporation - UOB Kay Hian 2015-10-29: 1HY16 ~ Uninsipring Results But Look Forward to Rail Restructuring

SMRT CORPORATION LTD S53.SI

SMRT Corporation - 1HY16: Uninsipring Results But Look Forward to Rail Restructuring

1HFY16 results were in line with expectations. However, we trim FY16-18 net profit by 3-12% to build in higher maintenance expenses and an adjustment in average fares for its MRT and bus segments.
Maintain HOLD with a DCF-based target price of S$1.46 (raised from S$1.25 to reflect lower long-term capex).
Entry price is S$1.30.

1HFY16 net profit of S$45.9m (-3.7%) came in within our estimates, accounting for 48% of our full-year estimates.
Despite a 6.2% yoy rise in revenue, net profit suffered a 3.7% yoy decline due to a decline in margins.
Operating profit margin slipped 1ppt to 9.3% in 1HFY16 as repairs/maintenance costs remain elevated (+11.7% yoy and outpacing revenue growth of 6.2% yoy). A slight increase in its effective tax rate to 18.9% (vs 17.9% in 1HFY15) also contributed to the decline in net profits. Its 49%-owned associate Shenzhen Zona also performed well, contributing S$2.1m to pre-tax profit in 1HFY16 (previously S$0.1m) after a change in management and a significant reduction in financing costs.

Management declared an interim dividend of 1.5 S cents/share (unchanged). In terms of gearing, SMRT’s net gearing rose slightly to 0.80x from 0.77x (as at Mar 15) but this remains comfortable given its strong operating cashflows and interest cover of 25.8x.

Rail and LRT continued to be loss-making in 1HFY16, losing S$9.3m (higher ridership and fares were mitigated by rising costs). On the other hand, bus operations were in the black, with an operating profit of S$4.0m in 1HFY16. As for the non-fare business, 1HFY16 contributions were up 13% yoy on better earnings from taxi, rental and advertising. Demand for its retail properties remained strong, with an occupancy rate of 98.2%.

We expect higher staff expenses in the near term as SMRT continues to employ engineers to carry out R&M works for its rails. As at 1HFY16, its total headcount is circa 8,800 (+6-7% yoy) and this is expected to continue rising as the group beefs up staff count for its train division by another 300-500 by the end of FY16. We understand from the analysts’ briefing that maintenance and repair costs are likely to trend even higher due to its ageing and expanding fleet.

In terms of fuel costs, the group is fully hedged until the end of FY16 but has not started hedging for FY17. No guidance was provided on capex. Management reiterated that they are “making progress” on negotiations over the new rail financing framework but did not commit to a timeline, citing complexities over issues such as asset valuation, licensing terms and the need for a structure that is sustainable.

We cut FY16-18F net profit estimates by 3-12% to build in a lower fare (with effect from 27 Dec 15) as well a higher repair & maintenance costs. We understand that rail maintenance-related expenses will continue rising. As an indication, 2QFY16 rail maintenance-related expense to rail revenue was 41%. This is expected to rise up to 50% by 4QFY16. On our revised estimates, we forecast a 3-year net profit CAGR of 11.5%.

We have raised our target price to reflect lower capex in anticipation of a more asset-light model. We make no changes to our HOLD rating, with an entry price of S$1.30.
Pending more details on the rail financing framework, we prefer ComfortDelGro for its overseas growth potential, diversification and stronger balance sheet.

Shareholders’ value accretion from new financing framework for the rail segment.
Stronger-than-expected bus and rail ridership growth.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-29

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.46 Up 1.25