SMRT - DBS Research 2015-10-29: Take a further step back

SMRT CORPORATION LTD S53.SI

SMRT - Take a further step back

Cut recommendation to FULLY VALUED as market has prematurely priced in rail reforms, in our view.
Limited upside from current level in the event of the fruition of the NFF on our assumed terms (S$1.55).
2Q16 results in line; operating loss of $4m from rail ops, while buses turned profitable on lower diesel costs, higher ridership.
R&M related expenses for rail expected to increase over the next few quarters.

With the recent surge in share price, we believe the market may have been overly optimistic on the possible impact of the New Rail Financing Framework (NFF) for SMRT. While this should relieve SMRT of its future capex burden, the details and timing are not known.
At 26.4x / 26.1x PE, valuations look too stretched to take a “blind-faith” bet. As such, we downgrade to Fully Valued (from HOLD) with a TP of S$1.24 based on PE/DCF valuation methodology.
This represents c.22x FY16F/17F PE, slightly above its historical 10-year average PE of 20x.

We took a stab at estimating the potential upside based on our view of the NFF. Assuming the NFF comes into effect at the start of SMRT’s next financial year (FYMar17), we project that it can lift our FY17F/18F earnings by c.8%-15%.
We estimate that our PE/DCF based TP would be around S$1.55 in the event of the fruition of the NFF.
While the event should be a positive catalyst for SMRT (when it happens), we believe there is limited upside at current share price.

SMRT’s 2Q16 results are within expectations, with net profit up by 2% y-o-y to S$25.7m.
Revenue grew by 4.7% to S$328.8m driven by higher fares and non-fare revenue contribution, namely rental, advertising and taxis.
Management indicated that rail-related maintenance expense as a percentage of rail revenue is projected to rise to 50% by end-FY16F, up from 41% in 2Q16, on the back of its aging fleet and expanded network.
Key risk lies in the fruition of the rail reform and terms which may be significantly better than our expectations and/or assumptions.

Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2015-10-29

DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade HOLD 1.24 Up 1.22