SMRT - Maybank Kim Eng 2015-10-28: Rail losses to continue

SMRT - Maybank Kim Eng 2015-10-28: Rail losses to continue SMRT CORPORATION LTD S53.SI 

SMRT - Rail losses to continue 

  • 2QFY3/16 net profit of SGD25.7m in line. 55% of full-year estimates. 
  • Rail remained in the red. Better bus profits on higher revenue and relief from lower energy cost. Stronger showing from non-fare businesses. 
  • At rich valuations of 27x P/E and 2.2% yield, the stock has priced in a perfect transition even though details are still under negotiation. Maintain SELL and SGD1.10 TP

Better bus profits, rail remains in the red 

  • 2QFY3/16 net profit of SGD25.7m was in line with 1H16 at 55% of full-year estimates. Its rail business continued to incur losses due to higher repair & maintenance, staff and depreciation expenses. 
  • Profitability for the bus segment improved due to higher revenue and cost relief from lower energy cost. 
  • EBIT for its non-fare businesses improved significantly to SGD33.7m (+21.7% YoY) due to stronger rental, advertising and taxi performance. 
  • Management remains in discussions on a transition to a new rail financing framework and has begun negotiations on the new bus contract terms after the existing license expires in Aug 2016. 

Rail and bus transition terms remain hazy 

  • The company’s earnings outlook remains lacklustre. We forecast sustained losses for the rail business due to the impending fare cuts of 1.9% from end-2015. 
  • Further, higher costs to improve system reliability are not captured in the fare adjustment formula. 
  • We maintain that the Street has taken a far too simplistic view on the impending rail transition and has ignored the finer details that are still under negotiation. Furthermore, the timing for a transition remains hazy. 
  • With the stock trading at rich valuations of 27x P/E and yielding only 2.2%, we believe it has already priced in a perfect transition which is unlikely to be the case. 
  • Maintain SELL with unchanged TP of SGD1.10, based on 20x FY3/16 EPS. 

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-26
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.10 Same 1.10