SMRT Corporation - CIMB Research 2015-12-09: Bumpy ride ahead

SMRT Corporation - CIMB Research 2015-12-09: Bumpy ride ahead SMRT CORPORATION LTD S53.SI 

SMRT Corporation - Bumpy ride ahead 

  • We expect SMRT to incur higher maintenance-related expenses (MRE) in FY16-17 to cater to its aging rail system. 
  • FY16-17F earnings outlook further subdued by 1.9% fare cut effective Dec 15. 
  • The operation of the Downtown Line (DTL) stage II (starting in Dec 2015) may add further downside risk to our FY16-17F EPS. 
  • While the potential rail reform is a positive, market views that the government will grant favourable terms to SMRT are unwarranted. 
  • Maintain Reduce with a TP of S$1.37 based on FY16 DCF. 

■ Lifted repair & maintenance expenses 

  • We expect SMRT to incur higher MRE in FY16-17 to cater to an aging rail system as well as a larger train fleet. 
  • Due to the lifted MRE, the rail fare business ran into a third consecutive quarterly loss in 2QFY16. 
  • Management expects the rail MRE to continue increasing in the coming quarters, from currently 41% of rail revenue to c.50% of rail revenue by end-FY16. The intensity of repair and maintenance works may return to normal level in FY18 onwards. 

■ FY16-17 fare outlook subdued by 1.9% fare cut 

  • Apart from lifted MRE, SMRT’s FY16-17 EPS are also likely to be adversely affected by the LTA’s 1.9% fare cut, effective from Dec 2015. In FY15, 53% of group revenue was derived from rail fare business and 28% from bus fare business. 
  • Given SMRT’s largely fixed operating cost structure, we believe most of the fare cut will flow to the group’s bottom line. 

■ Potential traffic diversion from DTL 

  • Connecting the Northwest to the central region 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 in FY15 and 1H16. 
  • We estimate that every 1% decrease in rail ridership would lower our FY17F EPS by 4.8%. 

■ Rail reform is good but one should not hope for too much 

  • While we acknowledge that SMRT should benefit from potential capital-unlocking if a rail reform materialises, we doubt if the company will receive favourable terms for the asset transfer. 
  • Two issues that must be taken into consideration are the authority’s treatment of SMRT’s asset purchase obligation under the old rail regime and the government’s balancing of public and operator interests. Such issues point to the risk of an undesirable outcome for SMRT. 

■ Maintain Reduce, with a target price of S$1.37 

  • We maintain our Reduce rating on SMRT. 
  • Our target price of S$1.37, based on FY16 DCF (WACC: 8.0%), has incorporated a scenario where SMRT transfers S$970m worth of rail operating assets at book value to the government in FY19. 
  • Key upside risks to our call include SMRT managing to receive a favourable term for rail reform.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | 2015-12-09
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 1.37 Same 1.37