SMRT Corp Ltd - Phillip Securities 2016-01-27: Positive earnings surprise

SMRT CORPORATION LTD S53.SI

SMRT Corp Ltd - Positive earnings surprise

Revenue of S$327.6mn was in line with consensus expectation of S$333.7mn.
S$36.9mn PATMI beat consensus expectation of S$24.1mn, with 53% positive surprise.
Upgraded our rating from sell to reduce, with higher target price of S$1.17.

110 buses were sold to LTA for S$30mn during the quarter. The buses were sold at book value and there was no cash flow involved in the transaction, as there was a loan directly associated with the buses which were directly offset in conjunction with the sale of the buses.

Management expects lower Bus and Train revenue in 4QFY16, of about S$5mn-S$6mn in a 20/80 proportion respectively.
The lower revenue is attributable to the cannibalisation of ridership by the commencement of operations of Downtown Line Stage 2 (DTL2). DTL2 runs parallel to the bus routes as well parallel to a section of the North-South East-West Line (NSEWL). DTL2 is operated by SBS Transit, while NSEWL is operated by SMRT.
Additionally, there will be further impact of revenue from the 1.9% fare reduction from 27 December 2015.

The turnaround was attributed to the disposal of one businesses, whereby better aligning capital structure.
Also, a new management team that was brought in had done well in focusing on the operating activities.
Management expects the performance to be sustainable.

Related Expense (MRE) expected to be close to 50% of Rail revenue in 4QFY16, as Rail revenue compresses. Rail MRE comprises Staff costs and Repair & Maintenance components. Rail revenue is expected to face downward pressure as outlined previously.
Cost pressures expected to creep up as SMRT remains committed to rail reliability.
Consequently, Management expects Rail MRE to be close to 50% of Rail revenue. (43% in 3QFY16)

Higher Train profit was primarily due to higher y-o-y revenue and the S$3mn PTSC grant. The grant was in relation to the year's expenditures. This is non-recurring in nature and not expected to see this quantum of a grant in 4QFY16.
Going forward, grant level in FY17 will not necessarily be of this quantum either, and is subject to application and approval by the government.

We leave our 4QFY16 estimates largely intact, as we believe the factors that contributed to the improved profits in 3Q are non-recurring in nature.
We also lower our FY17e fuel costs assumption by 5% from previous forecast, to be in line with the expected prolonged weakness in fuel price.
Upgrade to "Reduce" rating, with a new higher target price of S$1.17 (previous: S$1.11).

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-01-27

Phillip Securities SGX Stock Analyst Report REDUCE Upgrade SELL 1.17 Up 1.11