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

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. 


RESULTS


 Sale of buses to the Land Transport Authority (LTA) was at book value. 

  • 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. 

 Bus and Train Revenue to be impacted on two fronts. 

  • 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. 

 Two key factors in the turnaround for Shenzhen ZONA. 

  • 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. 

 Rail Maintenance 

  • 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) 


How do we view this? 


 Higher Train (MRT) profit in 3QFY16 was boosted by one-off Public Transport Security Committee (PTSC) grant. 

  • 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. 


Investment Actions 

  • 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


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