SMRT Corporation - CIMB Research 2016-01-27: Results good, outlook poor

SMRT Corporation - CIMB Research 2016-01-27: Results good, outlook poor SMRT CORPORATION LTD S53.SI 

SMRT Corporation - Results good, outlook poor 

  • 3QFY16 net profit jumped 63% yoy to S$37m on broad-based improvements. 
  • 3QFY3/16 earnings above expectations at 46%/43% of our/consensus forecast due mainly to higher-than-expected rail profit, which we think is unsustainable. 
  • Outlook of fare businesses remains challenging; full impact of the 1.9% fare cut and ridership diversion to the DTL stage II will kick in from 4QFY16. 
  • Maintain Reduce, with a slightly higher TP of S$1.40. 

■ 3QFY16 above expectations, surprised by rail 

  • SMRT's 3QFY16 earnings came in above our expectations, at 46% of our FY16 (9M16 at 102%) forecast. 
  • The surprise was mainly due to higher rail profit, which is unsustainable, in our view. After three consecutive quarterly losses, rail posted a positive operating profit of S$7.4m in 3QFY16 (vs. S$3.8m loss in 2QFY16 and our forecast of S$3m loss), helped by higher government grants received and still-moderate rail maintenance-related expenses (MRE) during the quarter. 

■ Non-rail segments continued to perform in 3QFY16 

  • Bus operating profit widened qoq from S$1.1m in 2QFY16 to S$3m in 3QFY16 (3QFY15: S$0.7m loss), due mainly to the lower diesel cost. 
  • Operating profit of non-fare businesses (taxi, rental, advertisement, etc) was largely flat qoq, but 18.5% higher yoy due to lower taxi contribution in 3QFY15. 
  • All included, group net profit rose 63% yoy to S$37m in 3QFY16 (3QFY15: S$23m). 

■ Strong headwinds for fare businesses from 4Q16 onwards 

  • We expect SMRT’s rail and bus fare revenue to be adversely impacted by the Land Transport Authority’s (LTA) 1.9% fare cut and the operations of the Downtown Line (DTL) stage II (started 27 Dec 15). 
  • Management estimated that the ridership diversion to DTL alone could result in S$5m-6m fare revenue loss for its North-South and East-West Lines in 4QFY16. This is in addition to the S$4m-5m fare revenue loss from the 1.9% fare cut. 
  • We believe these fare revenue losses are likely to flow through to its bottomline. 

■ Rising cost pressure from the lifted rail maintenance regime 

  • Apart from the subdued fare outlook, we expect the group’s rail profitability to be further squeezed by the rising MRE related to its aging rail network. SMRT’s rail MRE of S$74m in 3QFY16 (2QFY16: S$71m) was equivalent to 43% of its rail fare revenue (2QFY16: 41%). 
  • Management guided that the MRE will continue to increase to c.50% of rail fare revenue by 4QFY16. The MRE is likely to stay elevated throughout FY17, in our view. 

■ Maintain Reduce on SMRT 

  • We raise our EPS forecast by 25% for FY16F to reflect the stellar 3QFY16 results, and by 10% for FY17F to reflect the improving bus profit from the lower energy cost. 
  • Our FY17 DCF-based target price has been nudged up to S$1.40. 
  • We maintain our Reduce call on SMRT. 
  • Potential earnings disappointment is a key de-rating catalyst.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | 2016-01-27
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 1.40 Up 1.37