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SMRT Corporation - UOB Kay Hian 2016-01-27: 9MFY16 Good Results With A Boost From Grants

SMRT Corporation - UOB Kay Hian 2016-01-27: 9MFY16 Good Results With A Boost From Grants SMRT CORPORATION LTD S53.SI 

SMRT Corporation (MRT SP) 9MFY16: Good Results With A Boost From Grants 

  • SMRT’s 9MFY16 results were ahead of market expectations. However, this was also partly boosted by government grants. 
  • We raise our FY16-18 net profit forecasts by 10-17%. 
  • Maintain HOLD with a DCF-based target price of S$1.51 (previously: S$1.46). Entry price is S$1.35. 


RESULTS 


 Strong 9MFY16 results, aided by government grants. 

  • SMRT Corporation’s (SMRT) 9MFY16 net profit of S$82.7m (+18% yoy) exceeded market expectations, helped by a 41% yoy rise in other income, which included training grants, grants for the Bus Service Enhancement Programme (BSEP) and from the Public Transport Security Committee. 
  • The latter was for capex to raise security standards (50% covered by grants). 

 Good showing from bus and non-fare segments. 

  • Buses reverted to profitability, with an operating profit of S$7.5m in 9MFY16. 
  • As for the non-fare business, 9MFY16 contributions were up 15% yoy on better earnings from taxis and rentals. 
  • 9MFY16 operating profit from the taxi segment rose 77% due to higher rental contribution. 


STOCK IMPACT 


 Near-term headwinds for fare business. 

  • SMRT cautioned that the group’s fare revenue will be impacted by the 1.9% fare reduction (with effect from 27 Dec 15) as well as the commencement of the downtown line 2 (DTL2). The latter will have an impact on SMRT’s bus routes and rail line along the alignment of DTL2. 
  • While it is too early to determine the extent of DTL2’s impact on earnings, management guided for a potential revenue drop-off of S$5m-6m for both rail (80%) and bus (20%) operations for 4QFY16. 
  • In terms of the rail operations, primarily the NS line and the western side of the EW line are likely to be impacted. Bus operations along Upper Bukit Timah stretch could also be affected by the DTL2. 

 Maintenance to remain elevated. 

  • Management also guided that repair and maintenance costs will remain elevated to meet higher maintenance standards. 
  • Including staff costs related to maintenance, rail maintenance-related expenses are expected to be close to the upper-end of the 40-50% revenue range. 

 Other updates. 

  • In terms of fuel costs, the group is fully hedged until the end of FY16. As for FY17, no hedging for diesel has been done, but discussions with suppliers are underway while the electricity tariff has been set up until Sep 16. 
  • No guidance was provided on capex. In respect to the rail financing framework, management re-iterated that they are making progress on negotiations with authorities, with no details provided on a probable timeline. 


EARNINGS REVISION/RISK 


 Raising estimates. 

  • We raise our FY16-18 net profit forecasts by 10-17% to factor in the government grants and higher contributions from its taxi segment. 


VALUATION/RECOMMENDATION 


 Maintain HOLD with a DCF-based target price of $1.51 (previously S$1.46). 

  • We have raised our target price after the recent earnings revision. Maintain HOLD with an entry price of S$1.35. 
  • Pending more details on the rail financing framework, we prefer ComfortDelGro for its overseas growth potential, diversification and stronger balance sheet. 
  • While we think the rail financing framework could improve profitability, we believe a significant portion of the cash proceeds may go towards addressing the group’s high gearing (0.77x as at Dec 15). 


SHARE PRICE CATALYST 

  • Shareholders’ value accretion from new financing framework for the rail segment. 
  • Stronger-than-expected bus and rail ridership growth.



Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-27
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.51 Up 1.46


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