SMRT - DBS Research 2016-01-26: Benefitting from grants, energy costs

SMRT CORPORATION LTD S53.SI

SMRT Corp - Benefitting from grants, energy costs

Upgrade to HOLD, TP revised to S$1.50
3Q16 net profit surged 63% y-o-y beating our expectations
Positive performance due to higher government grants, lower electricity/ diesel and other operating expenses
Raised FY16/17F earnings by 23%/15%

We upgrade SMRT to HOLD from FULLY VALUED, with a revised TP of S$1.50.
Taking a leaf from 3Q16 results, we may have been too bearish on our costs assumptions previously, and we now see a sustained cost environment ahead providing sustainability to the group’s profit levels, barring further significant and unforeseen train disruptions.

3Q16 net profit surged by 63.5% y-o-y to S$36.9m, beating our expectations. Revenue grew 4.6% y-o-y to S$327.6m while total operating expenses grew by 2%.
The strong performance arose largely from higher other operating income (due to government grants), lower electricity and diesel costs (-8.8%) and lower ‘other operating expenses’ (-5.5%).
As a result, EBIT margin improved by 4ppts to 13.9% versus 9.9% in 3Q15.

On a segmental basis, operating profits of Train and Bus did well, registering a profit of S$9.7m and S$3.4m in 3Q16, respectively.
For non-fare business, taxis’ operating profit increased manifold to S$4.8m from a larger and new fleet, coupled with absence of write-offs seen in 3Q15.
Rentals was steady, registering 5.4% increase in operating profit to S$21.8m, accounting for 48% of group profit.

We raised our FY16F/ 17F . forecasts by 23%/ 15%, taking into account the higher grants recognised in FY16, coupled with lower energy costs assumptions and interest expenses.
While we acknowledge the strong 3Q performance, we believe 4Q16 performance could be more subdued taking into account the recent fare cuts (of 1.9% effective from 27 Dec 2015), coupled with higher repair and maintenance costs typically associated in the last quarter of the financial year.
Upgrade to HOLD.

Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2016-01-26

DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 1.50 Up 1.24