SMRT CORPORATION LTD
S53.SI
SMRT Corporation - Strong headwinds ahead
- SMRT’s taxi business has remained resilient but is only a small profit contributor.
- We expect strong headwinds for SMRT from
- the LTA’s 1.9% fare cut,
- ridership diversion to the DTL, and
- rising rail maintenance-related expenses.
- We deem the market’s view that SMRT will get favourable terms from the possible rail reform as unwarranted.
- We maintain a Reduce call on SMRT, with an unchanged DCF-based target price of S$1.40; potential earnings disappointment is a key de-rating catalyst
■ Maintain Reduce on strong headwinds
- We maintain our Reduce rating on SMRT with an unchanged FY3/17 DCF-based target price of S$1.40, (WACC: 7.5%).
- We expect SMRT to face strong earnings headwinds from 4Q16 onwards and believe a potential earnings disappointment is a key de-rating catalyst ahead.
- There has been no clarity on the rail reform to date, and we deem the market’s view that SMRT will get a favourable terms for the rail reform as unwarranted.
■ Taxi business remains resilient but only small contributor
- SMRT’s taxi business has remained resilient to date. In 9M15, SMRT’s taxi revenue rose 6% yoy and taxi operating profit rose 77% yoy, due to
- an expanded taxi fleet and economies of scale, and
- higher taxi rental from replacement of old taxis (other than these, we note the strong operating profit growth was also due to a low base effect as 3Q15’s taxi profit was subdued by earlier taxi retirement).
- While it has remained resilient, taxi only formed 12% of group revenue and 10% of group operating profit in FY15.
■ Subdued fare outlook: fare cut and ridership diversion to DTL
- Bus and rail fare businesses are SMRT’s two biggest revenue contributors, forming 53% and 19% of the group revenue in FY15.
- We expect both to be adversely impacted by the LTA’s 1.9% fare cut and the operations of the DTL stage II (started 27 Dec 15). We estimate these two events will result in c.S$10m decline in SRMT’s fare revenue in 4Q16 and an annualised S$40m decline in fare revenue in FY17. We believe most of the decline will flow down to SMRT’s bottom line.
■ Rising cost pressures from rail maintenance regime
- Apart from the subdued fare outlook, we expect the group’s rail profitability to be further eroded by the rising maintenance-related expenses (MRE). SMRT’s rail MRE of S$74m in 3Q16 (2QFY16: S$71m) was equivalent to 43% of its rail fare revenue (2Q16: 41%).
- Management has guided that the MRE will continue to increase to c.50% of rail fare revenue (c.S$80m based on our estimate) by 4QFY16. The rail MRE is likely to stay elevated throughout FY17, in our view.
■ Don’t pin your hopes on rail reform
- We think investors should not pin too much hope on the possible rail reform until we get greater clarity from the authorities. We doubt if a possible nationalisation of rail will necessarily lead to favourable terms for SMRT.
- Two issues must be taken into account:
- SMRT’s asset purchase obligations (an off-balance sheet liability) under the old rail framework; and
- the government’s need to balance public and operator interests.
- Such issues point to the risk of an undesirable outcome for SMRT.
Roy CHEN
CIMB Securities
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William TNG CFA
CIMB Securities
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http://research.itradecimb.com/
2016-02-10
CIMB Securities
SGX Stock
Analyst Report
1.40
same
1.40