SMRT Corporation - CIMB Research 2016-02-10: Strong headwinds ahead

SMRT Corporation - CIMB Research 2016-02-10: Strong headwinds ahead 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 
    1. the LTA’s 1.9% fare cut, 
    2. ridership diversion to the DTL, and 
    3. 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 
    1. an expanded taxi fleet and economies of scale, and 
    2. 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: 
    1. SMRT’s asset purchase obligations (an off-balance sheet liability) under the old rail framework; and 
    2. 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 | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-10
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 1.40 same 1.40