SMRT Corporation - OCBC Investment 2016-02-12: Cautious On Increasing Expenses

SMRT CORPORATION LTD S53.SI

SMRT Corporation - Cautious On Increasing Expenses

• YTD share price up 6.3%

• Likely driven by strong 3QFY16 results

• Cost pressures to mount

With almost half of Feb 16 over, we note that the share price of SMRT Corporation (SMRT) has significantly outperformed the broader Singapore market (i.e. STI).

SMRT’s YTD share price rose 6.3% (11 Feb close) while STI recorded a substantial 12.0% decline over the same period.
We believe its better-than-expected 3QFY16 results (announced on 25 Jan) is the key driver for such gains.
3QFY16 revenue grew 4.6% YoY with growth across most business segments while PATMI jumped 63.5% as operating expenses grew at a slower pace of 2.4% on cheaper energy costs.
Since SMRT’s results release, SMRT’s share price has gained a material 15.9% compared to STI’s decline of 1.7%.

While SMRT has stated progress is being made on the rail reform, we prefer to wait for further clarity over the uncertain timeline and structure of the rail reform, and opt not to factor in any assumption at this point in time.
On its operations, we are holding a cautious view as we expect unexciting growth outlook in the near-term on two key reasons.
- First, we expect downward pressure on SMRT’s revenue coming from two fronts:
  1. management guided for a S$5-6m fall in 4QFY16 revenue due to potential rider cannibalization from the launch of Downtown Line 2 (DTL 2), and
  2. 1.9% fare reduction to weigh on revenue growth for CY16.
- Second, we expect cost pressures to continue to mount, especially for repair and maintenance expenses as well as staff costs.
Management has guided for rail-related maintenance expenses to increase further to 50% of rail revenue by 4QFY16, from 43% in 3QFY16.
Furthermore, we also expect the preparation for Tuas West Extension (opening in CY16) to pile onto its expenses.

Taking the 3QFY16 results into consideration, we increase our FY16F PATMI by 34.6% as we note a slower than expected pace of growth in expenses.
Consequently, our DDM-derived fair value estimate increases from S$1.43 to S$1.51. Maintain HOLD.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-02-12

OCBC Securities Analyst Report HOLD Maintain HOLD 1.51 Up 1.43