SMRT Corporation - OCBC Investment 2016-05-03: Weak core rail operations to continue

SMRT Corporation - OCBC Investment 2016-05-03: Weak core rail operations to continue SMRT CORPORATION LTD S53.SI 

SMRT Corporation: Weak core rail operations to continue

  • FY16 within expectation
  • Recorded one-off S$19m tax refund
  • Cost pressures to persist

4QFY16 rail MRE hits 53% of rail revenue

  • SMRT Corporation’s (SMRT) 4QFY16 revenue increased 2.8% YoY to S$320.0m, with growth across all businesses except for taxi and engineering services segments. 
  • 4QFY16 top line growth in fare business was driven by higher ridership but offset by 1.9% fare reduction and cannibalization impact from DTL2. 
  • While 4QFY16 operating expenses grew at a slower rate of 2.2% YoY to S$310.0m, we noted this was helped by a S$19.0m property tax refund (S$17.1m from rail business). Stripping out the one-off tax refund, 4QFY16 core PATMI plunged 63.5% to S$7.6m. 
  • For the quarter, we also saw rail maintenance-related expenses (MRE) crept up to hit 53% of rail revenue, which resulted in operating losses of S$8.5m for core rail operations compared to operating profit of S$9.6m. 
  • For FY16, revenue grew 4.9% to S$1.30b on higher ridership and average fare, but on higher MRE, core PATMI came in flat at S$90.3m, which formed 100.0% of our FY16 forecasts.

High rail related expenses likely to continue

  • As SMRT is in the midst of executing its multi- year rail network renewal programme that is targeted to complete in CY18, management has guided that rail MRE will likely sustain around 50% of total rail revenue over the next one to two years. 
  • While repairs & maintenance (R&M) expenses are unlikely to see significant increase, we believe the MRE will likely be incurred as SMRT increase headcount to boost its engineering and maintenance capabilities. Hence, we expect the softness in rail operations to offset the improvement in core bus operations post transition to the new bus government contracting model (GCM). 
  • Another key point we noted was management stated they are making progress on the discussions with the government in relation to the transition to a new asset-light rail financing framework (RFF), and management went on to highlight that RFF is key to sustainable rail operations. However, without concrete details and timeline, we have yet to factor in for such impact.

Maintain HOLD with FV of S$1.55

  • As we roll-forward and introduce FY18 forecasts, our DDM-derived fair value estimate increases from S$1.51 to S$1.55
  • Maintain HOLD.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-05-03
OCBC Securities Analyst Report HOLD Maintain HOLD 1.55 Up 1.51