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SMRT Corporation - UOB Kay Hian 2016-05-03: FY16 Good Set Of Results But Boosted By Property Tax Refund

SMRT Corporation - UOB Kay Hian 2016-05-03: FY16 Good Set Of Results But Boosted By Property Tax Refund SMRT CORPORATION LTD S53.SI 

SMRT Corporation - FY16: Good Set Of Results But Boosted By Property Tax Refund

  • FY16 results were boosted by property tax refund. Excluding this, results would have been below expectations due to losses from rail. 
  • All eyes are now on the rail refinancing framework, as we await more details. 
  • Meanwhile, we trim FY17-18 net profit by 1-5% to reflect higher maintenance costs as well as the impact from DTL. 
  • Maintain HOLD with DCF-based target price of S$1.48 (from S$1.51). Entry price is S$1.30.



RESULTS


• Adjusted net profit (excluding property refund tax) was below expectations. 

  • SMRT reported FY16 net profit of S$109.3m (+20.1% yoy), which was broadly in line with our expectations. However, earnings were actually below expectations due to a S$19m boost from property tax refund relating to prior years’ over assessment. 
  • The key reason for the earnings shortfall was due to the rail division, which was loss-making. 
  • While group revenue grew 5% yoy, it was exceeded by higher operating costs, as key components such as staff costs (+11% yoy), depreciation (+5.0% yoy) and repair and maintenance (+15% yoy) trended higher, on heightened operational requirement, a larger bus and train fleet as well as more rigorous maintenance work related to an ageing train network. 
  • A total DPS of 4.0 S cents/share was announced (vs 3.25 S cents/share in FY15).

• Rail struggles. 

  • The rail business, excluding net property tax refund of S$17.1m, was in the red and registered an operating loss of S$9.6m. 
  • Higher ridership and average fare were mitigated by higher operating costs, with rail maintenance-related expenditure (MRE) accounting for 45% of FY16 rail revenue (vs 42% in FY15). 
  • We believe that MRE is likely to normalise at the range of 45-50% of rail revenue over the next 1-2 years, and start trending downwards towards end of FY19 as SMRT gradually begins to reap the benefit of its staggered multi-year rail renewal project (anticipated to be fully completed by 2019), which includes replacement of track sleepers and signalling works for the NSEWL as well as upgrading of its power system.

• Non-rail business in the black. 

  • Meanwhile, its non-rail business registered yoy profit increase of 23% for FY16, largely attributable to improved earnings from the bus, rental and taxi segments.



STOCK IMPACT


• New Rail Financing Framework (NRFF) work in progress. 

  • SMRT is still in discussion with authorities on the NRFF, with no clarity on the details of the deadline. 
  • Given the recent train service disruption in April as well as rail losses, we think it may pave the way for NRFF discussions between SMRT and authorities to gain momentum. 
  • Net gearing for FY16 fell to 64% from 77% in FY16. We believe that there could be further downside to the net gearing if NRFF materialises as capex would decline.

• Manageable DTL2 impact. 

  • While total ridership for bus and rail has increased (4Q16: train: +4.6% yoy, bus: +3.5% yoy), likely due to network effect of rails and more people taking public transport as Singapore moves to a car-lite concept, we note the effect of DTL2 opening could be in the form of lower average fare per user (4Q16: train: -2.4% yoy, bus:-2.1% yoy) as trips per user become shorter.



EARNINGS REVISION/RISK


• Trimmed FY17-18 earnings slightly, introduce FY19 numbers. 

  • We have adjusted FY17-18 earnings downwards slightly by 1-5% to reflect a higher rail MRE. 
  • However, we expect the MRE to trend down towards more sustainable levels closer to FY19 as SMRT reaps the productivity and gains from renewal projects.



VALUATION/RECOMMENDATION


• Maintain HOLD with a lower DCF-based target price of $1.48 (previously S$1.51). 

  • We expect SMRT to re-rate should there be further details offering clarity on NRFF. 
  • Pending more details on the rail financing framework, we prefer ComfortDelGro for its overseas growth potential, diversification and stronger balance sheet.



SHARE PRICE CATALYST

  • Shareholders’ value accretion from NRFF for the rail segment. 
  • Stronger-than-expected bus and rail ridership growth.




Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-03
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.48 Down 1.51


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