SMRT - DBS Research 2016-04-29: Headline profit boosted by tax refund

SMRT - DBS Research 2016-04-29: Headline profit boosted by tax refund  SMRT CORPORATION LTD S53.SI 

SMRT - Headline profit boosted by tax refund

  • 4Q16/FY16 net profit boosted by tax refund; otherwise core profits below expectations.
  • Final DPS of 2.5 Scts proposed.
  • NRFF a key catalyst; Licence Charge quantum an unknown.
  • Maintain HOLD, TP S$1.53.


Maintain HOLD, TP adjusted to S$1.53. 

  • While we expect its core operations to remain challenging on the back of higher operating costs, we estimate that SMRT core profits should remain relatively stable, barring any significant and unforeseen train disruptions. 
  • We expect share price to be supported by expectations of the New Rail Financing Framework (NRFF), but scarce details and its relatively high valuation could put a lid on any significant outperformance. 
  • We maintain our HOLD recommendation on SMRT.


4Q16 core results below expectations. 

  • 4Q16 net profit surged by 28% y-o-y to S$26.6m on a 3% growth in revenue. However, this was boosted by a property tax refund (S$17.1m) without which, core profit would have been below our expectations. 
  • The drag came from its train operations being impacted by higher operating costs, the fare reduction and cannibalisation from opening of Downtown Line 2; and would have registered an operating loss of S$7.6m in 4Q16. 
  • Core EBIT margins dipped marginally on higher staff, and repair and maintenance costs, offset partially by lower electricity/diesel costs.


Licence Charge for NRFF to watch for. 

  • Our ongoing view has been that while the NRFF will ease SMRT’s future capex burden, it would be required to pay the authorities a Licensing Charge for the use of the operating assets. This has just been indicated in SMRT’s results announcement, which we believe is the first time being mentioned by the Group. 
  • Based on our current view, we believe the resultant financial impact on SMRT is neutral.


Valuation:

  • Our target price is adjusted to S$1.53, based on the average of our discounted cash flow (DCF) and price-earnings (PE) ratio valuation methodology. 
  • We peg our PE valuation at 19x FY17F earnings, its 10-year historical average. 
  • Our DCF methodology is based on a weighted average cost of capital of 6.1% and a terminal growth assumption of 1%.


Key Risks to Our View:

  • Higher-than-expected operating costs or fines. Higher-than- expected costs, particularly from repair and maintenance, could undermine our forecasts and pose downside risks.




Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-04-29
DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 1.53 Up 1.50


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