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SMRT - DBS Research 2016-05-05: Key takeaways from post-results group meeting

SMRT - DBS Research 2016-05-05: Key takeaways from post-results group meeting SMRT CORPORATION LTD S53.SI 

SMRT - Key takeaways from post-results group meeting

  • SMRT's management reiterated key strategic thrusts and its focus on sustainable growth in a well-attended post-results investors’ lunch meeting
  • Investors’ focus on New Rail Financing Framework
  • Maintain view on counter, and forecasts


WHATS' NEW

  • We hosted a post-results lunch between SMRT’s management team and a group of institutional investors earlier this week. The meeting was very well attended.
  • The Group President and CEO, Mr Desmond Kuek, reiterated the five key strategic thrusts of the Group, encompassing the various stakeholders. The thrusts are to 
    • improve operational performance, 
    • enhance customer experience, 
    • strengthen workforce health, 
    • enhance organisational excellence, and to 
    • ensure sustainable growth.
  • This was followed by an interactive Q&A session. Much of the session focused on the New Rail Financing Framework (NRFF) and its background.
  • Our summarised salient points are as follows:

Rail/New Rail Financing Framework

  • The transition to the NRFF was the key focus of attendees and questions largely centred around it. As per the results briefing and announcement, it was shared that progress is being made with the discussion with the authorities for the operator to be asset-light. In return, the operator will pay a licence charge. 
  • Management reminded that the key tenets of the NRFF are to ensure financial sustainability and provide the authorities with flexibility to expand network quickly when needed. In terms of timing and quantum, there were limited details shared.
  • Management shared that in its drive to improve operational performance under its key strategic thrusts, upgrading work continues on the matured North-South-East-West Line (NSEWL); and when completed in 2-3 years’ time, there would be a “virtually new” network. The upgrading works includes re-sleepering, replacement of the third rail, turnout barrier, re-signalling and power expansion.

Thomson-East Coast Line (TEL). 

  • Within SMRT’s drive for continued growth, an area of focus is to capitalise on new rail operations. SMRT will look to compete in the tender for Thomson East Coast Line (TEL), which management expects tender for operators to occur by end-2016. TEL is projected to start in stages from 2019.

Bus margins to improve with transition to GCM. 

  • With the government bus contracting model (GCM) expected to take effect from 1 September 2016, the margins would improve as the fare-box revenue risks are removed. There was also more clarity on the perceived discrepancies of SMRT’s tender price between the first tender bid (for Bulim contract) and the second (for Loyang contract). It would also look to increase its share of bus contracts progressively beyond 2022, when the initial term of five years is up.
  • It was explained that in the first tender bidding for the Bulim contract, SMRT was willing to work with a lower margin given its effort put in, but still maintaining its profitability.

Taxis/Strides. 

  • Its taxi business has improved over the years, with more stability in its operating profits compared to previously. Its taxi segment achieved an operating profit of S$17m in FY16, up from S$13.7m in FY15. 
  • The purpose of the recently launched Strides, a private-chauffeur rental hire car, is to provide its hirers who prefer a more flexible schedule with more choices compared to a taxi driver, rather than cannibalise its taxi operations. 
  • The key difference between a private-chauffeur and taxi driver is the ability to pick up “street-hail” passengers, which still makes up a large proportion of rides.


OUR VIEW

  • We maintain our view on the counter and our forecasts. While we expect core operations to remain challenging on the back of higher operating costs, we project core profits to remain at c.S$97m to S$100m for FY17F/18F, helped partially by lower electricity and diesel costs and transition of buses to the GCM. 
  • Our views remain unchanged and forecasts are available in our report dated 29 April 2016, titled "SMRT: Headline profit boosted by tax refund".




Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-05
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.53 Same 1.53


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