SMRT CORPORATION LTD
S53.SI SMRT Corporation - A bailout, not a boost
- SMRT announced the transition of its rail operation to the NRFF last Friday.
- The c.5% composite rail EBIT margin embedded in the NRFF could have been a big disappointment to those who have been hoping for more.
- We cut FY17-19F EPS by 13-37% to reflect the lower rail margin under the NRFF.
- No special dividend is declared out of the proceeds from the rail asset sale.
- Maintain Reduce, with a lower TP of S$1.17 based on FY17 DCF (WACC: 6.5%).
Transition of SMRT rail into the NRFF
- SMRT announced on Friday that it has reached an agreement with the Land Transport Authority (LTA) on the transition of the group rail operation into the New Rail Financing Framework (NRFF), effective from 1 Oct 2016.
- Post transition, the LTA would take the ownership of SMRT’s rail operating assets, while SMRT will be focused on operations and maintenance.
5% composite EBIT margin, high hopes crashed into harsh reality
- While we have been cautioning the market to not be overly optimistic about terms of the reform (see our report: Positives from rail reform likely overblown, dated 7 Dec 15), the lower margin embedded in the NRFF may still have caught many by surprise. According to the LTA, the license charge under the NRFF has been structured to allow SMRT to achieve a composite (fare & non-fare) rail EBIT margin of c.5%; this is lower compared to the 9-24% margin that SMRT used to achieve in FY12-16 under the old framework.
The terms are fair, in our view
- Even with a lower rail margin, we deem the terms granted by the LTA as fair, given that the transition has relieved SMRT from a S$2.8bn capex burden, which would otherwise have been incurred by SMRT in 2016-2020 under the old framework.
- We believe that, with SMRT’s limited equity base of S$914m and elevated net gearing of 64% as at end- FY3/16, this capex burden could send SMRT into insolvency under the old framework.
No special dividend
- Other than reviving the SMRT’s balance sheet strength (SMRT would be in a slight net cash position post reform), we think the asset sale is nothing much to be cheered about, especially when SMRT has no intention of paying a special dividend. SMRT said the sale proceeds of c.S$991m would be used to retire part of its existing debt, to settle its tax payable, and to fund the development of its core rail engineering competency.
Cut FY17-19F EPS by 13-37%
- We cut our FY17-19F EPS by 13-37% to factor in lower composite rail EBIT margins of 4.5-5% (vs our previous projection of 8-10% under the old rail framework).
- We have also adjusted our DCF model to reflect the updated collection schedule of proceeds from the rail asset sale (est. S$991m to be collected in tranches over FY17-20, with 1st tranche of S$797m in 3QFY17, vs our previously projected one-time cash transaction in FY19).
Lofty valuation, maintain Reduce call
- We maintain our Reduce call, with our FY3/17 DCF-based target price cut to S$1.17 (WACC: 6.5%). With our lowered EPS projection, SMRT currently trades at lofty CY16F/ 17F P/E of 28.9x/31.9x, vs its peer ComfortDelGro’s 18.8x/17.5x.
- Potential earnings disappointment is a key de-rating catalyst.
Roy CHEN
CIMB Securities
|
William TNG CFA
CIMB Securities
|
http://research.itradecimb.com/
2016-07-17
CIMB Securities
SGX Stock
Analyst Report
1.17
Down
1.40
