SMRT CORPORATION LTD
S53.SI
SMRT Corporation - Cap On Profit Margins Spoils The Party
- The announcement of the transition of SMRT’s rail business to NRFF was in line with our expectations.
- The expected cash inflow from the rail assets sale is higher and earlier than our estimates. However, the profit margins cap for its rail business was a major negative.
- We lower our FY17-19 earnings forecasts by 5-37% to account for lower margins for non-fare rail business and cut TP to SGD1.76 (from SGD2.25, 14% upside).
- Maintain BUY, as the firm can now aggressively bid to operate the TEL, given its much stronger balance sheet position.
Transition of the rail business to the New Rail Financing Framework (NRFF).
- SMRT Corp (SMRT) announced on Friday that it reached an agreement with the Land Transport Authority (LTA) on the transition of its rail operations to the NRFF. Under the latter, the LTA will take ownership of SMRT’s rail operating assets while it remains focused on operating and maintaining the rail lines.
Large and earlier cash inflow to strengthen balance sheet.
- SMRT’s rail business will turn asset-light from 1 Oct (our earlier expectations: early 2019) and receive SGD991m in cash (our prior estimate: SGD590m) from the sale of its train assets.
- A total of SGD797m will be paid up front, with the balance to be paid in three tranches.
- SMRT can now repay SGD550m worth of notes due in Oct 2017 without the need to draw down fresh loans. We expect it to turn to a net cash position in FY19 (Mar) vs a net gearing of 0.64x in FY16.
SMRT could aggressively bid for the Thomson East Coast Line (TEL).
- Given its stronger balance sheet position, we believe SMRT could stand a more formidable chance of competing in the in bidding process to operate the TEL, which is slated to be operational in 2019.
Transition to the Government Contracting Model (GCM) for buses on track.
- Our recent discussions with SMRT and ComfortDelGro’s (CD SP, BUY, TP: SGD3.25) respective managements reaffirms our view that the GCM for buses will be implemented in October.
- We expect SMRT’s bus business to earn a 7.5% operating margin under GCM and receive SGD237m in cash from the bus assets sale to the LTA.
No special dividend, but expect a higher payout.
- While SMRT does not plan to pay any special dividend, we believe that the lower capex requirement creates potential for higher dividend payouts.
- We increase our dividend payout estimate to 80% from 55% over the forecast period, translating into c.3% yield.
Lower estimates, maintain BUY.
- Under NRFF, train EBIT margins, including related advertising and rental business, will be regulated between 3.5-5% to account for such lower margins. Thus, we cut FY17-19 earnings estimates by 5- 37%.
- We continue to value SMRT based on DCF. Our SGD1.76 TP is based on WACC of 5.5% (5.8% previously).
- We lower our risk premium to 4% from 6% to account for lower business risk under NRFF. We also assume long-term growth at 1%.
- Lower than expected operating margins for the bus business, a weaker taxi business and a financial penalty for a recent fatal crash are risks to our call.
Shekhar Jaiswal
RHB Invest
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http://www.rhbinvest.com.sg/
2016-07-19
RHB Invest
SGX Stock
Analyst Report
1.76
Down
2.25
