SMRT CORPORATION LTD
S53.SI
SMRT Corporation - WORSENING PROFITABILITY – TAKE THE OFFER
- 1QFY17 missed our expectations.
- Rail profitability under pressure.
- Good opportunity to cash out.
1QFY17 earnings marred by core rail operations
- SMRT Corporation’s (SMRT) 1QFY17 revenue fell 2.0% YoY to S$313.9m due to declines recorded from core rail (-2.2%) and bus (- 4.4%) operations.
- The YoY drop in fare business revenue in 1QFY17 was mainly attributable to the 1.9% fare reduction effected since Dec 15 and cannibalization impact from DTL2.
- In addition, 1QFY17 operating expenses rose 0.8% YoY to S$311.5m due to higher staff costs and repairs and maintenance (R&M) costs.
- For the quarter, rail maintenance-related expenses (MRE) continued to put a drag on profitability as it formed 49% of rail revenue, and widened 1QFY17 operating loss for core rail operations by 76.8% YoY to S$9.4m.
- As a result, SMRT’s 1QFY17 PATMI plunged 22.9% to S$15.5m, which missed expectations as it only formed 19.3% of our FY17 forecast and 17.7% of consensus’ forecast for FY17 (based on Bloomberg).
Rail R&M costs to drag earnings down
- SMRT’s outlook remains unexciting and 1QFY17 results reinforce our view that earnings ahead will continue to be eroded by increasing rail MRE, amid weak revenue growth in FY17.
- The new rail financing framework (NRFF) announced last month did not help, as NRFF is structured such that SMRT’s rail EBIT margin (fare and non-fare) going forward will be capped at ~5%, with almost all of any upside in excess of 5% to be shared with LTA.
- With weak set of 1QFY17 earnings, worsening profitability dragged by core rail operations on increasing expenses and capped earnings upside under the NRFF, we cut our FY17/18 PATMI forecasts by 2.6%/14.6%.
Approve the scheme arrangement
- Consequently, our DCF-based 12-month FV estimate decreases from S$1.45 to S$1.40.
- The scheme price of S$1.68 now represents a 20% premium over our FV. Therefore, we maintain our recommendation for investors to ACCEPT THE OFFER by approving the scheme arrangement, as we believe it presents a good opportunity for investors to cash out at a premium.
- Nonetheless, as there is the risk of the proposed buyout by Temasek falling through, we advise investors to look for opportunities to sell part of their holdings in the open market closer to S$1.68.
Eugene Chua
OCBC Investment
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http://www.ocbcresearch.com/
2016-08-10
OCBC Investment
SGX Stock
Analyst Report
1.40
Down
1.450
