SMRT Corporation - RHB Invest 2016-08-10: Reaffirming The Case For Investors To Take The Offer

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SMRT CORPORATION LTD S53.SI

SMRT Corporation - Reaffirming The Case For Investors To Take The Offer

• 1QFY17’s results reinforce our view that SMRT’s train business will struggle to generate profits until rail renewal works are completed in 2018. A transition to NRFF also does not guarantee this business achieving 5% composite EBIT margins in the near term. 
• Its taxi and rental businesses have also seen declines in hire out and occupancy rates respectively in this quarter. 
• The transition to the new GCM for its bus wing remains the only near-term positive catalyst. 
• We continue to recommend investors to take Temasek’s SGD1.68 offer. 
• Downgrade to NEUTRAL (from Buy), with a new SDG1.68 TP (from SGD1.76, 3% upside).

Train margins under the New Rail Financing Framework (NRFF) could fall below 5%.

• Although composite EBIT margins for SMRT Corporation’s (SMRT) train business in 1QFY17 (Mar) (fare and non-fare) stood at 6.1%, post NRFF, margins will be capped at 5%. 
• Under the new framework, the Land Transport Authority (LTA) will share up to a maximum of 95% of incremental margins exceeding 5%. 
• Given near-term cost headwinds and uncertainty over rail fares and ridership, we maintain that SMRT may earn < 5% margins under NRFF. 

Government Contracting Model (GCM) for the bus business from September. 

• Meanwhile, the transition of SMRT’s bus segment into the GCM model should enable the company to earn 7.5% EBIT margins and realise SGD260m in cash over a 5-year period.

Fair value falls below offer price. 

• We lower 2017F-2019F earnings by 4-8% and reduce SMRT’s fair value to SGD1.64. This is now below Temasek’s offer price of SGD1.68. Thus, we downgrade the stock to NEUTRAL (from Buy) and continue to recommend investors to accept Temasek’s offer.

Earnings remain weak. 

• SMRT’s 1QFY17 net profit declined 23% YoY on a 2% YoY drop in revenue and 20% YoY fall in EBIT. 
• Revenue declined due to lower average bus and train fares from the 1.9% fare reduction and loss of ridership from the start of operations at Downtown Line 2. 
• The occupancy for rental space fell to 96% (FY16: 98%). 
• Losses for its train business doubled YoY, while operating profit from its rental business also fell 2% YoY.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-10

RHB Invest SGX Stock Analyst Report ACCEPT OFFER Maintain ACCEPT OFFER 1.68 Down 1.760