SMRT CORPORATION LTD
S53.SI
SMRT - Reiterate View to Accept The Offer
- Reiterate view to accept offer at S$1.68.
- 1Q17 results below expectations; margin erosion faster than expected on rising costs.
- Key risk: failure to secure sufficient approval for Scheme; and if so, share price may trade closer to fundamental TP of S$1.28.
Accept Offer of S$1.68.
- We reiterate our view for shareholders to accept the S$1.68 offer to privatize SMRT. In our view, the offer price looks attractive vis-à-vis our fundamental target price of S$1.28, taking into consideration the revised profitability outlook under the New Rail Financing Framework (NRFF).
- At S$1.68, this implies 29x/36x FY17F/18F earnings.
1Q17 forms 18% of FY17F forecasts.
- SMRT’s 1Q17 results were below expectations, with net profit at S$15.5m, down 22.9% y-o-y from last year. Top line dipped by 2% y-o-y to S$313.9m. In 1Q17, its rail composite operations (rail, including rental and advertising) posted an EBIT margin of 6.1%, down from 7.2%.
- The erosion of EBIT margins brings it closer to the margin cap of 5% when the NRFF takes place, but the rate of decline seems faster than we had earlier envisaged. This arose from escalating costs from its rail operations.
NRFF provides stability but caps profits; privatization offer an attractive exit option.
- The NRFF will relieve SMRT of the heavy burden of future capex, estimated to be S$2.8bn. There are, however, trade-offs. With the risk-sharing mechanism, SMRT Trains is required to share profits through a tiered structure (of up to 95%) should EBIT margins exceed 5%. Meanwhile, LTA will share 50% of the shortfall if EBIT margins fall below 3.5%.
- This provides less volatility to SMRT’s future earnings, but it will also limit the upside potential. We believe the Scheme of Arrangement offered provides shareholders an attractive exit route.
Valuation
- Our fundamental target price is S$1.28, based on the average of our discounted cash flow (DCF, WACC 5.1%, t=1%) and price-earnings (PE at 25x FY17F/18F – 5-year historical average) ratio valuation methodology.
- We pegged our TP to the offer price of S$1.68.
Key Risks to Our View
- Non-approval of offer. Failure to secure sufficient approval could see share price trade down nearer to our fundamental TP of S$1.28.
Andy Sim CFA
DBS Vickers
|
http://www.dbsvickers.com/
2016-08-10
DBS Vickers
SGX Stock
Analyst Report
1.280
Same
1.280
