Weak rail earnings
- At 21%/19% of our/consensus full-year forecast, SMRT’s 1QFY3/16 core EPS trailed our expectations slightly.
- The miss was mainly from rail operations, as the higher repair and maintenance (R&M) expenses and elevated labour cost sent rail earnings to a second consecutive quarter of loss.
- We cut our FY16-18 core EPS estimates by 6.7-9.1%, to reflect the disappointing rail earnings.
- We maintain our Reduce call on SMRT, with a lower target price of S$1.42 (prev S$1.53), based on FY16 DCF (WACC: 6.5%).
- SMRT will host an analyst briefing at 9am this Friday (31 Jul), following which we will come up with an update report.
- Widening rail loss and a potential fine for the recent rail breakdown are the key potential near-term de-rating catalysts for SMRT.
1Q FY3/16 results dragged by rail
- SMRT’s reported net profit decline of 9.4% yoy to S$20.2m in 1Q16 (1Q15: S$22.3m).
- Rail stayed in the red for a second consecutive quarter, with a widening operating loss of S$5.7m vs. S$3.9m loss in 4Q15 and S$4.3m gain in 1Q15.
- Bus reported operating gain of S$1.2m (1Q15: S$5.6m loss), thanks to lower diesel cost and electricity tariff.
- Operating profit of non-fare businesses (taxi, rental, advertising, engineering services, etc) grew 4.8% yoy to S$32.1m in 1Q16 (1Q15: S$30.6m).
- As at end-1Q16, net gearing remains high at 0.79x (4Q15: 0.77x).
Outlook for the rest of FY16
- We expect the public transport operating landscape to remain challenging for SMRT as it continues to see upward cost pressure from an aging rail network and an expanded train fleet to meet tightened regulatory standards and heightened operating demands.
- Recent operation disruptions in the North South and East West Lines also underlined the need for SMRT to lift its R&M expenses. As such, rail is likely to stay in the red for the rest of FY16 (and potentially beyond).
- Gains from bus (thanks to the low diesel cost) and non-fare businesses could lend some help but will not fully offset the rail weakness.
Maintain Reduce, with lower target price of S$1.42
- Given its elevated net gearing and the social pressure from the recent rail failure, we think management’s hands could be quite tied to pursue other growth opportunities.
- SMRT guided that it is making progress in its discussion with authorities on the transition to a new rail financing framework.
Source: http://research.itradecimb.com/
