A disappointing start
- 1Q16 below expectations; downgrade to Fully Valued with revised TP of S$1.27.
- Disappointment arose from higher staff and R&M costs which more than offset benefits from fare increase and lower energy costs.
- Recent train breakdown throws more uncertainty to earnings visibility; cut forecasts by 20%/18% on revised cost assumptions.
- Upside risk to our recommendation is the transition to rail framework but timing hard to pin down.
A disappointing 1Q16; downgrade to FV with revised TP of S$1.27.
- 1Q16 results were below our expectations with net profit down by 10% y-o-y to S$20.1m despite revenue growing by 7.8% y-o-y to S$320.3m.
- It seems that we have under-rated the risks of higher costs and challenges facing the Group, particularly for its rail operations.
- We downgrade our recommendation to Fully Valued from HOLD, with a revised TP of S$1.27.
Jump in staff and R&M costs.
- The negative surprise in 1Q16 results came about from higher staff and repair & maintenance (R&M) costs, increasing by 8% and 20% y-o-y respectively.
- These items more than negate the effects of lower electricity and diesel costs (-13%), higher ridership and fares, and rental revenue.
- Along with higher depreciation, total operating expenses increased by 10% to S$309m, causing EBIT to dip to 8.6% (vs 9.9% in 1Q15).
- Fare revenue business recorded an operating loss of S$3.8m, a steeper loss from -S$1.1m in 1Q15.
- This was partially offset by a 5.6% increase in operating profit from its Non-Fare business to S$31.5m.
FY15 profit turnaround and growth unlikely to sustain in FY16F; cut forecasts by 20%/18%.
- It seems that the cost challenges and the environment will continue to plague SMRT’s bottomline and undermine the sustained turnaround and earnings growth we were looking for.
- In view of 1Q16 performance, and expectations that R&M costs could remain elevated, we slashed our FY16F/17F forecasts by 20%/18%.
- As noted in an earlier note on 9 July 2015, we believe the recent rail disruption incident is likely to lower the earnings visibility of the Group.
- Our DCF/PE-based TP is cut to S$1.27 (prev S$1.59).
- Upside risks to our recommendation is the fruition of the rail financing reform which will alleviate its capex burden.
(Andy SIM)
Source: http://www.dbsvickers.com/
