SMRT - 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.


Technical Analysis
Daily Chart
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. Upside risks to our recommendation is the fruition of the rail financing reform which will alleviate its capex burden. (Read Report)

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Source : DBS Group Research

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