Transport Minister Mr. Lui Tuck Yew has announced a fare reduction of up to 1.9%, effective by end-15, to account for the lower fuel prices. While the specific size of the reductions has yet to be finalised, we conduct a sensitivity analysis to show the potential impact of the fare cut on SMRT. For conservative purposes, we adopt the worst-case scenario (i.e. a 1.9% fare cut). As a result, SMRT’s FY16, FY17 and FY18 estimates shrink by 4.1%, 11.5% and 8.6%, respectively. We maintain our Reduce call on SMRT, with our target price cut from S$1.42 to S$1.28, based on FY3/16 DCF (WACC: 6.5%). The prospective fare cut, together with the widening rail losses as well as a potential fine for the recent rail disruption, are the near-term de-rating catalysts for SMRT.
During his meeting with reporters at a preview of the new Circle Line trains on Monday 3 Aug, Mr. Lui announced a fare reduction of up to 1.9% by end-15, affecting public train and bus fares, to account for the lower fuel costs. The specific size of the cut will be determined by the Public Transport Council.
What We Think
The announced fare reduction is expected to have a negative impact on SMRT’s profitability and valuation. In FY3/15, 53% of group revenue was derived from rail fare collection and 28% from bus fare collection. The launch of the government contracting model (GCM), under which bus operators are free of fare risk, will only mitigate the fare cut’s negative impact on buses from Aug 16 onwards. Potential reform of the rail system towards a similar contracting model will be a positive for SMRT. However, there has yet to be a clear timeline for the rail reform. To assess the potential impact on SMRT’s core EPS estimates and target price, we have included a sensitivity analysis overleaf. For conservative purposes, we have adopted the worst-case scenario (1.9% fare cut) for our estimates.
What You Should Do
Switch from SMRT to ComfortDelGro (Add, TP: S$3.39). Potential de-rating catalysts include protracted rail operating losses from the increasing repair and maintenance expenses, worsened by the prospective fare reduction. SMRT could also be subject to a fine for the recent rail disruption. ComfortDelGro is our sector top pick due to its good business diversification, overseas growth initiatives and strong balance sheet. ComfortDelGro is trading at 19.9x CY16 P/E vs. SMRT’s 24.1x. (Read Report)
Source : CIMB Research