SMRT Corp - Trading At Stretched Valuations

1HFY16 profit of SGD46m (-4% YoY) was in line with our estimates. Rail business continues to report losses amidst elevated maintenance cost, while bus operation continues to benefit from low diesel cost. We raise FY17F profit by 3% to account for improved bus operating margin. Keep SELL with a revised SGD1.10 TP (from SGD1.05, 26% downside) amidst a dismal FY16F profit growth, lofty valuations and the low possibility of rail financing framework reforms anytime soon.

Non-fare businesses are the saviour
SMRT’s 1HFY16 (Mar) fare business revenue (72% of total revenue) grew 5% YoY to SGD476.1m, aided by higher ridership for rail and bus businesses. However, the overall fare business reported an operating loss of SGD5.3m as elevated costs related to rail business pushed margins into negative territory. SMRT still managed to report an overall operating profit of SGD60.2m (-4% YoY), thanks to strong profit growth from non fare businesses, like taxi (+32% YoY), rental (+7% YoY) and advertising (+14% YoY).

Outlook for fare business is weak
SMRT guided that maintenance expenses related to rail business will remain elevated next year. The company disclosed that maintenance expenses related to rail business, which accounted for 41% of its rail revenue, is expected to reach 50% in next year. At the same time, the finalised 1.9% reduction in bus and rail fares could impact revenue growth for SMRT’s bus and rail businesses. While we expect its bus business to remain profitable amidst low fuel costs, it may not offset the weak rail operations.

Rail financing reforms may not happen soon
SMRT continues to discuss with the authorities on the transition to a new rail financing framework. While we believe these reforms will have to be implemented eventually, we do not expect them to be implemented until the regulators complete the ongoing bus reforms by Sep 2016.

Technical Analysis
Daily Chart
Valuations are stretched
SMRT is trading at 22.2x FY17 P/E with a PEG of 1.6x. Our DCF-based SGD1.10 TP, based on a WACC of 7.4% and LT growth of 1%, assumes no implementation of rail reforms. Our TP implies 18.3x FY16 P/E, which is in line with its P/E during FY10-11 when SMRT delivered a 0-1.2% EPS growth. (Read Report)

Read Related Reports
1) SMRT Corp Ltd - Rail maintenance-related expenses set to rise by Phillip Securities Research, published on 30 October 2015

2) SMRT - Take a further step back by DBS Group Research, published on 29 October 2015

3) SMRT Corporation - Rail maintenance expenses set to increase further‏ by OCBC Investment Research, published on 29 October 2015

4) SMRT Corporation - Subdued outlook with widening rail losses by CIMB Research, published on 28 October 2015

5) SMRT - Rail losses to continue by Maybank Kim Eng Research, published on 28 October 2015

6) SMRT Corporation - Saved by non-fare businesses by CIMB Research, published on 27 October 2015

Source : RHB Research

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