SMRT – BT

Analysts zero in on SMRT’s mounting costs

ANALYSTS dubbed SMRT Corporation’s third-quarter showing an ‘uninspiring’ one as the transport group reported numbers that showed margins coming under siege from higher diesel and repair and maintenance costs.

Though SMRT’s Q3 revenue of $268.2 million met consensus estimates, analysts chose to focus on the pressures on its bottom line – net profit for the quarter fell 13.9 per cent to $37 million.

‘Persistent cost pressure remains our biggest concern as SMRT’s (earnings before interest and taxes) margin narrowed 4.6 percentage points to 16.7 per cent in 9M 2012 compared to 21.3 per cent a year ago,’ Kim Eng Research’s Eric Ong said in a report yesterday. He maintained his ‘sell’ call on the stock, with a target price of $1.50.

The pressure of operating costs is not expected to let up in Q4, prompting OCBC Investment Research analysts to lower their net profit estimate for SMRT by 4 per cent, even though they maintained their ‘buy’ call on the stock.

‘With an uninspiring Q3 2012 performance, consensus estimates for SMRT’s FY2012 earnings will likely come off,’ the OCBC report said.

Likewise, Phillip Securities Research’s Derrick Heng has cut his earnings estimates by between 6.4 and 10.2 per cent for the next three years, citing the ‘weak profit outlook’, among several things.

Investigations by the Committee of Inquiry (COI) – following the two major train service disruptions of December – have also given analysts reason to eye SMRT’s future with some wariness.

‘We remain cautious on the counter arising from regulatory risks post the release of the COI’s findings, and recommendations . . . We believe it is likely to be more onerous on the public transport operators going forward,’ said DBS Group Research’s Andy Sim in a report yesterday.

CIMB Research’s Lee Wen Ching also noted the possibility of the fallout from the service disruptions having a longer-term impact.

‘SMRT’s operations remain under scrutiny by the regulatory bodies. If these result in a more stringent maintenance regime, its cost structure may be permanently elevated,’ Ms Lee said in a report.

She believes that the stock’s current valuations – at $1.74 when the report was written – are ‘unjustified’, pegging its value at $1.55 instead.

‘SMRT trades at a premium to its peer ComfortDelGro (CD) despite weaker earnings prospects,’ Ms Lee said.

Even as jittery punters are wont to steer clear of SMRT shares in the meantime, OCBC’s analysts believe that ‘an attractive entry point’ for the counter has emerged, given that it has lost 1.7 per cent of its value since the start of the year and has an unchanged dividend policy.

Yesterday, SMRT also announced a $195 million undertaking to replace the signalling system on the North-South East-West Lines.

The counter closed a cent lower at $1.73 yesterday.

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