SMRT – Phillip
No fare adjustment this year
SMRT is a multi-modal land transport operator with exposures to various modes of operations, including rail, bus & taxi services. A significant part of its profits are generated from its ancillary businesses, such as advertising & rental of commercial spaces.
• No fare adjustments for 2012
• Under existing framework, capacity injection into the rail network would lead to mounting “Off Balance Sheet Liabilities
• Cut estimates by 8.4%/2.8% for FY13/14E
• Maintain Sell with revised target price of S$1.33
What is the news?
Singapore’s Transport Minister updated on plans for the public transport system during the Ministry’s Committee of Supply (COS) debate. (See: Transportation Sector Update, dated 8 March 2012) The key implication for SMRT is that there would be no fare revisions for 2012, implying that public transport fares for 2013 would be kept unchanged from current levels. Rail capacity would expand with more trains to be gradually injected into the system. Bus capacity would increase with the government retrieving its share of fare revenue from the 550 buses paid for by them.
How do we view this?
We reviewed our earnings forecasts to account for unchanged fares in 2013 (previous: +2.3%), but lifted fare adjustments in 2014 to 4.1% (2.3%+1.8%= 4.1%). Our fare adjustment for 2014 is on the premise that a substantial fare increase would be allowed, due to unchanged fares in 2013. With more trains to be injected into the system, we believe that a switch to the new rail financing framework is necessary for SMRT. If SMRT stays on its existing rail financing framework, the company’s “Off Balance Sheet Liabilities” could increase substantially and will be a major drag on future cash flows.
We kept our estimates for FY12E unchanged, but cut estimates by 8.4%/2.8% for FY13/14E. After adjusting our estimates, SMRT is currently trading at near historical peak multiples of 20X FY13E EPS. With the challenging
operating outlook, likely impairment charges to its bus business and uncertainties over implications of the Committee of Inquiry (COI) into Dec 2011’s disruptions, we believe that such pricey valuations are not justified. Maintain Sell, with TP lowered to S$1.33.