SMRT – Phillip

Lifting our CAPEX estimates

Company Overview

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.

S$900mn renewal and upgrading of train network

Majority of expenses over next 4-5yrs

Expect CAPEX to double historical figures to c.S$200mn/yr

Impairment charge on goodwill for bus business inevitable

Reiterate Sell with revised target price of S$1.31

What is the news?

Following a series of service disruptions, SMRT announced plans to renew and upgrade its train network at an estimated cost of S$900mn. As SMRT is still in discussions with LTA for cost sharing arrangements, the exact cost to be incurred by the company is not confirmed. Based on the schedule of upgrades, we believe that majority of the expenses would be incurred over the next 4-5yrs.

How do we view this?

We assume that SMRT would incur 75% of the estimated S$900mn disclosed and reviewed our CAPEX estimates for the major business segments. We expect average CAPEX incurred by SMRT to double its historical figures in FY13-16E, from c.S$100mn to c.S$200mn/yr. However, the strong cash generating nature of its business would allow SMRT to sustain its current annual dividend payout of c.8.5cents per share.

Investment Actions?

We believe that a partial impairment charge on goodwill for the bus business (S$21.7mn on book) is inevitable with oil prices (+7.7% q-q) staying high and is likely to be a key source of variance from market expectations. Even before accounting for this potential impairment charge, we expect profits to decline 9%y-y to S$31mn in 4QFY12E. We roll over our forecasts and reiterate our Sell recommendation on SMRT.

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