SMRT – CIMB

Watch out for falling dividends

SMRT faces intensifying headwinds from an ongoing inquiry into its service disruptions. Asset renewal will call for higher capex, while mandates for more stringent repairs and maintenance will elevate its cost structure permanently, eating into profits.

FY12 core misses expectations at 85% of our FY12 and consensus due to goodwill impairment for its bus business. We cut our FY13-14 EPS by 7-8% to incorporate higher opex. Our DCF target (WACC: 6.6%) falls accordingly. Maintain Underperform.

Cash cow no more

What surprised us was a reduction in dividends this quarter, reaffirming our suspicion that SMRT will need to lower its payouts. FY12 dividends totalled 7.45cts, below our 8.5ct forecast, which was culled from management’s earlier guidance of maintaining last year’s absolute payout. We have pre-emptively cut our payout assumptions to 60% of PATMI, lowering forward yields to less than 4%.

With a planned hike in capex for fleet expansion and asset renewal, SMRT could slip into net debt in FY13. Capex will be funded by its MTN programme and debt.

Cost pressure persists

Cashflow strains aside, SMRT continued to contend with margin erosion in 4Q12. Higher repair/maintenance costs and costlier energy erased the benefits of revenue growth from higher ridership. A S$21.7m goodwill impairment for its bus business further ate into profits, causing a 10.4%-pt slump in EBIT margins. We expect a structural increase in SMRT’s cost structure from stricter repair and maintenance mandates.

Poor prospects

Plagued by margin erosion and cashflow strains, we see no reason to own this stock. Further, dividend yields are no longer attractive. Switch to ComfortDelGro for exposure to Singapore’s land transport sector.

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