SMRT – DBSV

Lower final DPS

• 4Q12 core results within expectations

• Final DPS was lower at 5.7 Scts (4Q11: 6.75 Scts)

• Maintain Fully Valued and S$1.50 TP

Highlights

4Q12 core profit was within expectations. Net profit dropped by 59% y-o-y to S$13.9m, while revenue grew by 12% to S$274.8m on higher ridership, taxis, rental and advertising revenues. The drop in profits arose from impairment of goodwill of its buses amounting to S$21.7m. Excluding this, 4Q profit would have increased by c.5% y-o-y, helped by a significantly higher contribution of S$2.2m from its associate (4Q11: S$0.1m). EBIT impacted by higher costs. EBIT (excl. goodwill impairment) fell 5% y-o-y to S$39.4m while margins dropped by 2.5ppts to 14.4% (3Q11: 16.9%). EBIT from train operations, largest contributor to the company, fell 22% y-o-y to S$19.9m, but this was partially helped by stronger contribution from the rental (S$16.4m, +14% y-o-y) and advertising (S$5.1m, +26% y-o-y) segments. In 4Q12, the major cost items that led to a drop in EBIT were electricity and diesel costs (S$42.4m, +37%), repair & maintenance (S$24.1m, +13%) and other operating expenses (S$53.1m, +15%).

Our View

A challenging time for rail. The series of breakdowns since last Dec has brought unprecedented negative focus on its rail operations. Not unexpectedly, the company will step up on its maintenance programme to take into account the aging of the system and to meet increased train runs. It recently announced an upgrading and renewal capex programme that would cost c.S$900m. Discussions with LTA regarding the cost sharing arrangements are ongoing.

Final DPS cut to 5.7 Scts could be the final straw. The challenges faced may have led to a lower final DPS of 5.7 Scts. This, in our view, could trigger a de-rating risk we mentioned in an earlier report on 18 Jan 2012 (“Disembark and move on”). We believe chances are high that its Board of Directors may no longer indicate that it would “endeavour to maintain or increase payout in terms of cents per share”. This, in our view, could be a final straw, particularly for those holding out for stable or higher dividends.

Recommendation

Maintain Fully Valued and S$1.50 TP. With valuations at 18.3x FY13F PE on projected lackluster growth going forward, we believe this counter is pricey. As such, we maintain our Fully Valued recommendation, with a TP of S$1.50, based on blended DCF/PE valuation.