Persistent cost pressures

Core earnings within expectations. SMRT’s 4QFY12 core PATMI (this excludes S$21.7m impairment of goodwill) came in within expectations and was up 5% YoY to S$36m (-4% QoQ) while top-line rose 12% YoY to S$275m (+3% QoQ). Including the impairment, 4QFY12 and FY12 PATMI was down 59% YoY to S$14m and down 26% to S$120m respectively. Our concerns over SMRT’s current cost issues remain, with further downside risks pertaining to costs related to its rail upgrading and renewal plans. A final dividend of 5.7S¢ per share has been declared bringing total FY12 dividends to 7.45S¢ per share and reflecting a decent yield of 4.4%. Our TP remains unchanged at S$1.73 based on DCF implying a FY13 (FYE Mar) P/E of 17x. Maintain NEUTRAL.

Bottomline hit by impairment of goodwill on bus operations. The S$21.7m impairment charge was made due to adverse impact by substantial increases in bus operating costs which was less than offset by fare hikes. Going forward we see limited downside risks relating to this as intangible assets have been lowered to a smaller S$13.6m (as at 31 Mar 12) from S$35.3m (as at 31 Mar 11). 4QFY12 bus operations remained poor reporting operating losses of S$3.7m (+111% YoY, +118% QoQ) due to higher diesel and staff costs.

CCL ridership picking up; rail upgrading costs remain a concern. The average weekday ridership for CCL was up 17% QoQ to 350k in 4QFY12. This provides some relief as CCL ridership heads towards the estimated breakeven of ~450k/day. However, higher expected costs relating to SMRT’s rail upgrading and renewal plans remain a concern. 4QFY12 expenses (from mainly repair, maintenance and professional fees) arising from the Dec 12 MRT disruptions amounted to S$3m (~12% of 4QFY12 repair and maintenance expenses).

Fairly valued. SMRT does not appear cheap trading at 16x FY13 (FYE Mar) P/E versus ComfortDelGro’s 13x FY12 P/E. We believe SMRT’s share price may see limited upside given the potential costs involved in its rail upgrading and renewal plans. Investors will also be looking out for its CEO succession plans.

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