SMRT – CIMB

One-off fine is no surprise

The LTA will impose a S$2m fine on SMRT for December’s service disruptions. This fine has been widely expected and should not result in knee-jerk selling. We are not too bothered by this one-off cost. Rather, we worry about a structural increase in SMRT’s opex.

We are keeping our EPS forecasts intact as the quantum of the penalty is within expectations. Maintain Underperform and our DCF target price (WACC: 6.6%). We anticipate de-rating catalysts from falling dividends and margin compression.

What Happened

LTA has fined SMRT the maximum penalty of S$2m for two instances of service disruptions on the North-South Line in December 2011. The fine translates to 1.4% of our FY13 profit forecast. We believe that SMRT will have no issues funding this via its operating cash flows. In reaching this decision, LTA highlighted lapses in SMRT’s due diligence and maintenance, among other shortcomings. Funds will be donated to the Public Transport Fund to provide needy families with financial assistance.

What We Think

This fine has been widely anticipated and should not result in knee-jerk selling. We view this fine as a one-off expense that should not eclipse the permanent elevation in SMRT’s cost structure arising from higher repairs and maintenance costs. We forecast a 0.3%-pt decline in recurring net profit margin in FY13, dampened by higher maintenance and energy costs. We expect positives from falling energy prices to be eroded by higher energy consumption and staff costs as the group increases the frequency of train and bus runs to meet Singapore’s growing ridership.

What You Should Do

We maintain our preference for ComfortDelGro over SMRT for exposure to Singapore’s land transport sector. SMRT’s efforts to improve service reliability will result in higher staff costs as the group beefs up its technical team, as well as maintenance costs in a bid to implement a more pre-emptive maintenance regime. We expect lower dividends in FY13 as free cash flow weakens on higher capex spending.

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