SMRT – Kim Eng

Interim Dividend Cut on Cautious Outlook

1HFY3/13 results, dividend cut in line with our forecasts. SMRT reported 1HFY3/13 NPAT of SGD69.8m, which came in at 50% of ours and consensus’ full-year estimates. In our July 2012 land transport sector note “No light at the end of SMRT’s tunnel yet”, we had cut our FY3/13 dividend forecast by 10% due to impinged cashflow. This projection was seemingly validated as SMRT cut its interim dividend by 14% from SG1.75cts/sh to SG1.50cts/sh on the premise of prudence – management guided that FY3/13 will remain challenging on cost pressures and lack of fare adjustments until 2013. We maintain our SELL call, and roll forward our valuations based on FY3/14 PER.

Buses still weighing down transport portfolio. SMRT’s bus business continued its poor results, as operating profits were down SGD4mil (-157% YoY) on increased staff costs from salary revisions and higher depreciation and R&M costs associated with a larger fleet. This was mitigated by operating profit growth YoY in the rail (+6.5%), taxi (+SGD1.2m) and commercial space rental (+7.4%) segments.

Government help still not guaranteed. Management shared that the company had applied to, and was awaiting a response from the LTA for asset replacement grants for funding part of the SGD900m asset renewal plan announced earlier. In addition, grant amounts / formulas have yet to be nailed down for the sharing of bus shelter advertising revenues as part of the Bus Services Enhancement Programme (BSEP).

Outlook challenging, yields unattractive – reiterate SELL. The future for SMRT looks daunting as operating costs escalate, the group takes on debt (now net debt vs net cash in FY3/12), and fare revisions likely only kick in from mid-2013. We roll forward our valuations to 15x FY3/14 PER, maintaining our SELL call and adjusting our Target Price accordingly to SGD1.37. SMRT’s stable-to-increasing dividends are a thing of the past, as our forecasts of a full-year dividend cut to SG 6.8 cts/sh (~74% payout ratio) are also maintained.

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