SMRT – DBSV

Still riding against headwinds

  • 2Q13 net profit within expectations with marginal 2% drop; 1H13 accounts for 50% of our FY13F
  • EBIT margins dropped 1.7ppts on higher operating costs
  • Cut in interim DPS of 1.5 Scts was expected, down from 1.75 Scts in 1H12, due to higher capex
  • Above mean valuations unwarranted, dividend yield at 3.9% is unattractive, maintain Fully Valued. TP at S$1.50

Highlights

2Q13 within expectations. 2Q net profit dipped 2% y-o-y to S$33.3m despite an 8% increase in revenue to S$281.2m. 1H13 accounts for 50% of our FY13F forecasts. All business segments registered revenue growth, except Engineering due to lower consultancy revenue. Rail continued to be the main revenue driver with average daily ridership up by 7.3% to 1.9m. This was helped by Circle MRT Line (CCL) average ridership of 350k/day.

Margins under pressure from higher costs. EBIT margins dipped by 1.7ppts to 14.4% as a result of higher staff costs (+10% y-o-y), depreciation (+20%), repairs and maintenance (+28%) and other operating expenses (+10%). This was partially mitigated by lower electricity and diesel costs (-6%) due to lower tariffs and diesel price.

Our View

Lower interim DPS of 1.5 Scts not a surprise. The Board declared a lower interim DPS of 1.5 Scts (1H12: 1.75 Scts), which was not a surprise to us given the higher capex needs and operating expenses. Management had guided for capex of S$500m in FY13F, and S$118.5m has been incurred as of 1H. As such, we should see a significant ramp up in capex in 2H.

Lacklustre growth. While ridership is expected to grow, operating costs is projected to increase at a faster pace due to higher staff costs, repair & maintenance and depreciation. Thus, bottomline growth is expected to remain unexciting.

Recommendation

Maintain FV, TP unchanged at S$1.50. The stock is trading at c.0.5 std dev above its historical trading mean (c.16x), which is unwarranted in our view given its lackluster growth due to higher operating costs. Maintain FULLY VALUED recommendation with an unchanged TP of S$1.50. Furthermore, lower interim dividends should further signal the Board’s conservatism in its payout in view of capex and operational challenges, thus undermining its attractiveness as a yield counter.

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