SMRT – Kim Eng

3Q Encumbered by Expense Escalation

3Q results below expectations; SELL call reinforced. SMRT Corp (SMRT) reported 9MFY3/13 PATMI that comprised less than 70% of ours and consensus’ full-year FY3/13 estimates, as 3QFY3/13 PATMI fell 31.2% YoY to SGD25.5m. We had forecast cost increases to continue plaguing SMRT, led by staff, repair and maintenance costs, but not to the magnitude reported this quarter. SMRT remains a SELL, as its core transport business continues to be a drag on company profitability. Our Target Price is trimmed to SGD1.34, implying 20% downside.

No let-up on escalating operating costs. SMRT’s operating costs featured heavily in the disappointing profitability shown by the company this quarter. Repair and Maintenance costs led the way with a 29.1% YoY increase to SGD26.9m, caused by a larger transport fleet and increase in scheduled maintenance. Staff costs followed closely with an 18.2% YoY increase to SGD98.5m attributed to increased train and bus hiring as well as wage adjustments.

Only Taxis, Rentals showed profit improvement. The only bright spots in SMRT’s business segments this quarter were its taxi and commercial space rental businesses. The Taxi business was boosted by a 16% increase in revenues from a newer and larger hired-out fleet, improving operating profit by SGD1.9m (+174.7% YoY). The commercial space rental business improved SGD1.3m (+8.3% YoY) as a result of new and redeveloped spaces at various stations.

No light at end of tunnel yet, reiterate SELL. As SMRT’s core transport woes still see no sign of letting up, we reiterate our SELL call pegged to 15x FY3/14 PER. Our target price is trimmed to SGD1.34 as we adjust our FY3/14 forecasts downwards by 3% to account for further operating expense increases. We advise investors looking for transport-related yield plays to consider switching to other sectors like aviation services where industry fundamentals present a rosier environment than that currently facing the Singapore land transport operators.

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