SMRT – DMG

Downgrade To Sell On Wage Revision

SMRT has announced a progressive revision of its non-executive wage scale, excluding Bus Captains, from 1 March. Despite factoring in payouts via the Wage Credit Scheme, we are lowering our FY13 and FY14 earnings by 4.2% and 11.9% respectively. Downgrade to SELL (from NEUTRAL), with a lower TP of SGD1.43 (from SGD1.55 previously) based on DCF. This implies a FY14 P/E of 19.3x.

Full impact of wage revision partially offset by Wage Credit Scheme. SMRT’s wage revision mainly targets the non-executive staff, excluding Bus Captains. This exercise is estimated to account for c. 63% of SMRT’s 7,350 employees. It is anticipated that almost all of those employees who qualify for the wage revision would see their monthly revised pay move up to no more than SGD4,000, making them eligible for the Wage Credit Scheme, through which the government co-funds 40% of the wage increases from 2013 to 2015. Although we expect this Scheme to help mitigate the full impact of the increased staff cost, we are cutting our FY13/14 earnings by 4.2%/11.9%.

Revision aims at nurturing a better public transport system. SMRT views the wage revision as a step towards creating a more productive, motivated and efficient workforce, which will in turn give rise to a safe and reliable public transport system. This move follows a series of train breakdowns as well as a strike by the company’s bus drivers. Although we agree that a wage revision could incentivize staff and ultimately improve public transport service levels, we believe it would be challenging for SMRT to achieve this while keeping profits tight, especially amidst an environment where transport fares are not keeping pace with cost increases.

Downgrade to SELL. No light yet at the end of the tunnel. SMRT does not appear attractive, trading at a 21.8x FY14 (FYE Mar) P/E vs ComfortDelGro’s 15.8x FY13 P/E. Apart from a higher than expected fare revision following a fare formula review deferred until at least May 2013, we see little potential catalysts for a share price upside given the cost pressure concerns.

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