SMRT – CIMB

Wheeling out its first-ever net loss

SMRT surprised us with its profit warning. The group will slip into its first-ever net loss in 4QFY3/13 as a result of high operating costs and S$17m goodwill impairment for its associate Shenzhen ZONA. But it

will remain profitable for the full year.

We slash our FY13-15 EPS by 4-22% to reflect structurally higher opex and the one-off goodwill write-down. Our target price (DCF, WACC 6.5%) falls to S$1.53. SMRT remains an Underperform, with earnings and dividend disappointments being de-rating catalysts.

What Happened

SMRT issued a profit guidance, warning that 4Q13 will end in losses as a result of 1) increasing operating costs without corresponding fare adjustments, which have derailed profit margins, and 2) S$17m impairment of goodwill for its associate Shenzhen ZONA. Despite this quarter’s losses, SMRT remains profitable for the full year.

What We Think

The S$17m goodwill impairment is non-operational and hopefully, non-recurring. A more pressing concern is SMRT’s ballooning costs. SMRT’s guidance for losses suggests that opex inflation has been more severe than expected. Such costs are structural in nature and will continue to erode margins. We have cut our FY13-15 EPS for higher opex and expect earnings downgrades across the market.

What You Should Do

Investors should steer clear of SMRT. Cost inflation will continue to erode profit margins in the absence of fare hikes.

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