Cutting Target Price On Profit Warning

SMRT has announced that it is expecting to report a net loss for 4QFY13 due to deteriorating profitability as well as a SGD17m impairment of goodwill in its associate Shenzhen ZONA Transportation Group. We are lowering our FY13 and FY14 earnings by 21.1% and 7.2% respectively. Maintain SELL with lower TP of SGD1.37 (from SGD1.43 previously) based on DCF. This implies a FY14 P/E of 19.9x.

SGD17m impairment may not be its last. The main reason for an expected loss making 4QFY13 for SMRT is due to a SGD17m impairment of goodwill in SMRT’s associate Shenzhen ZONA Transportation Group. Its operating conditions in China have been challenging and management felt it was appropriate to report impairment at this point in time. SMRT had also previously reported SGD21.7m of impairment back in FY12 due to adverse impact by substantial increases in bus operating costs which was less than offset by fare hikes. Going forward, we do not rule out further impairment charges should bus operating conditions both locally and abroad remain weak.

MRT average daily ridership declines in Jan-Feb 13. MRT average daily ridership declined by 0.7% for Jan – Feb 13, compared to a growth of 9.7% and 11.8% for the same periods in 2012 and 2011 respectively. The declining train ridership numbers are not a positive for SMRT as we estimate that a 5% decline in total annual ridership will result in a 28% fall in FY13 PAT.

Maintain SELL. Expect further earnings cut from the street. SMRT does not appear attractive, trading at 22.4x FY14 (FYE Mar) P/E vs ComfortDelGro’s 15.8x FY13 P/E. We see little potential catalysts for a share price upside given the cost pressure concerns SMRT is facing.

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