SMRT – MayBank Kim Eng

Ending the Year with a Whimper

Loss guidance follows wage hike – dividend cuts again? The previously unimaginable has happened. SMRT is expecting its first ever quarterly loss in its history for 4QFY3/13. Escalating operating costs and a SGD17m impairment in goodwill in its associate, Shenzhen ZONA, are the primary causes of the loss. We are expecting the PATMI loss to come in at ~SGD2m for the quarter, which still points to profitability at a core level excluding the effects of the impairment. However we expect final dividends to be cut as a result of this announcement. We were among the earliest to downgrade SMRT to a SELL in early 2012. This loss guidance validates our sustained SELL call, and we are reiterating it with a reduced, Street-low target price of SGD1.19.

A fallen dividend angel. SMRT has been a dividend darling in the past, with stable and growing earnings providing shareholders with a steady stream of dividends to look forward to. However those days of stability and certainty look to be coming to an end, as our final dividend forecast for FY3/13 is correspondingly cut by 30% to SG 3.5 cts /share

Posturing possibility, but immaterial to our call. We see a possibility of SMRT lumping all its bad news in a single quarter to posture for a favourable fare review outcome. The method in which public transport fares are decided is currently under review, and land transport companies like SMRT could be attempting to signal its poor financial position should the revised fare formula not equitably account for its rising costs. However, this does not change our SELL call.

SELL call reinforced – fare review lifeline still not in sight. In light of such firm guidance on the challenges ahead for land transport operators like SMRT, we are slashing our earnings forecasts by 25% for FY3/13 and ~10% for FY3/14-15. Our target price is reduced to SGD1.19, as we maintain our valuation peg to 15x FY3/14 PER, a full standard deviation below mean. SELL SMRT – we see no reason to own a stock where earnings continue to be hampered by a postponement in an equitable fare review formula and rising operational costs, which in turn translate to lower dividend yields (~3%) for shareholders.

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