SMRT – CIMB

Stuck on a stalled train

SMRT’s FY13 profit missed expectations as cost inflation outpaced revenue growth. Margin pain will persist until SMRT moves to a more sustainable business model. Until then, not only are profits at risk, so are dividends.

 

Dividend payout was cut to 45% vs. its previous 60% policy. FY13 core net profit met only 92% of our and consensus estimates. We cut our FY14-15 EPS estimates by 21-27% and introduce FY16. Our target price (DCF, WACC 6.5%) falls to S$1.26. Maintain Underperform, de-rating catalysts are earnings and dividend disappointments.

Costs bite

We expect margin compression to persist as costs outpace revenue growth. SMRT’s revenue grew 2.4% to S$281m in 4Q13 but operating profit tumbled 72% to S$10.9m as higher repair and maintenance, staff and depreciation charges ate into profits. These resulted in an 85% drop in core net profit to S$5.4m. A S$17m impairment in its associate dragged the group into a S$12m loss for the quarter.

Dividend cut a surprise

We were surprised by the cut in the dividend payout ratio to just 45% (final dividend of 1 Sct vs. 5.7 Scts last year). Not only is this lower than the 94% paid last year, it is also below our 60% assumption, which was in line with its previous dividend policy. Management refrained from committing to a dividend policy in light of upcoming capex intensity, suggesting that future payouts are uncertain.

No light in sight

We see the risk of more earnings and dividend disappointment. SMRT’s priority to improve service standards entails spending to build a larger, newer fleet and incurring higher opex for headcount expansion, more stringent repairs and maintenance schedules, higher depreciation for a larger fleet and higher energy consumption for increased train and bus runs. Revenue growth will lag cost inflation. Margins remain at risk.

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