SMRT – Phillip

Not a stock to own

Company Overview

SMRT is a multi-modal land transport operator with exposures to various modes of operations, including rail, bus & taxi services. A significant part of its profits are generated from its ancillary businesses, such as advertising & rental of commercial spaces.

  • FY13 profits of S$83.3mn (-30.5%y-y).
  • Elevated CAPEX guidance of S$500mn.
  • Full year DPS cut to 2.50cents.
  • Outlook statement remains negative.
  • Maintain Sell with revised target price of S$0.93.

What is the news?

SMRT reported losses of S$12mn for 4QFY13. The losses in the quarter were driven by an S$17.3mn impairment charge on Shenzhen Zona, significantly higher staff cost (+28.5%) and repair & maintenance expenses (+41.6%). With significantly lower profits for the year, SMRT cut its final DPS to 1.50cents, representing a full year payout of 2.50cents (45.6% of FY13 PATMI). Outlook statement remains negative as management highlighted continued increase in operating costs and expects profitability to be impacted in FY2014.

How do we view this?

With the company’s earlier profit warning, the quarterly losses were well expected by the market. However, the magnitude of the dividend cut surprised us (and probably consensus), reflecting a dividend yield of merely 1.7% at the current price. With operating costs trending north, we expect SMRT to report structurally lower profits in our forecast years.

Investment Actions?

Despite a sharp decline in recent months, we believe that the stock of SMRT had not bottomed out. We maintain our Sell recommendation as the unsustainable business model, structurally lower earnings, rising leverage and poor dividend yield support gives investors little reason to own this stock. Unless there is a radical change in the business model, we expect a multi-year de-rating of this stock. With poor cashflow visibility, we switch to our blended valuation method to a simple P/E model pegged to 15X FY14E.

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