SMRT – CIMB
Earnings were disappointing, no thanks to a nightmarish mix of higher opex and the lack of a fare hike. The only positives are that the risk of significant dividend cuts is lower now and management is proactive in growing its non-fare business domestically and overseas.
2QFY3/14 net profit was 34% short of our below-consensus estimate, with 1HFY14 making only 35% of our FY14 forecast. We reduce our FY14-15 forecasts by 6-30% to account for higher operating expenses. Maintain Underperform with a lower target price (DCF, WACC 6.5%) of S$1.06. De-rating catalysts are poor earnings from cost issues and the inability to navigate regulatory constraints.
Bottomline got hit again
Revenue rose 5.3% yoy, thanks to the strong ridership in Singapore. However, with relentlessly higher operating costs, 2QFY3/14 profit was dragged lower by 57% yoy. Costs escalated in several business segments. The large jump in costs was the result of a sharper rise in staff costs (+27% yoy), wage adjustment and higher headcount.
Higher opex but higher dividend payout ratio too
We increase all the key operating expenditure assumptions, although we think that staff costs should hover around this level for the rest of the year (c.40% of revenue). SMRT has proposed to pay an interim dividend of 1 Sct/share, a significant jump in payout ratio in this case. We believe the risk of further dividend cuts is now less of a concern given the more robust cash flow structure.
Fare adjustment remains a problem and revenue growth will still lag behind cost inflation. We believe that SMRT is making inroads with regulators regarding the accounting of asset transfers under the new rail-financing framework. Once this is resolved, the end result will be predictable cash flows and a more sustainable financing model, which will alter the fate of the company. Until then, the stock may continue to underperform.