SMRT – MayBank Kim Eng

Sustained losses at fare business

  • Disappointing quarter as expected, with net profit plunging 44% YoY to SGD14.2m.
  • Combined operating loss of SGD9.0m for its fare business. Impending fare hike unlikely to be sufficient to offset losses.
  • Structural headwinds from DTL cannibalisation yet to be priced in by the market. Maintain SELL with TP of SGD0.60.

 

What’s New

SMRT reported another disappointing set of numbers for 3QFY3/14, with net profit plunging 44% YoY to SGD14.2m. The combined operating loss for its fare-based business stood at SGD9.0m [MRT: SGD0.4m, LRT: (SGD0.6m), bus: (SGD8.9m)], reflecting the challenging business environment for public transport operators. On the bright side, 3QFY3/14’s rental profits improved 9.2% YoY to SGD18.5m, mitigating negatives at its core fare-based business. As of 9MFY3/14, capex of SGD604m has exceeded management’s previous guidance of SGD500m for the full year. Consequently, the company’s balance sheet deteriorated with net gearing climbing to 64% at end-2013 (Mar 2013: 8%).

What’s Our View

We maintain our negative view on the stock. While the fare increase from Apr 2014 would give SMRT an estimated net benefit of SGD13.2m pa, or SGD3.3m per quarter, we do not think this alone is sufficient to offset losses in view of the current run-rate of SGD9m per quarter for its fare business. Furthermore, SMRT faces the threat of cannibalisation when Stage 2 of the Downtown Line (DTL) opens in 2016, which puts approximately 17% of its fare revenue at risk (Figure 4). While transiting to a sustainable business model for its train and bus operations appears imminent, we argue that it is highly speculative to conclude that the transition terms will be favourable to shareholders. Our TP of SGD0.60 is based on 14x FY3/14-16E P/E. Maintain SELL.

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