SMRT – Maybank Kim Eng

Smaller bus loss gives cheer

• Bus operations posted sharp drop in loss but fare-based business still in the red. Fare hike implemented in April will ensure continued improvement in profitability.
  
• Earnings raised by 17-29% to reflect lower cost estimates.
  
• Maintain SELL with higher TP of SGD0.65.
  

What’s New

SMRT reported net profit of SGD16.9m for 4QFY3/14, marginally above our expectations. The boost came from its bus operations, which recorded a sharp reduction in operating loss to SGD4.4m (4QFY3/13: SGD11.9m) in what appeared to be better cost control. Net gearing rose to 60% (FY3/13: 8.2%) as CAPEX more than doubled to SGD652m (FY3/13: SGD251m). Overall, the fare-based business remained in the red for the quarter, chalking up operating loss of SGD3.7m. Full-year DPS was trimmed to 2.2 SGD cts (FY3/13: 2.5 SGD cts), translating to a payout of 54%.

What’s Our View

Following the fare hike last month, we expect SMRT’s fare-based business to continue to improve in the coming quarters. However, as highlighted in our earlier report (note), the estimated annual net benefit of SGD13.2m is insufficient to fully compensate for losses at its fare-based business (FY3/14: SGD25.0m). Therefore, a transition to a sustainable model is still badly needed. We have not factored this into our forecasts. The sharp decline in FY3/17E EPS reflects our expectations for traffic cannibalisation when Stage 2 of the Downtown Line (DTL) opens in 2016. Management will host an analyst briefing today and we expect the discussion to centre on the transition of its fare-based businesses. We raise our FY3/15E/16E/17E earnings forecasts by 28%/17%/29%, albeit off a low base, to reflect lower cost estimates. We reiterate our SELL call but raise our TP to SGD0.65 (from SGD0.60), based on 14x FY3/15E-17E P/E. In our view, it is speculative to conclude that the transition terms for the business model will be favourable.