SMRT – OSK DMG

SMRT posted a PATMI of SGD22.4m (+36.8% y-o-y) on revenue of SGD297.1m (+4.3% y-o-y) in 1QFY15, largely due to stronger showing atits bus and non-fare units. Still, we remain cautious on the company’s outlook as we expect it to be impacted by increasingly severe fines and higher foreign worker levies. Maintain SELL. We raise our DCF-based TP to SGD1.24 from SGD1.00 (WACC: 7.7%, terminal growth rate: 1%).

  • Surprisingly good quarter. Despite slowing population growth and lower certificate of entitlement (COE) prices, the average daily ridership on SMRT’s buses rose by a steady 4.3% y-o-y to 980k. This, on top of a 1.6% fare increase, boosted its bus revenue to SGD58.1m (+8.4% y-oy), while losses from the division fell to SGD5.5m (-29.4% y-o-y). Profit from its non-fare business rose 17.4% y-o-y due to higher taxi contributions, higher rental renewal rates and increased advertising.
  • Fines get more severe. Parliament recently amended regulations stipulating that rail fines could go up to 10% of the corresponding rail system’s revenue. SMRT has paid fines totaling SGD1.6m for four recent incidents. While the fine per incident did not exceed SGD1.0m, we see an increase in the severity of the fines themselves.
  • Foreign worker levy to kick in. Since the bulk of SMRT’s workforce is made up of foreign workers, the company may feel the pinch of the increase in levies on foreign workers. Earlier this month, the levy for foreign workers in the service sector was increased by 5.0%-22.2% for S Passes and 5.0%-16.7% for work permits.
  • SMRT’s rail financing expectation “too optimistic”. SMRT’s expectations on the new rail financing framework may have been too optimistic. Singapore Transport Minister Mr Lui Tuck Yew has said that there is a wide gap between the company’s expectations and the Land Transport Authority’s position.
  • ComfortDelGro still preferred. We raise our FY15 and FY16 profit estimates for SMRT by 14.7% and 10.8% respectively in view of its stronger performance. However, we reiterate that the stock is trading at an unattractive 30.4x FY15 (FYE March) P/E vs ComforDelgro’s (CD SP, BUY, TP: SGD2.48) FY15 19.0x.

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