Author: kktan
SMRT – MayBank Kim Eng
Ending the Year with a Whimper
Loss guidance follows wage hike – dividend cuts again? The previously unimaginable has happened. SMRT is expecting its first ever quarterly loss in its history for 4QFY3/13. Escalating operating costs and a SGD17m impairment in goodwill in its associate, Shenzhen ZONA, are the primary causes of the loss. We are expecting the PATMI loss to come in at ~SGD2m for the quarter, which still points to profitability at a core level excluding the effects of the impairment. However we expect final dividends to be cut as a result of this announcement. We were among the earliest to downgrade SMRT to a SELL in early 2012. This loss guidance validates our sustained SELL call, and we are reiterating it with a reduced, Street-low target price of SGD1.19.
A fallen dividend angel. SMRT has been a dividend darling in the past, with stable and growing earnings providing shareholders with a steady stream of dividends to look forward to. However those days of stability and certainty look to be coming to an end, as our final dividend forecast for FY3/13 is correspondingly cut by 30% to SG 3.5 cts /share
Posturing possibility, but immaterial to our call. We see a possibility of SMRT lumping all its bad news in a single quarter to posture for a favourable fare review outcome. The method in which public transport fares are decided is currently under review, and land transport companies like SMRT could be attempting to signal its poor financial position should the revised fare formula not equitably account for its rising costs. However, this does not change our SELL call.
SELL call reinforced – fare review lifeline still not in sight. In light of such firm guidance on the challenges ahead for land transport operators like SMRT, we are slashing our earnings forecasts by 25% for FY3/13 and ~10% for FY3/14-15. Our target price is reduced to SGD1.19, as we maintain our valuation peg to 15x FY3/14 PER, a full standard deviation below mean. SELL SMRT – we see no reason to own a stock where earnings continue to be hampered by a postponement in an equitable fare review formula and rising operational costs, which in turn translate to lower dividend yields (~3%) for shareholders.
StarHub – DBSV
Outperformance leaves limited upside potential
• Negotiations for English Premier League (EPL) rights underway; need to stem decline in pay TV customer base
• Any potential rise in annual DPS to 22Scts would imply only a 5% yield.
• The stock has rallied 17% since our upgrade on 7 Nov, 2012. Downgrade to HOLD on valuation grounds.
Need to defend pay TV customer base. StarHub is negotiating with the Premier League for EPL rights for the 2013-16 seasons on a non-exclusive basis. As per our analysis, StarHub has benefitted at least S$20m annually due to the absence of EPL rights over the last three years. However, StarHub lost 9K pay TV customers in 2012 and in order to defend its hubbing proposition, StarHub needs to spend more on content in our view.
Even a higher 22 Scts annual DPS would translate to only a 5% yield. Current dividend yield of 4.6% does not seem attractive compared to 5%-6% yield offered by some of the Thai and Malaysian telcos. Potential auction of spectrum in mid 2013 and negotiations for EPL rights are the key events before management could raise dividends. Post these events, the annual DPS could potentially be raised to match our projected EPS of 22 Scts in 2013. Prior to 2012, StarHub paid out higher DPS than EPS as it did not have to pay any cash tax due to certain group losses, which is not the case now.
Downgrade to HOLD. The stock has risen 17% since our upgrade on 7 Nov, 2012, and has exceeded our TP of S$4.30, based on DCF (WACC 6.5%, terminal growth 0%). Positives are priced in.
StarHub – DBSV
Outperformance leaves limited upside potential
• Negotiations for English Premier League (EPL) rights underway; need to stem decline in pay TV customer base
• Any potential rise in annual DPS to 22Scts would imply only a 5% yield.
• The stock has rallied 17% since our upgrade on 7 Nov, 2012. Downgrade to HOLD on valuation grounds.
Need to defend pay TV customer base. StarHub is negotiating with the Premier League for EPL rights for the 2013-16 seasons on a non-exclusive basis. As per our analysis, StarHub has benefitted at least S$20m annually due to the absence of EPL rights over the last three years. However, StarHub lost 9K pay TV customers in 2012 and in order to defend its hubbing proposition, StarHub needs to spend more on content in our view.
Even a higher 22 Scts annual DPS would translate to only a 5% yield. Current dividend yield of 4.6% does not seem attractive compared to 5%-6% yield offered by some of the Thai and Malaysian telcos. Potential auction of spectrum in mid 2013 and negotiations for EPL rights are the key events before management could raise dividends. Post these events, the annual DPS could potentially be raised to match our projected EPS of 22 Scts in 2013. Prior to 2012, StarHub paid out higher DPS than EPS as it did not have to pay any cash tax due to certain group losses, which is not the case now.
Downgrade to HOLD. The stock has risen 17% since our upgrade on 7 Nov, 2012, and has exceeded our TP of S$4.30, based on DCF (WACC 6.5%, terminal growth 0%). Positives are priced in.
SMRT – RHB DMG OSK
Cutting Target Price On Profit Warning
SMRT has announced that it is expecting to report a net loss for 4QFY13 due to deteriorating profitability as well as a SGD17m impairment of goodwill in its associate Shenzhen ZONA Transportation Group. We are lowering our FY13 and FY14 earnings by 21.1% and 7.2% respectively. Maintain SELL with lower TP of SGD1.37 (from SGD1.43 previously) based on DCF. This implies a FY14 P/E of 19.9x.
SGD17m impairment may not be its last. The main reason for an expected loss making 4QFY13 for SMRT is due to a SGD17m impairment of goodwill in SMRT’s associate Shenzhen ZONA Transportation Group. Its operating conditions in China have been challenging and management felt it was appropriate to report impairment at this point in time. SMRT had also previously reported SGD21.7m of impairment back in FY12 due to adverse impact by substantial increases in bus operating costs which was less than offset by fare hikes. Going forward, we do not rule out further impairment charges should bus operating conditions both locally and abroad remain weak.
MRT average daily ridership declines in Jan-Feb 13. MRT average daily ridership declined by 0.7% for Jan – Feb 13, compared to a growth of 9.7% and 11.8% for the same periods in 2012 and 2011 respectively. The declining train ridership numbers are not a positive for SMRT as we estimate that a 5% decline in total annual ridership will result in a 28% fall in FY13 PAT.
Maintain SELL. Expect further earnings cut from the street. SMRT does not appear attractive, trading at 22.4x FY14 (FYE Mar) P/E vs ComfortDelGro’s 15.8x FY13 P/E. We see little potential catalysts for a share price upside given the cost pressure concerns SMRT is facing.
SMRT – OCBC
MORE IMPAIRMENTS?
- Profit guidance for 4Q13
- Possible impairment to come in FY14
- No turnaround in sight
First ever profit guidance issued
SMRT Corp issued its first ever profit guidance for 4Q13, attributing the expected net loss to higher operating expenses and an impairment of the S$17m in goodwill for its Chinese associate, Shenzhen ZONA Transportation Group.
Time to wipe the slate clean
We view the goodwill impairment as a way for SMRT’s new management to turn the page on its past overseas ventures although the timing did take us by surprise. While the Shenzhen ZONA venture failed to yield the desired results, its performance only turned negative over the past two quarters. On the other hand, SMRT was willing to wait out eight quarters of much larger operating losses on its SG bus operations before making a goodwill impairment in 4QFY12.
Further impairment to come
In our view, the review of SMRT’s business segments by the new management is still ongoing and we could see further impairments with regards to the SG bus business. Its operations continue to suffer from growing operating expenses and a write-down of assets could materialise in the coming quarters if operating losses persist and widen beyond the current losing streak of nine consecutive quarters.
Lower final FY13 dividend
For now, our 4QFY13 estimates call for a loss in excess of $4.3m, and this should reduce FY13’s reported profit to around S$90m. Assuming an unchanged 60% PATMI payout – last seen in FY04/05 – investors can expect a halving of last year’s dividend payout.
Valuation lowered
As we roll our valuations forward to include FY15, our fair value declines from S$1.62 to S$1.51 as higher operating expenses and lack of growth opportunities continue to bite. This undesirable combination will likely override any cheer from the upcoming fare increase in mid-CY2013. We reiterate that SMRT is unlikely to see an inflection point anytime soon. Maintain HOLD.