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.

Wheeling out its first-ever net loss

SMRT surprised us with its profit warning. The group will slip into its first-ever net loss in 4QFY3/13 as a result of high operating costs and S$17m goodwill impairment for its associate Shenzhen ZONA. But it

will remain profitable for the full year.

We slash our FY13-15 EPS by 4-22% to reflect structurally higher opex and the one-off goodwill write-down. Our target price (DCF, WACC 6.5%) falls to S$1.53. SMRT remains an Underperform, with earnings and dividend disappointments being de-rating catalysts.

What Happened

SMRT issued a profit guidance, warning that 4Q13 will end in losses as a result of 1) increasing operating costs without corresponding fare adjustments, which have derailed profit margins, and 2) S$17m impairment of goodwill for its associate Shenzhen ZONA. Despite this quarter’s losses, SMRT remains profitable for the full year.

What We Think

The S$17m goodwill impairment is non-operational and hopefully, non-recurring. A more pressing concern is SMRT’s ballooning costs. SMRT’s guidance for losses suggests that opex inflation has been more severe than expected. Such costs are structural in nature and will continue to erode margins. We have cut our FY13-15 EPS for higher opex and expect earnings downgrades across the market.

What You Should Do

Investors should steer clear of SMRT. Cost inflation will continue to erode profit margins in the absence of fare hikes.