Lower final DPS

• 4Q12 core results within expectations

• Final DPS was lower at 5.7 Scts (4Q11: 6.75 Scts)

• Maintain Fully Valued and S$1.50 TP

Highlights

4Q12 core profit was within expectations. Net profit dropped by 59% y-o-y to S$13.9m, while revenue grew by 12% to S$274.8m on higher ridership, taxis, rental and advertising revenues. The drop in profits arose from impairment of goodwill of its buses amounting to S$21.7m. Excluding this, 4Q profit would have increased by c.5% y-o-y, helped by a significantly higher contribution of S$2.2m from its associate (4Q11: S$0.1m). EBIT impacted by higher costs. EBIT (excl. goodwill impairment) fell 5% y-o-y to S$39.4m while margins dropped by 2.5ppts to 14.4% (3Q11: 16.9%). EBIT from train operations, largest contributor to the company, fell 22% y-o-y to S$19.9m, but this was partially helped by stronger contribution from the rental (S$16.4m, +14% y-o-y) and advertising (S$5.1m, +26% y-o-y) segments. In 4Q12, the major cost items that led to a drop in EBIT were electricity and diesel costs (S$42.4m, +37%), repair & maintenance (S$24.1m, +13%) and other operating expenses (S$53.1m, +15%).

Our View

A challenging time for rail. The series of breakdowns since last Dec has brought unprecedented negative focus on its rail operations. Not unexpectedly, the company will step up on its maintenance programme to take into account the aging of the system and to meet increased train runs. It recently announced an upgrading and renewal capex programme that would cost c.S$900m. Discussions with LTA regarding the cost sharing arrangements are ongoing.

Final DPS cut to 5.7 Scts could be the final straw. The challenges faced may have led to a lower final DPS of 5.7 Scts. This, in our view, could trigger a de-rating risk we mentioned in an earlier report on 18 Jan 2012 (“Disembark and move on”). We believe chances are high that its Board of Directors may no longer indicate that it would “endeavour to maintain or increase payout in terms of cents per share”. This, in our view, could be a final straw, particularly for those holding out for stable or higher dividends.

Recommendation

Maintain Fully Valued and S$1.50 TP. With valuations at 18.3x FY13F PE on projected lackluster growth going forward, we believe this counter is pricey. As such, we maintain our Fully Valued recommendation, with a TP of S$1.50, based on blended DCF/PE valuation.

Watch out for falling dividends

SMRT faces intensifying headwinds from an ongoing inquiry into its service disruptions. Asset renewal will call for higher capex, while mandates for more stringent repairs and maintenance will elevate its cost structure permanently, eating into profits.

FY12 core misses expectations at 85% of our FY12 and consensus due to goodwill impairment for its bus business. We cut our FY13-14 EPS by 7-8% to incorporate higher opex. Our DCF target (WACC: 6.6%) falls accordingly. Maintain Underperform.

Cash cow no more

What surprised us was a reduction in dividends this quarter, reaffirming our suspicion that SMRT will need to lower its payouts. FY12 dividends totalled 7.45cts, below our 8.5ct forecast, which was culled from management’s earlier guidance of maintaining last year’s absolute payout. We have pre-emptively cut our payout assumptions to 60% of PATMI, lowering forward yields to less than 4%.

With a planned hike in capex for fleet expansion and asset renewal, SMRT could slip into net debt in FY13. Capex will be funded by its MTN programme and debt.

Cost pressure persists

Cashflow strains aside, SMRT continued to contend with margin erosion in 4Q12. Higher repair/maintenance costs and costlier energy erased the benefits of revenue growth from higher ridership. A S$21.7m goodwill impairment for its bus business further ate into profits, causing a 10.4%-pt slump in EBIT margins. We expect a structural increase in SMRT’s cost structure from stricter repair and maintenance mandates.

Poor prospects

Plagued by margin erosion and cashflow strains, we see no reason to own this stock. Further, dividend yields are no longer attractive. Switch to ComfortDelGro for exposure to Singapore’s land transport sector.