Riding against the tide

At a Glance

• 3Q12 net profit dropped 14% y-o-y as expected

• Expect higher costs in 4Q and beyond, largely from train service disruptions related costs, higher staff and energy costs

• Regulatory risks will also cap upside in share price

• Cautious view maintained, Fully Valued and TP at S$1.50

Comment on Results

3Q drop as expected. Net profit dropped by -14% y-o-y to S$37m, while revenue grew by 10% to S$268.2m on higher ridership, taxis, rental and advertising revenues. The drop in profits arose from higher electricity and diesel costs (S$40.4m, +31%), repair & maintenance (S$20.9m, +15%) and other operating expenses (S$48.1m, +21%). EBIT fell to S$46.4m (-11% yo-y) while margins dropped by 4.1ppts to 17.3% (3Q11: 21.4%). Largest contributor, train segment posted 14% y-o-y drop in EBIT to S$25.7m, but this was partially helped by stronger contribution from rental (S$15.6m, +9% y-o-y) and advertising (S$5.6m, +18% y-o-y) segments.

4Q to be lackluster with rising expenses. 9M12 net profit formed 77% of our full year estimates (9M11: 79% of FY11). We maintain our projected c.15% fall in FY12F net profit, and a lackluster growth of 1% in FY13F. Management has guided for its train profitability to be impacted by higher professional, legal and repair & maintenance costs arising from last Dec’s MRT train breakdowns. In addition, its bus operations remain in the red due to high diesel costs and impairment of goodwill could ensue if this persists (current intangibles for Bus: S$21.7m).

Recommendation

Cautious view maintained, TP $1.50. We remain cautious on the counter arising from regulatory risks post the release of the Committee of Inquiry’s findings, and recommendations. LTA, in response to a newspaper forum on 27 Jan, indicated that it “will thoroughly review the regulatory and penalty framework and its oversight over the operators’ maintenance regimes to strengthen it where necessary“. We believe it is likely to be more onerous on the public transport operators going forward. We continue to prefer ComfortDelGro (at c.12.2x FY12F PE) for its lower valuation, and more geographically diverse business contributions. Our TP of S$1.50 is based on average of PE (13x FY12F) and DCF (WACC: 7.1%, t=1%).

SMRT’s Q3 profit falls 14%

Repairs, power, fuel costs drain profit; it warns disruptions will hit 2012 profits

SMRT Corporation concluded a downbeat calendar year with a similarly subdued 13.9 per cent drop in net profit for its third quarter ended Dec 31, 2011.

The transport operator’s Q3 net profit fell to $37 million, from October-December 2010’s $43 million, despite a 10 per cent increase in revenue to $268.2 million for the three months.

For the nine months to Dec 31, 2011, the group saw net profit shrink 16.6 per cent to $105.9 million, even as revenue grew 7.9 per cent to $782.4 million. Earnings per share for the quarter and nine-month period stood at 2.4 cents and 7 cents respectively, down from 2.8 cents and 8.4 cents for the year-ago corresponding periods.

While SMRT’s two major service disruptions on the North-South Line happened in December towards the end of the third quarter, the resulting expenses booked for the period ‘were not significant’, according to Catherine Lee, SMRT’s executive vice-president and chief financial officer.

Instead, repairs and maintenance costs grew 14.8 per cent – or $2.7 million – in the third quarter, the bulk of which were ‘scheduled’ for the group’s train operations, it said.

Taking a further bite out of the bottom line were electricity and diesel costs which jumped 30.6 per cent – or $9.5 million – in the third quarter.

SMRT’s Q3 train operations saw revenue grow 9.2 per cent to $144.9 million, but operating profit took a 14.4 per cent hit, shrinking to $25.7 million.

SMRT warned that ‘consequential costs’ from the train service disruptions will affect the segment’s profitability over the next 12 months.

‘Such costs will be incurred in professional fees – in particular legal fees … and some costs in repair and maintenance as well,’ said Ms Lee.

While Ms Lee was unable to provide specific figures, she said that the group’s current estimate of disruption-related expenses stands at ‘a couple of million dollars’.

The service disruptions of December had been followed in short order by the resignation of the firm’s chief executive officer, Saw Phaik Hwa, last month.

While Tan Ek Kia, one of SMRT’s executive directors, has stepped in as interim CEO, the search for a new CEO continues. ‘It will take some time for us to find a suitable candidate,’ said Ms Lee yesterday.

SMRT’s bus operations posted revenue growth of 3.3 per cent to $54.4 million during the quarter, but sank further into the red. It posted an operating loss of $1.7 million, against a loss of $1.1 million for the same period a year ago, because of higher diesel and staff costs.

Over the next 12 months, if diesel costs stay high, the bus segment will bear the brunt of it and ‘goodwill will be impaired’, SMRT said.

The group’s taxi operations had a more robust showing, with a 28.4 per cent increase in revenue to $29.6 million. Operating profit almost doubled during the quarter, from $570,000 to $1.06 million.

Rental revenue saw an 11 per cent increase to $20.7 million and enjoyed an 8.6 per cent boost in operating profit to $15.6 million.

Despite analyst concerns about a tightening of dividend payouts in anticipation of the expensive aftermath of the disruptions, Ms Lee said yesterday that SMRT would ‘endeavour to maintain the dividend payout each year’ and that there was no intention to change its dividend policy.

For its last financial year, the group had declared a total dividend of 8.5 cents per share.

While revenue is expected to be higher in the group’s fourth quarter, SMRT does not expect to maintain the previous financial year’s profitability, because of ‘increasing cost pressures’.

SMRT’s counter closed 1 cent lower at $1.74 yesterday, before its financial results were announced.