Riding high

• 3Q15 results in line; net profit up by 59% y-o-y
  
• Fare business segments turned in positive EBIT as expected
  
• Sustained low oil price could provide further tailwind for operating results
  
• Maintain BUY, TP: S$1.90
  

Highlights

3Q15 net profit tracking well

• 3Q15 net profit was higher by 59% y-o-y to S$22.6m, driven by revenue growth of 6.8% and lower increase in operating expenses (+4.2%). The higher costs were due to depreciation (+14%), repair and maintenance (+7%) and other operating expenses (+10%), offset by lower electricity and diesel costs (-7.3%). Staff costs increased only marginally by 0.6%. 9M15 net profit accounts for 72% of our forecasts, similar to last year.
  
• The 10.6% q-o-q fall in net income was largely due to a smaller EBIT contribution from taxis (S$0.8m, vs S$3.4m in 2Q15), which we understand to stem from non-recurring write-offs from some early retirements within its fleet. We should see taxis’ contribution revert to normal in 4Q15.
  

Fare business turned in profits vs losses last year

• Fare business turned around with a positive EBIT of S$1.9m, compared to a loss of S$8.9m in 3Q14. The major reversal is a result of significantly lower losses from bus operations at –S$0.5m, vs loss of S$8.7m last year, and is tracking within our expectations.
  
• Non-fare segments continue to perform well with rental remaining as the main EBIT contributor.
  

Outlook

Recently announced fare increase to provide support

• The Public Transport Council (PTC) has just approved a 2.8% fare increase effective 5 April’15, and this should provide support to its bottomline. We have factored this in, and are currently projecting a 22% net profit growth in FYE Mar’16F. We have also pencilled in a 1% fare decline in 2016.
  

Benefits from low oil price to continue

• Oil prices have corrected to below c.US$50/bbl from above US$100/bbl just about six months ago. We expect SMRT to continue to benefit through lower diesel and electricity costs. Assuming oil price continues to stay low at current levels, this should provide further benefit to land transport operators.
  

Bus tender outcome should not pose much downside risks

• The Government Bus Contracting tender for the first package (“Bulim package”) closed on 19 Jan’15, and the results are expected to be out in 2Q15. We have already factored in the incumbents (SMRT/SBSTransit) not winning the competitive tenders and just retaining nine out 12 packages.
  

Valuation

Our target price of S$1.90 is based on the average of our discounted cash flow (DCF) and price-earnings ratio (PER) valuation methodology. We adopt a DCF model as the business has previously shown a stable and predictable pattern, while the PER methodology takes into account near term earnings volatility. We peg our PER valuation at 18x FY16F. DCF methodology is based on a weighted cost of capital at 5.2% and a terminal growth assumption of 1%.

Risks

Regulatory changes

• Significant changes in the regulatory framework that could benefit or pose a risk to the Group’s financials.
  

Service disruptions

• Further train service disruptions leading to higher repair/ maintenance costs, operating expenses and regulatory fines.
  

Oil price spike

• Energy and fuel costs account for about 12% of SMRT’s costs and a surge in oil price may impact margins and vice versa. The surge in oil price may have a greater impact on SMRT compared to CD (at thisjuncture), given the latter’s proactive stance in hedging.

Riding high

• 3Q15 results in line; net profit up by 59% y-o-y
  
• Fare business segments turned in positive EBIT as expected
  
• Sustained low oil price could provide further tailwind for operating results
  
• Maintain BUY, TP: S$1.90
  

Highlights

3Q15 net profit tracking well

• 3Q15 net profit was higher by 59% y-o-y to S$22.6m, driven by revenue growth of 6.8% and lower increase in operating expenses (+4.2%). The higher costs were due to depreciation (+14%), repair and maintenance (+7%) and other operating expenses (+10%), offset by lower electricity and diesel costs (-7.3%). Staff costs increased only marginally by 0.6%. 9M15 net profit accounts for 72% of our forecasts, similar to last year.
  
• The 10.6% q-o-q fall in net income was largely due to a smaller EBIT contribution from taxis (S$0.8m, vs S$3.4m in 2Q15), which we understand to stem from non-recurring write-offs from some early retirements within its fleet. We should see taxis’ contribution revert to normal in 4Q15.
  

Fare business turned in profits vs losses last year

• Fare business turned around with a positive EBIT of S$1.9m, compared to a loss of S$8.9m in 3Q14. The major reversal is a result of significantly lower losses from bus operations at –S$0.5m, vs loss of S$8.7m last year, and is tracking within our expectations.
  
• Non-fare segments continue to perform well with rental remaining as the main EBIT contributor.
  

Outlook

Recently announced fare increase to provide support

• The Public Transport Council (PTC) has just approved a 2.8% fare increase effective 5 April’15, and this should provide support to its bottomline. We have factored this in, and are currently projecting a 22% net profit growth in FYE Mar’16F. We have also pencilled in a 1% fare decline in 2016.
  

Benefits from low oil price to continue

• Oil prices have corrected to below c.US$50/bbl from above US$100/bbl just about six months ago. We expect SMRT to continue to benefit through lower diesel and electricity costs. Assuming oil price continues to stay low at current levels, this should provide further benefit to land transport operators.
  

Bus tender outcome should not pose much downside risks

• The Government Bus Contracting tender for the first package (“Bulim package”) closed on 19 Jan’15, and the results are expected to be out in 2Q15. We have already factored in the incumbents (SMRT/SBSTransit) not winning the competitive tenders and just retaining nine out 12 packages.
  

Valuation

Our target price of S$1.90 is based on the average of our discounted cash flow (DCF) and price-earnings ratio (PER) valuation methodology. We adopt a DCF model as the business has previously shown a stable and predictable pattern, while the PER methodology takes into account near term earnings volatility. We peg our PER valuation at 18x FY16F. DCF methodology is based on a weighted cost of capital at 5.2% and a terminal growth assumption of 1%.

Risks

Regulatory changes

• Significant changes in the regulatory framework that could benefit or pose a risk to the Group’s financials.
  

Service disruptions

• Further train service disruptions leading to higher repair/ maintenance costs, operating expenses and regulatory fines.
  

Oil price spike

• Energy and fuel costs account for about 12% of SMRT’s costs and a surge in oil price may impact margins and vice versa. The surge in oil price may have a greater impact on SMRT compared to CD (at thisjuncture), given the latter’s proactive stance in hedging.