Category: SMRT
SMRT – DMG
Downgrade To Sell On Wage Revision
SMRT has announced a progressive revision of its non-executive wage scale, excluding Bus Captains, from 1 March. Despite factoring in payouts via the Wage Credit Scheme, we are lowering our FY13 and FY14 earnings by 4.2% and 11.9% respectively. Downgrade to SELL (from NEUTRAL), with a lower TP of SGD1.43 (from SGD1.55 previously) based on DCF. This implies a FY14 P/E of 19.3x.
Full impact of wage revision partially offset by Wage Credit Scheme. SMRT’s wage revision mainly targets the non-executive staff, excluding Bus Captains. This exercise is estimated to account for c. 63% of SMRT’s 7,350 employees. It is anticipated that almost all of those employees who qualify for the wage revision would see their monthly revised pay move up to no more than SGD4,000, making them eligible for the Wage Credit Scheme, through which the government co-funds 40% of the wage increases from 2013 to 2015. Although we expect this Scheme to help mitigate the full impact of the increased staff cost, we are cutting our FY13/14 earnings by 4.2%/11.9%.
Revision aims at nurturing a better public transport system. SMRT views the wage revision as a step towards creating a more productive, motivated and efficient workforce, which will in turn give rise to a safe and reliable public transport system. This move follows a series of train breakdowns as well as a strike by the company’s bus drivers. Although we agree that a wage revision could incentivize staff and ultimately improve public transport service levels, we believe it would be challenging for SMRT to achieve this while keeping profits tight, especially amidst an environment where transport fares are not keeping pace with cost increases.
Downgrade to SELL. No light yet at the end of the tunnel. SMRT does not appear attractive, trading at a 21.8x FY14 (FYE Mar) P/E vs ComfortDelGro’s 15.8x FY13 P/E. Apart from a higher than expected fare revision following a fare formula review deferred until at least May 2013, we see little potential catalysts for a share price upside given the cost pressure concerns.
SMRT – Kim Eng
3Q Encumbered by Expense Escalation
3Q results below expectations; SELL call reinforced. SMRT Corp (SMRT) reported 9MFY3/13 PATMI that comprised less than 70% of ours and consensus’ full-year FY3/13 estimates, as 3QFY3/13 PATMI fell 31.2% YoY to SGD25.5m. We had forecast cost increases to continue plaguing SMRT, led by staff, repair and maintenance costs, but not to the magnitude reported this quarter. SMRT remains a SELL, as its core transport business continues to be a drag on company profitability. Our Target Price is trimmed to SGD1.34, implying 20% downside.
No let-up on escalating operating costs. SMRT’s operating costs featured heavily in the disappointing profitability shown by the company this quarter. Repair and Maintenance costs led the way with a 29.1% YoY increase to SGD26.9m, caused by a larger transport fleet and increase in scheduled maintenance. Staff costs followed closely with an 18.2% YoY increase to SGD98.5m attributed to increased train and bus hiring as well as wage adjustments.
Only Taxis, Rentals showed profit improvement. The only bright spots in SMRT’s business segments this quarter were its taxi and commercial space rental businesses. The Taxi business was boosted by a 16% increase in revenues from a newer and larger hired-out fleet, improving operating profit by SGD1.9m (+174.7% YoY). The commercial space rental business improved SGD1.3m (+8.3% YoY) as a result of new and redeveloped spaces at various stations.
No light at end of tunnel yet, reiterate SELL. As SMRT’s core transport woes still see no sign of letting up, we reiterate our SELL call pegged to 15x FY3/14 PER. Our target price is trimmed to SGD1.34 as we adjust our FY3/14 forecasts downwards by 3% to account for further operating expense increases. We advise investors looking for transport-related yield plays to consider switching to other sectors like aviation services where industry fundamentals present a rosier environment than that currently facing the Singapore land transport operators.
Land Transport – DMG
Slower ridership growth for operators
Slower ridership growth a dampener for operators. From Jan – Oct 12, train ridership is up 8.5% versus previous period’s 9.8% and bus ridership is up 3.8% from Jan – Oct 12 versus previous period’s 6.1%. We believe slower ridership growth is partially attributable to slower population growth (Singapore’s population growth has slowed to 2.5% in mid 2012 versus its prior 5-year CAGR of 3.3%). We also think population growth could remain soft given the government’s stance on managing foreigner inflow and moderating Singapore’s GDP growth expectations. As operators continue to face cost pressures, we maintain our NEUTRAL call on the sector, with preference for ComfortDelGro (CD) (S$1.72 BUY TP S$1.85) for its cheaper valuations and overseas growth potential over SMRT (S$1.69 NEUTRAL TP S$1.60).
Jan – Oct 12 ridership for rail and bus growing, albeit at a more moderate pace. Ridership for rail and bus continues to grow, due to population growth, as well as high car purchasing costs. However we believe growth is moderating. From Jan – Oct 12, train ridership is up 8.5% versus previous period’s 9.8% and bus ridership is up 3.8% from Jan – Oct 12 versus previous period’s 6.1%. The slower pace in ridership growth coupled with an environment of higher repair and maintenance and staff costs will likely weigh on operators’ margins.
Population growth slowing down. Singapore’s population growth has slowed to 2.5% in mid 2012 versus its prior 5-year CAGR of 3.3%. The Ministry of Transport (MOT) has capped Singapore’s annual vehicle growth rate at 0.5% pa from Feb 13 to Jan 15, and COE (Cat A) prices has spiked 50% YoY to S$78,523 in Dec 12. While we expect more commuters to switch to rail and bus transportation due to the higher car ownership cost, this may not be able to compensate against expected softer population growth given the government’s stance on managing foreigner inflow and moderating Singapore’s GDP growth expectations. We think catalysts for the operators could come from a fare revision formula expected in 1H13.
ComfortDelGro remains our preferred pick due to cheaper valuations and overseas potential. We remain NEUTRAL on Singapore’s land transport sector due to slower ridership outlook stemming from slower population growth as well as cost pressures that could cling in the near term. We favour CD over SMRT due to the former’s cheaper valuation and greater overseas exposure. CD’s overseas operations accounts for 46% of its EBIT. CD’s average overseas EBIT margin of 12.7% is also higher than the 10.4% for its Singapore operations. CD is currently trading at a more attractive 14.5x FY13 P/E vs SMRT’s 19.0x FY13 P/E (FYE Mar).
Land Transport – DMG
New Taxi availability standards
We expect minimal impact to operators. LTA has announced new taxi availability standards to be implemented from 1 Jan 13. This will involve having taxi availability during peak periods (For 2013: 65% of taxis on the road from 6am-7am, 11pm-12am, and 70% from 7am-11am, 5pm-11pm), as well as general availability throughout the day (70% of taxis with minimum daily mileage of 250km). Any financial penalty implemented could begin from Jun 13 onwards. We believe the impact on operators will be minimal: (1) ComfortDelGro (CD) has high chance to have already met criteria with currently 80% of its fleet running on two shifts with average daily taxi mileage of 400km, while (2) SMRT’s fleet, of which less than 50% is running on two shifts could benefit from LTA’s measures to complement taxi availability. Maintain BUY on CD with TP of S$1.85 and NEUTRAL on SMRT with TP of S$1.60. We prefer CD on the back of overseas expansion potential and cheaper valuations with CD trading at 13x FY13 P/E compared SMRT trading at 19x FY13 (FYE Mar) P/E.
CD likely to have already met new Taxi availability standards. CD currently has 80% of its fleet running on two shifts compared to 50% for Singapore’s overall taxi fleet. During peak hour periods, it is likely that percentage of its taxis on the road averages above 90% (compared to the 65-70% LTA requirement for 2013). With a high percentage of its fleet running on two shifts (implying likely longer hours on the road), its average daily mileage per taxi currently stands at 400km (versus the required 70% of taxis with min. daily mileage of 250km for 2013). As such, we believe CD would likely meet the standards set by LTA.
SMRT has room to benefit from LTA’s complementary measures. SMRT has less than 50% of its fleet running on two shifts (below Singapore’s overall 50% level). While this could imply a chance that SMRT is not meeting the minimum requirements set by LTA, we believe LTA’s measures to complement taxi availability such as (1) relaxation of CBD taxi pick up/drop off points, (2) online portal to aid matching between taxi hirers and relief drivers, and (3) discounts on Taxi Driver’s Vocational Licence renewal fee for “active” drivers, will help improve average daily mileage as well as more conversions towards double shifts.
SMRT – DBSV
Still riding against headwinds
- 2Q13 net profit within expectations with marginal 2% drop; 1H13 accounts for 50% of our FY13F
- EBIT margins dropped 1.7ppts on higher operating costs
- Cut in interim DPS of 1.5 Scts was expected, down from 1.75 Scts in 1H12, due to higher capex
- Above mean valuations unwarranted, dividend yield at 3.9% is unattractive, maintain Fully Valued. TP at S$1.50
Highlights
2Q13 within expectations. 2Q net profit dipped 2% y-o-y to S$33.3m despite an 8% increase in revenue to S$281.2m. 1H13 accounts for 50% of our FY13F forecasts. All business segments registered revenue growth, except Engineering due to lower consultancy revenue. Rail continued to be the main revenue driver with average daily ridership up by 7.3% to 1.9m. This was helped by Circle MRT Line (CCL) average ridership of 350k/day.
Margins under pressure from higher costs. EBIT margins dipped by 1.7ppts to 14.4% as a result of higher staff costs (+10% y-o-y), depreciation (+20%), repairs and maintenance (+28%) and other operating expenses (+10%). This was partially mitigated by lower electricity and diesel costs (-6%) due to lower tariffs and diesel price.
Our View
Lower interim DPS of 1.5 Scts not a surprise. The Board declared a lower interim DPS of 1.5 Scts (1H12: 1.75 Scts), which was not a surprise to us given the higher capex needs and operating expenses. Management had guided for capex of S$500m in FY13F, and S$118.5m has been incurred as of 1H. As such, we should see a significant ramp up in capex in 2H.
Lacklustre growth. While ridership is expected to grow, operating costs is projected to increase at a faster pace due to higher staff costs, repair & maintenance and depreciation. Thus, bottomline growth is expected to remain unexciting.
Recommendation
Maintain FV, TP unchanged at S$1.50. The stock is trading at c.0.5 std dev above its historical trading mean (c.16x), which is unwarranted in our view given its lackluster growth due to higher operating costs. Maintain FULLY VALUED recommendation with an unchanged TP of S$1.50. Furthermore, lower interim dividends should further signal the Board’s conservatism in its payout in view of capex and operational challenges, thus undermining its attractiveness as a yield counter.