Circle Line to increase capacity by 60 per cent

The Circle Line's capacity will be ramped up by 60 per cent, with 24 more trains to be added progressively from 2015, said Transport Minister Lui Tuck Yew today.

Minister Lui was speaking at the groundbreaking ceremony for the Tuas West extension. The extension will see four stations added to the East-West Line, starting from Joo Koon: Gul Circle, Tuas Crescent, Tuas West Road and Tuas Link. There will also be a 26-hectare depot.

The Tuas West extension is expected to benefit more than 100,000 commuters daily. The four stations will be located close to offices and factories to help reduce travelling time by up to 35 minutes for many commuters.

Even as the rail network is being expanded, capacity will also be improved in the coming years, said Minister Lui.

Twenty-four trains will be added into the Circle Line's progressively from 2015, instead of the 16 previously announced. This will increase the Circle Line's capacity by 60 per cent.

During the ceremony, Minister Lui said the government and train operators will spare no effort in making the rail system more reliable.

The transport minister noted the concerns over serious trains disruptions in recent months. He said SMRT will put in place a more robust system to anticipate potential faults and vulnerabilities in the system.

On the recently-announced S$900 million plan to upgrade and renew ageing assets, Mr Lui said two main components will contribute to the costs. One is replacing the sleepers of the track, while the other is upgrading of the signalling system.

He said the Land Transport Authority (LTA) and SMRT are in the process of making sure that each party will pay a "fair share of the costs".

"Broadly speaking, I think the formulation is that infrastructural works should come under the government and the replacement of operating assets comes under the operator," Mr Lui said. "There is a formula on how to share the costs so what is happening now between LTA and SMRT is that they are going to through the details and making sure that each party is paying its fair share of the costs."

On whether the costs will eventually be passed on to commuters as higher fares, Mr Lui said fares are determined by the fare adjustment formula, which is being reviewed. He also said fares will not be adjusted this year while the review is underway. CHANNEL NEWSASIA

Circle Line to increase capacity by 60 per cent

The Circle Line's capacity will be ramped up by 60 per cent, with 24 more trains to be added progressively from 2015, said Transport Minister Lui Tuck Yew today.

Minister Lui was speaking at the groundbreaking ceremony for the Tuas West extension. The extension will see four stations added to the East-West Line, starting from Joo Koon: Gul Circle, Tuas Crescent, Tuas West Road and Tuas Link. There will also be a 26-hectare depot.

The Tuas West extension is expected to benefit more than 100,000 commuters daily. The four stations will be located close to offices and factories to help reduce travelling time by up to 35 minutes for many commuters.

Even as the rail network is being expanded, capacity will also be improved in the coming years, said Minister Lui.

Twenty-four trains will be added into the Circle Line's progressively from 2015, instead of the 16 previously announced. This will increase the Circle Line's capacity by 60 per cent.

During the ceremony, Minister Lui said the government and train operators will spare no effort in making the rail system more reliable.

The transport minister noted the concerns over serious trains disruptions in recent months. He said SMRT will put in place a more robust system to anticipate potential faults and vulnerabilities in the system.

On the recently-announced S$900 million plan to upgrade and renew ageing assets, Mr Lui said two main components will contribute to the costs. One is replacing the sleepers of the track, while the other is upgrading of the signalling system.

He said the Land Transport Authority (LTA) and SMRT are in the process of making sure that each party will pay a "fair share of the costs".

"Broadly speaking, I think the formulation is that infrastructural works should come under the government and the replacement of operating assets comes under the operator," Mr Lui said. "There is a formula on how to share the costs so what is happening now between LTA and SMRT is that they are going to through the details and making sure that each party is paying its fair share of the costs."

On whether the costs will eventually be passed on to commuters as higher fares, Mr Lui said fares are determined by the fare adjustment formula, which is being reviewed. He also said fares will not be adjusted this year while the review is underway. CHANNEL NEWSASIA

Persistent cost pressures

Core earnings within expectations. SMRT’s 4QFY12 core PATMI (this excludes S$21.7m impairment of goodwill) came in within expectations and was up 5% YoY to S$36m (-4% QoQ) while top-line rose 12% YoY to S$275m (+3% QoQ). Including the impairment, 4QFY12 and FY12 PATMI was down 59% YoY to S$14m and down 26% to S$120m respectively. Our concerns over SMRT’s current cost issues remain, with further downside risks pertaining to costs related to its rail upgrading and renewal plans. A final dividend of 5.7S¢ per share has been declared bringing total FY12 dividends to 7.45S¢ per share and reflecting a decent yield of 4.4%. Our TP remains unchanged at S$1.73 based on DCF implying a FY13 (FYE Mar) P/E of 17x. Maintain NEUTRAL.

Bottomline hit by impairment of goodwill on bus operations. The S$21.7m impairment charge was made due to adverse impact by substantial increases in bus operating costs which was less than offset by fare hikes. Going forward we see limited downside risks relating to this as intangible assets have been lowered to a smaller S$13.6m (as at 31 Mar 12) from S$35.3m (as at 31 Mar 11). 4QFY12 bus operations remained poor reporting operating losses of S$3.7m (+111% YoY, +118% QoQ) due to higher diesel and staff costs.

CCL ridership picking up; rail upgrading costs remain a concern. The average weekday ridership for CCL was up 17% QoQ to 350k in 4QFY12. This provides some relief as CCL ridership heads towards the estimated breakeven of ~450k/day. However, higher expected costs relating to SMRT’s rail upgrading and renewal plans remain a concern. 4QFY12 expenses (from mainly repair, maintenance and professional fees) arising from the Dec 12 MRT disruptions amounted to S$3m (~12% of 4QFY12 repair and maintenance expenses).

Fairly valued. SMRT does not appear cheap trading at 16x FY13 (FYE Mar) P/E versus ComfortDelGro’s 13x FY12 P/E. We believe SMRT’s share price may see limited upside given the potential costs involved in its rail upgrading and renewal plans. Investors will also be looking out for its CEO succession plans.

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.