SMRT cuts dividend as Q4 profit drops 59%

Singapore's main subway operator SMRT Corp Ltd reported on Monday a 59 per cent drop in fiscal fourth-quarter net profit, hurt by higher operating expenses and impairment of goodwill on its bus operations.

The company earned S$13.9 million (US$11.2 million) in the three months ended March, down from S$34 million a year earlier.

Singapore Mass Rapid Transit (SMRT) declared a reduced final dividend of 5.70 Singapore cents compared with 6.75 cents a year ago.

SMRT shares have fallen around 7 per cent since it said last week it would spend S$900 million to overhaul the train system following numerous breakdowns in recent months. Part of the cost will be borne by the government's Land Transport Authority (LTA).

Lifting our CAPEX estimates

Company Overview

SMRT is a multi-modal land transport operator with exposures to various modes of operations, including rail, bus & taxi services. A significant part of its profits are generated from its ancillary businesses, such as advertising & rental of commercial spaces.

• S$900mn renewal and upgrading of train network

• Majority of expenses over next 4-5yrs

• Expect CAPEX to double historical figures to c.S$200mn/yr

• Impairment charge on goodwill for bus business inevitable

• Reiterate Sell with revised target price of S$1.31

What is the news?

Following a series of service disruptions, SMRT announced plans to renew and upgrade its train network at an estimated cost of S$900mn. As SMRT is still in discussions with LTA for cost sharing arrangements, the exact cost to be incurred by the company is not confirmed. Based on the schedule of upgrades, we believe that majority of the expenses would be incurred over the next 4-5yrs.

How do we view this?

We assume that SMRT would incur 75% of the estimated S$900mn disclosed and reviewed our CAPEX estimates for the major business segments. We expect average CAPEX incurred by SMRT to double its historical figures in FY13-16E, from c.S$100mn to c.S$200mn/yr. However, the strong cash generating nature of its business would allow SMRT to sustain its current annual dividend payout of c.8.5cents per share.

Investment Actions?

We believe that a partial impairment charge on goodwill for the bus business (S$21.7mn on book) is inevitable with oil prices (+7.7% q-q) staying high and is likely to be a key source of variance from market expectations. Even before accounting for this potential impairment charge, we expect profits to decline 9%y-y to S$31mn in 4QFY12E. We roll over our forecasts and reiterate our Sell recommendation on SMRT.

Lifting our CAPEX estimates

Company Overview

SMRT is a multi-modal land transport operator with exposures to various modes of operations, including rail, bus & taxi services. A significant part of its profits are generated from its ancillary businesses, such as advertising & rental of commercial spaces.

• S$900mn renewal and upgrading of train network

• Majority of expenses over next 4-5yrs

• Expect CAPEX to double historical figures to c.S$200mn/yr

• Impairment charge on goodwill for bus business inevitable

• Reiterate Sell with revised target price of S$1.31

What is the news?

Following a series of service disruptions, SMRT announced plans to renew and upgrade its train network at an estimated cost of S$900mn. As SMRT is still in discussions with LTA for cost sharing arrangements, the exact cost to be incurred by the company is not confirmed. Based on the schedule of upgrades, we believe that majority of the expenses would be incurred over the next 4-5yrs.

How do we view this?

We assume that SMRT would incur 75% of the estimated S$900mn disclosed and reviewed our CAPEX estimates for the major business segments. We expect average CAPEX incurred by SMRT to double its historical figures in FY13-16E, from c.S$100mn to c.S$200mn/yr. However, the strong cash generating nature of its business would allow SMRT to sustain its current annual dividend payout of c.8.5cents per share.

Investment Actions?

We believe that a partial impairment charge on goodwill for the bus business (S$21.7mn on book) is inevitable with oil prices (+7.7% q-q) staying high and is likely to be a key source of variance from market expectations. Even before accounting for this potential impairment charge, we expect profits to decline 9%y-y to S$31mn in 4QFY12E. We roll over our forecasts and reiterate our Sell recommendation on SMRT.

Announces S$900m of upgrading plans

900m to be rolled out over eight years. SMRT has announced a planned renewal and preventive maintenance across the MRT system which is estimated to cost S$900m. It intends to address the needs of an ageing 25 year old MRT system, on top of the current maintenance regime for the tracks and trains. The cost sharing arrangements between SMRT and LTA are currently in discussion, and this program is expected to roll out over eight years.

Costs borne by SMRT still unclear. Though we do not know SMRT’s share of the costs at this point in time, we think that the impact on SMRT may not be that significant. The simple average of the S$900m amounts to S$113m a year, while our sensitivity analysis shows that if our FY13 base case capex increases by S$100m (or 40%), SMRT’s FY13 PAT would only decrease by 6%. Moreover, we see a possibility of LTA bearing the bulk of the S$900m cost, given its recent efforts to more actively engage in Singapore’s public transport matters (as shown from the S$1.1b Bus Services Enhancement Fund announced in the 2012 budget). Maintain NEUTRAL with TP of S$1.73.

SMRT plans $900m in rail maintenance, upgrade Bulk is for renewal, replacement; sum is on top of $30m annual maintenance

April hasn't been a good month for SMRT with five breakdowns and an ongoing inquiry into earlier disruptions in December, so the rail operator plans to spend an estimated $900 million in additional maintenance and upgrading to make the ride a lot smoother.

Between now and 2019, nine areas have been identified for the upgrade to ensure a safe and reliable rail system, said Tan Ek Kia, SMRT Corp's executive director and interim chief executive officer.

"The bulk will be for renewal and replacement, with some brought forward instead of maintaining it, for example, the train‐borne electronic cards," he said yesterday at a media briefing.

The system upgrade over the next eight years will be implemented on top of the usual $30 million‐plus annual maintenance programme for the North‐South and East‐West MRT lines.

Mr Tan stressed that the $900 million is an estimate and discussions with the Land Transport Authority are necessary regarding a "costsharing
arrangement".

According to SMRT Corp senior vice‐president for communications and services Goh Chee Kong, the plans to install wheel impact load detection systems and positive‐locking rail claws, and re‐sleeper and re‐signal the train lines, among others, have always been there.

"They are ongoing. But after the disruptions in December, we decided to bring them forward," said Mr Goh.

On Dec 15 and 17 last year, two massive MRT breakdowns affected 210,000 commuters and resulted in the ongoing Committee of Inquiry (COI). The COI, which started on April 16, is expected to last six weeks.