Analysts zero in on SMRT’s mounting costs

ANALYSTS dubbed SMRT Corporation’s third-quarter showing an ‘uninspiring’ one as the transport group reported numbers that showed margins coming under siege from higher diesel and repair and maintenance costs.

Though SMRT’s Q3 revenue of $268.2 million met consensus estimates, analysts chose to focus on the pressures on its bottom line – net profit for the quarter fell 13.9 per cent to $37 million.

‘Persistent cost pressure remains our biggest concern as SMRT’s (earnings before interest and taxes) margin narrowed 4.6 percentage points to 16.7 per cent in 9M 2012 compared to 21.3 per cent a year ago,’ Kim Eng Research’s Eric Ong said in a report yesterday. He maintained his ‘sell’ call on the stock, with a target price of $1.50.

The pressure of operating costs is not expected to let up in Q4, prompting OCBC Investment Research analysts to lower their net profit estimate for SMRT by 4 per cent, even though they maintained their ‘buy’ call on the stock.

‘With an uninspiring Q3 2012 performance, consensus estimates for SMRT’s FY2012 earnings will likely come off,’ the OCBC report said.

Likewise, Phillip Securities Research’s Derrick Heng has cut his earnings estimates by between 6.4 and 10.2 per cent for the next three years, citing the ‘weak profit outlook’, among several things.

Investigations by the Committee of Inquiry (COI) – following the two major train service disruptions of December – have also given analysts reason to eye SMRT’s future with some wariness.

‘We remain cautious on the counter arising from regulatory risks post the release of the COI’s findings, and recommendations . . . We believe it is likely to be more onerous on the public transport operators going forward,’ said DBS Group Research’s Andy Sim in a report yesterday.

CIMB Research’s Lee Wen Ching also noted the possibility of the fallout from the service disruptions having a longer-term impact.

‘SMRT’s operations remain under scrutiny by the regulatory bodies. If these result in a more stringent maintenance regime, its cost structure may be permanently elevated,’ Ms Lee said in a report.

She believes that the stock’s current valuations – at $1.74 when the report was written – are ‘unjustified’, pegging its value at $1.55 instead.

‘SMRT trades at a premium to its peer ComfortDelGro (CD) despite weaker earnings prospects,’ Ms Lee said.

Even as jittery punters are wont to steer clear of SMRT shares in the meantime, OCBC’s analysts believe that ‘an attractive entry point’ for the counter has emerged, given that it has lost 1.7 per cent of its value since the start of the year and has an unchanged dividend policy.

Yesterday, SMRT also announced a $195 million undertaking to replace the signalling system on the North-South East-West Lines.

The counter closed a cent lower at $1.73 yesterday.

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%).

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%).