SMRT’s Q3 profit falls 14%

Repairs, power, fuel costs drain profit; it warns disruptions will hit 2012 profits

SMRT Corporation concluded a downbeat calendar year with a similarly subdued 13.9 per cent drop in net profit for its third quarter ended Dec 31, 2011.

The transport operator’s Q3 net profit fell to $37 million, from October-December 2010’s $43 million, despite a 10 per cent increase in revenue to $268.2 million for the three months.

For the nine months to Dec 31, 2011, the group saw net profit shrink 16.6 per cent to $105.9 million, even as revenue grew 7.9 per cent to $782.4 million. Earnings per share for the quarter and nine-month period stood at 2.4 cents and 7 cents respectively, down from 2.8 cents and 8.4 cents for the year-ago corresponding periods.

While SMRT’s two major service disruptions on the North-South Line happened in December towards the end of the third quarter, the resulting expenses booked for the period ‘were not significant’, according to Catherine Lee, SMRT’s executive vice-president and chief financial officer.

Instead, repairs and maintenance costs grew 14.8 per cent – or $2.7 million – in the third quarter, the bulk of which were ‘scheduled’ for the group’s train operations, it said.

Taking a further bite out of the bottom line were electricity and diesel costs which jumped 30.6 per cent – or $9.5 million – in the third quarter.

SMRT’s Q3 train operations saw revenue grow 9.2 per cent to $144.9 million, but operating profit took a 14.4 per cent hit, shrinking to $25.7 million.

SMRT warned that ‘consequential costs’ from the train service disruptions will affect the segment’s profitability over the next 12 months.

‘Such costs will be incurred in professional fees – in particular legal fees … and some costs in repair and maintenance as well,’ said Ms Lee.

While Ms Lee was unable to provide specific figures, she said that the group’s current estimate of disruption-related expenses stands at ‘a couple of million dollars’.

The service disruptions of December had been followed in short order by the resignation of the firm’s chief executive officer, Saw Phaik Hwa, last month.

While Tan Ek Kia, one of SMRT’s executive directors, has stepped in as interim CEO, the search for a new CEO continues. ‘It will take some time for us to find a suitable candidate,’ said Ms Lee yesterday.

SMRT’s bus operations posted revenue growth of 3.3 per cent to $54.4 million during the quarter, but sank further into the red. It posted an operating loss of $1.7 million, against a loss of $1.1 million for the same period a year ago, because of higher diesel and staff costs.

Over the next 12 months, if diesel costs stay high, the bus segment will bear the brunt of it and ‘goodwill will be impaired’, SMRT said.

The group’s taxi operations had a more robust showing, with a 28.4 per cent increase in revenue to $29.6 million. Operating profit almost doubled during the quarter, from $570,000 to $1.06 million.

Rental revenue saw an 11 per cent increase to $20.7 million and enjoyed an 8.6 per cent boost in operating profit to $15.6 million.

Despite analyst concerns about a tightening of dividend payouts in anticipation of the expensive aftermath of the disruptions, Ms Lee said yesterday that SMRT would ‘endeavour to maintain the dividend payout each year’ and that there was no intention to change its dividend policy.

For its last financial year, the group had declared a total dividend of 8.5 cents per share.

While revenue is expected to be higher in the group’s fourth quarter, SMRT does not expect to maintain the previous financial year’s profitability, because of ‘increasing cost pressures’.

SMRT’s counter closed 1 cent lower at $1.74 yesterday, before its financial results were announced.

Disembark and move on

• A lower DPS could be additional de-rating catalyst for the counter in light of challenges faced

• Lowered our FY13F yield projections to 4.1%

• Negative profit growth, regulatory risks, management changes are reasons not to hold on

• Cut earnings by 11%/12%; Downgrade to Fully Valued, TP lowered to S$1.50

Lowering our DPS in FY13F. We believe prospective dividend payout could have downside risk on the back of lower profits, higher repair and maintenance costs, and possibly regulatory policy changes. We have lowered our FY13F DPS to 7.25 Scts (interim and final payout) equating to a payout ratio of c.79%, similar to FY07 to FY10. This would bring the prospective dividend yield down to c.4.1%; and, could be an additional de-rating catalyst for the stock, in our view.

Many reasons not to hold on. We project earnings to register -15%/ 1% growth in FY12F/ 13F after trimming forecasts by 11%/12% on higher expenses and lower ridership growth. Higher regulatory risks going forward, as well as the numerous management departures over the last 14 months add to reasons for not holding this counter.

Downgrade to Fully Valued, cut earnings and TP. We lowered our PE/DCF-based TP to S$1.50 given lower earnings, and a lower target PE valuation peg of 13x (-0.5 std dev from average) given sub-par earnings growth. We are cautious on the counter and downgrade SMRT to Fully Valued.

Disembark and move on

• A lower DPS could be additional de-rating catalyst for the counter in light of challenges faced

• Lowered our FY13F yield projections to 4.1%

• Negative profit growth, regulatory risks, management changes are reasons not to hold on

• Cut earnings by 11%/12%; Downgrade to Fully Valued, TP lowered to S$1.50

Lowering our DPS in FY13F. We believe prospective dividend payout could have downside risk on the back of lower profits, higher repair and maintenance costs, and possibly regulatory policy changes. We have lowered our FY13F DPS to 7.25 Scts (interim and final payout) equating to a payout ratio of c.79%, similar to FY07 to FY10. This would bring the prospective dividend yield down to c.4.1%; and, could be an additional de-rating catalyst for the stock, in our view.

Many reasons not to hold on. We project earnings to register -15%/ 1% growth in FY12F/ 13F after trimming forecasts by 11%/12% on higher expenses and lower ridership growth. Higher regulatory risks going forward, as well as the numerous management departures over the last 14 months add to reasons for not holding this counter.

Downgrade to Fully Valued, cut earnings and TP. We lowered our PE/DCF-based TP to S$1.50 given lower earnings, and a lower target PE valuation peg of 13x (-0.5 std dev from average) given sub-par earnings growth. We are cautious on the counter and downgrade SMRT to Fully Valued.

BUSINESS AS USUAL BUT FOCUS

ON MINISTERIAL STATEMENT

•Beleaguered SMRT CEO resigns

•No interim impact; business as usual

•Ministerial Statement will be key focus

SMRT CEO resigns immediately.

SMRT announced late Friday evening that CEO Saw Phaik Hwa has decided to step down with immediate effect to “pursue personal interests”. Ms. Saw had been under pressure ever since the series of major service disruptions in Dec last year but had previously rejected calls for her resignation whilst stating her commitment to fix the service issues.

No interim impact; business as usual.

As the Board of Directors search for a new CEO – most probably externally – Board member, Mr. Tan Ek Kia, will assume interim executive responsibility for the management of the company. With his previous work experience as Managing Director of Shell Malaysia Exploration and Production and Chairman of Shell North East Asia, we do not foresee any issues arising from this temporary arrangement on operations.

Ministerial Statement to shed light on punishment.

Transport Minister, Mr. Lui Tuck Yew, will make a Ministerial Statement today on the MRT service disruptions last month. Some of the issues expected to be discussed are on the Committee of Inquiry and its work, reasons for the disruptions as well as if SMRT will be held accountable for the breakdowns.

Initial selling pressure may occur but maintain BUY.

While the timing was a surprise, Ms. Saw’s resignation had been somewhat expected and should not affect its share price. Instead, we believe that investor focus will be on the Transport Minister’s Ministerial Statement, which should provide some indication on the penalty to be imposed on SMRT as well as the possibility of any additional costs necessary to plug service gaps. As we maintain our assertion that SMRT’s dividend payout ability remains intact at least for the year (FY12F dividend yield: 4.4%), we leave our DDMderived fair value of S$2.04 unchanged and maintain our BUY rating on SMRT.

HIGHER COSTS TO COME AS EXPECTED

• Increased train runs to reduce wait time

• Electricity consumption will go up

• But accounted for in FY12F estimates

Train frequency to increase as expected.

SMRT announced on Sunday that it will increase train frequencies on the NSEWL (North-South East-West Lines) to lower the average interval waiting times during peak commuter travelling periods. Previously, the interval between trains had been between 3.75-5 minutes following the operational loss of 13 damaged trains but will now return to an interval of between 2.14-3 minutes following the subsequent repairs made to 12 of the trains. However, speed restrictions for certain parts of the NSEWL tracks will remain in place – as a precautionary measure pending the conclusion of further investigation – and will add about two minutes to end-to-end travel time.

COI appointed; internal investigation ongoing.

The transport minister has appointed a three-person Committee of Inquiry (COI) to look into last month’s service disruptions. The COI will gather information from SMRT and the Land Transport Authority (LTA) as well as solicit evidence from the public. Meanwhile, internally, SMRT has commenced its own investigation, which is expected to take at least two months to complete.

Higher costs factored in; earnings est. unchanged.

As we have previously lowered our FY12F operating profits to account for the possibility of increased train runs and higher 3Q repair and maintenance costs, we are leaving our earnings estimates unchanged pending the release of SMRT’s 3Q12 results.

Dividend payout uninhibited – maintain BUY.

Even with the expected increase in repair and maintenance expenses as well as electricity consumption costs resulting from a greater number of train runs, we maintain our assertion that SMRT’s dividend payout ability remains intact at least for the year (FY12F dividend yield: 4.4%). Therefore, we leave our DDM-derived fair value of S$2.04 unchanged and maintain our BUY rating on SMRT.