Category: SMRT
Land Transport – DMG
Operators seek fare increase of up to 2.8%
SBS Transit and SMRT have both applied for fare hike of 2.8%, in accordance to the maximum fare adjustment formula set by the government-appointed Fare Review Mechanism Committee (FRMC) in 2005. Results of the application will most likely be announced in 4Q11 by the Public Transport Council (PTC). Given SMRT’s earnings are predominantly driven by Singapore’s train service (accounted for 58% of FY11 EBIT), it will experience the most impact compared to ComfortDelGro (CD). Our sensitivity analysis shows that a fare hike of 2.8% could raise SMRT’s and CD’s net profit by 11% and 6.6% respectively. Maintain OVERWEIGHT on the sector on the back of 1) resilient growth in ridership number, 2) potential fare hike, and 3) imminent award of Downtown Line in 2H11.
Maximum fare adjustment formula is tied to CPI, WPI and productivity gains. In order to cap overall fare increases in small, regular steps, the land transport operators are allowed to apply for fare adjustments according to FRMC-stipulated formula. Besides taking into consideration of the maximum fare adjustment request put forth by operators, the PTC also takes into consideration of other factors such as profitability of the two transport companies, as well as Singapore’s economic condition. This is evident from the fare adjustments carried out in 2008-2009 (2008: +0.7% fare hike; 2009: -4.6% fare hike) vs maximum allowable adjustments of +3%-+4.8% respectively. Our current estimates for both SMRT and CD are based on ~0.5% hike in fare prices of Singapore’s MRT and bus services.
Prefer CD within the sector. We continue to favour CD (BUY/TP S$1.80) over SMRT (NEUTRAL/TP S$1.94) due to the former’s 1) greater overseas growth potential, and 2) cheaper valuation. In addition to margin improvements from ridership increase, we think CD will be looking at acquisition of more land transport companies in foreign markets in order to achieve overseas growth. Separately, previous concerns regarding CD’s forex exposure due to its extensive overseas operations in UK & Ireland (9M10: 13% CD’s EBIT), Australia (9M10: 16% CD’s EBIT), and China (9M10: 12% CD’s EBIT) is overblown, evidenced from the minute forex impact on CD’s results in the last three quarters. Given the approximately even contributions from the emerging (China) and developed nations (UK, Ireland, Australia), we reckon the chances of adverse forex movement from sustained strengthening of S$ against the local currencies of CD’s overseas operations as low.
SMRT, SBSTransit – BT
SMRT, SBS Transit seek fare adjustments
FACED with rising cost pressures, transport operators SMRT and SBS Transit have submitted applications to the Public Transport Council (PTC) seeking fare adjustments.
Despite efforts to manage costs, SMRT’s energy costs rose 17.5 per cent to $122.4 million in FY2011 on the back of higher electricity and diesel prices as well as with the launch of the Circle Line, it highlighted in a press release yesterday.
Staffing costs have also increased in line with both the higher employer’s CPF contribution rate and increased headcount for the Circle Line.
At the same time, SMRT has in recent years bumped up the frequency of train and bus trips to ease crowding as well as to cut waiting times, and has also continued to invest in new buses to beef up its fleet.
‘SMRT has been managing our costs while improving our productivity. Our non-fare businesses from commercial activities like retail rentals and advertising have contributed to productivity gains that are shared with commuters as it lowers the maximum allowable fare adjustment,’ said SMRT Corp’s executive vice-president (trains) Khoo Hean Siang. ‘However, with uncontrollable cost increases due to rising fuel prices and manpower costs, we have applied for the maximum fare adjustment of 2.8 per cent, which if approved, will help mitigate the cost increases.’
Meanwhile, SBS also said that it continues to face significant cost pressures despite efforts to cut costs and boost productivity.
‘Fuel and energy costs have been increasing. At the same time, we have also been investing in new buses as part of our fleet-renewal exercise which began in 2006. In the last year alone, we have ordered another 600 buses at a total cost of $268 million. In all, our 2,050 new buses are costing us some $854 million,’ SBS said, adding that details of its application, which is subject to the PTC’s approval, will be announced at a later date.
SMRT – OCBC
1Q revenue growth likely to be minimal
1Q revenue growth likely to be minimal. SMRT’s 1QFY12 revenue growth over the previous quarter is likely to be minimal despite increases in MRT and bus ridership for the first two months of the quarter as compared to 4QFY11. Extrapolating the ridership statistics for the quarter, we anticipate an increase in ridership of about 5% QoQ for MRT and 4% QoQ for bus services, but believe that the lower average fares resulting from the implementation of distance-based fares will negate these ridership improvements and limit revenue growth to only around 1% QoQ. Furthermore, the general increase of wholesale electricity prices over the same period and the upsurge in staff and related costs after the completion of additional staff recruitments for Stages 4 and 5 on the Circle Line during the last quarter will put a squeeze on 1Q11 operating profits.
Challenging operating environment remains. As SMRT’s 1QFY12 comes to a close, we expect cost pressures to persist with revenue growth being unable to keep pace with operating expenses. We maintain our view that operating losses from the Circle Line will continue due to the lack of optimal ridership levels and higher staff costs, and may persist even after the completion and full operation of the Circle Line in Oct 2011. The higher electricity and diesel costs experienced earlier during the year will also continue to bite and augment expenses. Although cost prices have since come off from earlier highs, they remain elevated at current levels compared to previous quarters. In terms of revenue growth, modification of fares seem unlikely this year even with increases in the consumer price index and average wages, which are the two main components in the fare adjustment formula. Given the general sensitivity of the population towards price increases, we believe that any fare hike decision will only take place towards the end of the year at the earliest.
Lack of growth catalysts, maintain HOLD. Since our last update issued on 3 May 2011, SMRT’s share price has hovered around S$1.86-S$1.92. We feel that these range-bound movements reflect the incorporation of the above-mentioned factors by the market as well as the general bearish mood over the recovery strength of the global economy by investors although prices have been supported by its relatively decent dividend yield of about 4.5%. As such, any immediate catalyst for improvement in its stock performance will have to come externally, from improvements in the general sentiment of investors over the global economic situation. In light of the anticipated mediocre 1Q results, we have revised our previous fair value estimate of S$2.07 down to S$2.04 and maintain our HOLD rating.
SMRT – DBSV
4Q above, but cost headwinds linger
At a Glance
• 4Q/FY11 results above ours but within consensus’ expectations
• Strong 4Q growth due to low base in 4Q10 and lower-than-expected rise in electricity, diesel and staff costs
• Cost concerns likely to linger, especially with volatile oil price, which is unhedged
• Maintain Hold, TP revised slightly to S$2.08
Comment on Results
4Q/FY11 results in above. SMRT’s 4Q net profit at S$34m (+50% y-o-y) was above ours, but within market expectations. FY11 posts a marginal decline of 1.1% in net profit to S$161.1m, vs our forecast of S$148m due to a lower than expected rise in electricity/diesel, and staff costs. 4Q EBIT margins improved to 16.9% (4Q10: 12%) as costs rose by a slower clip than topline. A 6.75 Scts final dividend was proposed; coupled with interim dividend of 1.75 Scts equates to a payout of 80% (FY10: 8.5 Scts).
Rail and rental remain key EBIT contributors, collectively accounting for c.97% of Group’s EBIT. This is partially offset by losses from Taxis (-S$3.9m), Buses (-S$1.8m), and LRT (-S$0.1m). Taxi losses came about from higher depreciation, insurance costs, and write off of property, plant and equipment.
Circle Line (CCL) still below breakeven, but losses narrowed. Average ridership at CCL is currently around 180k/day, which is a marked improvement from the 30k/day when it first started. Operating losses continued, but has narrowed, as it is still below the 200k/day, which is estimated for breakeven.
Recommendation
Maintain Hold, TP revised slightly to S$2.08. Despite a better than expected performance in 4Q, we expect cost pressures to continue to plague the bottomline. This should come about from the volatile oil prices (which currently remains unhedged), coupled with higher staff costs. We believe these concerns will linger and cap share price gains in the near future, with support from a healthy yield of c.4.5%. As such, we maintain our Hold recommendation with a PE/DCF backed TP of S$2.08.
SMRT – DBSV
4Q above, but cost headwinds linger
At a Glance
• 4Q/FY11 results above ours but within consensus’ expectations
• Strong 4Q growth due to low base in 4Q10 and lower-than-expected rise in electricity, diesel and staff costs
• Cost concerns likely to linger, especially with volatile oil price, which is unhedged
• Maintain Hold, TP revised slightly to S$2.08
Comment on Results
4Q/FY11 results in above. SMRT’s 4Q net profit at S$34m (+50% y-o-y) was above ours, but within market expectations. FY11 posts a marginal decline of 1.1% in net profit to S$161.1m, vs our forecast of S$148m due to a lower than expected rise in electricity/diesel, and staff costs. 4Q EBIT margins improved to 16.9% (4Q10: 12%) as costs rose by a slower clip than topline. A 6.75 Scts final dividend was proposed; coupled with interim dividend of 1.75 Scts equates to a payout of 80% (FY10: 8.5 Scts).
Rail and rental remain key EBIT contributors, collectively accounting for c.97% of Group’s EBIT. This is partially offset by losses from Taxis (-S$3.9m), Buses (-S$1.8m), and LRT (-S$0.1m). Taxi losses came about from higher depreciation, insurance costs, and write off of property, plant and equipment.
Circle Line (CCL) still below breakeven, but losses narrowed. Average ridership at CCL is currently around 180k/day, which is a marked improvement from the 30k/day when it first started. Operating losses continued, but has narrowed, as it is still below the 200k/day, which is estimated for breakeven.
Recommendation
Maintain Hold, TP revised slightly to S$2.08. Despite a better than expected performance in 4Q, we expect cost pressures to continue to plague the bottomline. This should come about from the volatile oil prices (which currently remains unhedged), coupled with higher staff costs. We believe these concerns will linger and cap share price gains in the near future, with support from a healthy yield of c.4.5%. As such, we maintain our Hold recommendation with a PE/DCF backed TP of S$2.08.