3QFY15 results reinforces positive outlook

• Solid 3QFY15 performance
  
• Lower oil prices to help
  
• Raise FV; maintain BUY
  

Good showing from 3QFY15 results

SMRT continued its recovery momentum with a set of solid 3QFY15 results. Its 3QFY15 PATMI jumped 58.4% YoY to S$22.5m on the back of a 6.8% broad-based revenue growth to S$313.2m. 3QFY15 operating profit grew 54.4% YoY to S$31.0m. The fare business continues to show solid growth on higher ridership and average fares as well as lower diesel costs but these gains were partially offset by higher depreciation from a larger train fleet and mandatory contribution to the public transport fund. As for the non-fare business, it improved mainly on higher rental income as a result of higher rental renewal rates of commercial spaces but was partially offset by early retirement of taxis. The sustained strong performance for all three quarters led to a 56.0% YoY increase in its 9MFY15 PATMI to S$70.2m, which formed 76.5% of our slightly more conservative FY15 forecast.

Profitability to improve on lower diesel costs

Our view on SMRT’s outlook remains positive on several factors: 1) its ability to consistently manage expenses since 1QFY15 reflects the measures taken are likely sustainable, 2) management though tightlipped on hedging position, stated electricity costs will continue to decrease; we believe that their FY16 diesel needs are largely exposed and hence should see further reduction in costs as well, 3) management also stated full contribution of rental income from Kallang Wave Mall is likely to materialize only from FY16 onwards, and hence we change our assumption of full contribution from 2HFY15 to FY16 onwards, 4) the taxi segment is likely to see higher growth with newer fleet commanding higher rental income though early retirement of taxis eroded 3QFY15 EBIT by 48.0% YoY to S$0.8m, 5) LTA’s purchase of SMRT’s bus assets in order to switch to the new bus contracting model could potentially see lump sum cash inflow to SMRT, leading to a possible special dividend or acquisition for growth. However, with no details announced, we have yet to factor this into our model.

Raise FV; maintain BUY

Based on the above factors, we increase our FY15 and FY16 PATMI forecasts by 4.1% and 15.3%, respectively, as we believe lower energy costs will drive up profitability at least in FY16. Consequently, our DDM-derived FV increases from S$1.70 to S$1.90. Maintain BUY.

Improvement better-than-expected

• 1QFY15 PATMI up 36.8% YoY
  
• Fare business’ operating losses narrowed
  
  
• Raise FV but maintain HOLD
  

1QFY15 earnings exceeded expectations

SMRT reported a decent set of 1QFY15 results which beat ours and the street’s expectations. This was achieved despite a S$1.6m fine by LTA over four train service

disruptions. PATMI jumped 36.8% YoY to S$22.4m on the back of a 4.3% increase in revenue to S$297.1m. The former constituted 31.8% of our FY15 forecast and 30.2% of Bloomberg consensus. Both SMRT’s

Fare business and Non-fare business recorded an improvement in operational performance. Operating losses narrowed from S$5.5m in 1QFY14 to S$1.1m in 1QFY15 for the former, boosted by higher ridership and average fares as well as productivity gains; while operating profits climbed 17.4% YoY to S$29.9m for its Non-fare segment.

Yet to reach a mutual agreement with LTA

Singapore’s Transport Minister Mr. Lui Tuck Yew recently commented that there was still a “wide gap between SMRT’s expectations and LTA’s position” with regards to the new rail financing model. As expected, management remained tight-lipped on this issue during the conference call, but highlighted that it hopes to reach a win-win situation with the authorities. According to LTA, SMRT also has ~S$2b of financial obligations from 2014 to 2019 under the existing financing framework. We believe this situation would change once LTA implements a new rail financing model to enhance the sustainability of the transport sector. The recent introduction of the “Government contracting model” for buses is proof that the government is committed to achieving this goal.

Maintain HOLD

We bump up our FY15 and FY16 PATMI projections by 18.8% and 8.8%, respectively. We also raise our terminal growth rate assumption from 1.5% to 2.0% to take into account the positive long-term prospects of SMRT. Correspondingly, our DDM-derived fair value estimate increases from S$1.40 to S$1.65. While we like SMRT’s solid 1QFY15 operational performance, its

share price has already appreciated 34.9% YTD. Moreover, there is still uncertainty over the timeframe and details of LTA’s rail financing framework implementation. This may limit SMRT’s near-term share price upside potential, in our view. Hence, we maintain our HOLD rating on SMRT.

Train kept a-rollin’

SMRT’s 1QFY15 earnings are above our expectation, forming 32% of our previous full-year forecast. The deviation was primarily due to better-than expected margins arising from moderate operating costs. The highlight of the results is the sustainability of its fare business. We raise our FY15-17 EPS forecasts by 6-8% to incorporate its increased earnings sensitivity to improving ridership and restrained costs. This lifts our DCF-based target

price (WACC 7%). Other potential re-rating catalysts are better earnings from its cost-control measures. A rail financing model, if come about early, could add euphoria. We reiterate our Add rating.

Results outperform

The 1QFY15 PATMI of S$22m (+37% yoy) is deemed to be above expectation. Strong revenue was recorded in almost all the business segments. With the recent fare adjustments and continued rise in ridership, earnings, which bottomed out in the previous quarter, have turned sharply around. The trend of narrowing losses in its bus business and growth in its train business looks sustainable. The 1QFY15 results are the best in seven quarters of reporting. Staff expenses remained the largest cost component (40% of revenue), though wage adjustments and headcount increases have moderated.

Improving costs environment

Operating costs moderation is also key to this set of results, as every operating cost items were pegged back. The group’s current net gearing stands at 65%. We believe this will come down progressively over the next two financial years as the group manages its capex programme via internal funding and external credit lines. Note that the capex of S$94m spent in 1Q15 is not reflective of the S$550m targeted forFY15. According to management, the sports Hub space is now more than 80% leased out, with progressive openings scheduled for the months to come. This segment falls into the other services segment.

Reiterate Add

The new management has turned the company around faster than expected as it targeted costs with greater impact on earnings. In addition, a new rail financing framework is currently under discussion, with the earlier-than expected move on the bus model serving as a prelude to the rail model. Add.

Train kept a-rollin’

SMRT’s 1QFY15 earnings are above our expectation, forming 32% of our previous full-year forecast. The deviation was primarily due to better-than expected margins arising from moderate operating costs. The highlight of the results is the sustainability of its fare business. We raise our FY15-17 EPS forecasts by 6-8% to incorporate its increased earnings sensitivity to improving ridership and restrained costs. This lifts our DCF-based target

price (WACC 7%). Other potential re-rating catalysts are better earnings from its cost-control measures. A rail financing model, if come about early, could add euphoria. We reiterate our Add rating.

Results outperform

The 1QFY15 PATMI of S$22m (+37% yoy) is deemed to be above expectation. Strong revenue was recorded in almost all the business segments. With the recent fare adjustments and continued rise in ridership, earnings, which bottomed out in the previous quarter, have turned sharply around. The trend of narrowing losses in its bus business and growth in its train business looks sustainable. The 1QFY15 results are the best in seven quarters of reporting. Staff expenses remained the largest cost component (40% of revenue), though wage adjustments and headcount increases have moderated.

Improving costs environment

Operating costs moderation is also key to this set of results, as every operating cost items were pegged back. The group’s current net gearing stands at 65%. We believe this will come down progressively over the next two financial years as the group manages its capex programme via internal funding and external credit lines. Note that the capex of S$94m spent in 1Q15 is not reflective of the S$550m targeted forFY15. According to management, the sports Hub space is now more than 80% leased out, with progressive openings scheduled for the months to come. This segment falls into the other services segment.

Reiterate Add

The new management has turned the company around faster than expected as it targeted costs with greater impact on earnings. In addition, a new rail financing framework is currently under discussion, with the earlier-than expected move on the bus model serving as a prelude to the rail model. Add.

SMRT posted a PATMI of SGD22.4m (+36.8% y-o-y) on revenue of SGD297.1m (+4.3% y-o-y) in 1QFY15, largely due to stronger showing atits bus and non-fare units. Still, we remain cautious on the company’s outlook as we expect it to be impacted by increasingly severe fines and higher foreign worker levies. Maintain SELL. We raise our DCF-based TP to SGD1.24 from SGD1.00 (WACC: 7.7%, terminal growth rate: 1%).

• Surprisingly good quarter. Despite slowing population growth and lower certificate of entitlement (COE) prices, the average daily ridership on SMRT’s buses rose by a steady 4.3% y-o-y to 980k. This, on top of a 1.6% fare increase, boosted its bus revenue to SGD58.1m (+8.4% y-oy), while losses from the division fell to SGD5.5m (-29.4% y-o-y). Profit from its non-fare business rose 17.4% y-o-y due to higher taxi contributions, higher rental renewal rates and increased advertising.
  
• Fines get more severe. Parliament recently amended regulations stipulating that rail fines could go up to 10% of the corresponding rail system’s revenue. SMRT has paid fines totaling SGD1.6m for four recent incidents. While the fine per incident did not exceed SGD1.0m, we see an increase in the severity of the fines themselves.
  
• Foreign worker levy to kick in. Since the bulk of SMRT’s workforce is made up of foreign workers, the company may feel the pinch of the increase in levies on foreign workers. Earlier this month, the levy for foreign workers in the service sector was increased by 5.0%-22.2% for S Passes and 5.0%-16.7% for work permits.
  
• SMRT’s rail financing expectation “too optimistic”. SMRT’s expectations on the new rail financing framework may have been too optimistic. Singapore Transport Minister Mr Lui Tuck Yew has said that there is a wide gap between the company’s expectations and the Land Transport Authority’s position.
  
• ComfortDelGro still preferred. We raise our FY15 and FY16 profit estimates for SMRT by 14.7% and 10.8% respectively in view of its stronger performance. However, we reiterate that the stock is trading at an unattractive 30.4x FY15 (FYE March) P/E vs ComforDelgro’s (CD SP, BUY, TP: SGD2.48) FY15 19.0x.