Category: SMRT
SMRT – OCBC
Laying low
- Free-ride scheme increasing ridership
- Weakness priced in by the street
- A stable share price for now?
Rail ridership figures exceed 60m for first time
The free MRT ride scheme introduced on 24 Jun has seen rail ridership figures for Jul and Aug exceed 60m rides for the first time in SMRT’s history. The incentive to promote travel to 16 designated MRT stations in the city area before 8am has also aided in the alleviation of a congested rail system during the morning peak periods. In terms of financials, SMRT will bear the cost of free travel up to S$5m and the relevant authorities will compensate the company for the remainder.
More of the same for 2Q14 results
We expect SMRT’s upcoming 2Q14 results to be similar with 1Q14: slight revenue growth with higher operating expenses – namely staff, depreciation and repair/maintenance – causing operating profit to decline by doubledigits YoY. On a segmental basis, bus operations will likely extend its streak of 11 consecutive quarters of losses (but we assume no asset impairments); rail profitability will be lower as well. The taxi, rental and advertising segments should stay positive and provide some consolation to SMRT.
Upgrade to HOLD on valuation grounds SMRT is unlikely to see an uptick in its share price due to the lack of a fare increase (delay by the Fare Review Mechanism Committee) and pressures on operating expenses. However, since the end of Aug, SMRT’s share price has stabilised between a tight band of 1.29-1.30, which has helped to arrest its slide of 10% following its 1Q14 results. The lower frequency of bad publicity has definitely aided the company, and we believe that the street has already factored in the majority of the negative expectations for FY14 as well as concerns over capex requirements. As SMRT is currently trading close to our unchanged fair value estimate of S$1.30, we upgrade the counter to HOLD on valuation grounds ahead of its 2Q14 results release at the end of the month.
Land Transport – MayBank Kim Eng
Imminent Changes To Bus Operating Model
Current bus model is not sustainable; Tender system a possibility. With stagnating bus fares and rising cost from inflationary pressure, the two existing operators have been running loss-making operations for years. Under a business model that is financially unviable, we believe that SMRT and SBS Transit, a subsidiary of ComfortDelGro, would be reluctant to renew their bus licences when they are due in 2016. Hence, a change to the bus model is imminent, in our view, in favour of a tender system to award packages of service contracts. We believe that the Land Transport Authority (LTA) is currently evaluating the merits of a tender system, as evident from the tender system used to award service contracts since the start of the year.
Tendering system would likely reverse losses – upside to profits. In the near term, switching to a tender system will be positive for the Public Transport Operators (PTO), as losses at their bus units will reverse. The future profitability of the bus business would depend on the bids placed during tenders. Our analysis suggests that our profit estimates for next year would be raised by 18-22%, if the PTOs retain their current market share and their bus units achieve a 10% margin under the new business model
Key negatives for PTOs under new system. It appears that under a tendering system, the PTOs will be able to reverse losses and turn profitable. So what is the catch? We caution that there are at least three areas that would be negative for the two existing operators under a tender system: heightened competition, higher cost to ensure better service standards and shorter service contracts.
Net effect should still be positive for existing PTOs. While competition from new entrants would pose a threat, we believe that existing operators would still have an edge over new entrants with their scale of operations. Even if the existing operators do concede market share, their profitability under a tender system would still be an improvement over their current loss-making operations.
Sticking with current calls: BUY CDG, SELL SMRT. While switching to a tender system is positive for both PTOs, we maintain our preference for CDG over SMRT. We believe that our forecasts for significantly higher gearing at SMRT over the next few years will be reflected in lower stock valuations. Furthermore, PER valuations for CDG are relatively more attractive under various bus margin scenarios on a tender system. Reiterate BUY CDG, SELL SMRT.
SMRT – OSK DMG
Dividend Slashed As Prospects Dim
SMRT reported 4QFY13 results which came in below the market’s already lowered expectations. This pulled down FY13 earnings, which slumped 31% to SGD83m. Management continues to foresee challenges that will impact profitability in the short term. The payout ratio has been cut to 45% of earnings. We lower FY14 earnings by 16%. Maintain SELL with lower DCF TP of SGD1.25 (from SGD1.37).
4QFY13 earnings in the red due to cost pressures, impairment. SMRT reported 4QFY13 PATMI losses of SGD12m (versus SGD14m profit in 4QFY12) which came in below our and consensus’ expectations. The weak results were due to higher staff and repair and maintenance costs, as well as a SGD17m impairment of interest in Shenzhen Zona, partially offset by a SGD22m goodwill impairment done in 4QFY12.
Cut in dividend payout could remain till conditions improve. SMRT had declared FY13 dividends of SGD2.5¢ a share, which amounts to a payout ratio of 45% of FY13 PATMI. Historically, SMRT had payout ratios ranging between 70-100% of PATMI. Though management has not committed to a 45% payout ratio for the future, we believe the payout ratio will only be raised when profitability improves.
Unexciting ridership growth. Rail average daily ridership grew 3% y-o-y in 4QFY13, a slowdown from the 9.3-11.8% run rate for the same periods in FY10-12. Average daily ridership for CCL was 360k which we believe remains under the breakeven level.
Maintain SELL, expect further cuts from the street. SMRT’s valuation is far from attractive, trading at 25.6x FY14 (FYE Mar) P/E vs ComfortDelGro’s 16.1x FY13 P/E. Apart from a higher than expected fare revision following a fare formula review, we see little potential catalysts for a turnaround given the cost pressures that SMRT is faced with.
SMRT – Phillip
Not a stock to own
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.
- FY13 profits of S$83.3mn (-30.5%y-y).
- Elevated CAPEX guidance of S$500mn.
- Full year DPS cut to 2.50cents.
- Outlook statement remains negative.
- Maintain Sell with revised target price of S$0.93.
What is the news?
SMRT reported losses of S$12mn for 4QFY13. The losses in the quarter were driven by an S$17.3mn impairment charge on Shenzhen Zona, significantly higher staff cost (+28.5%) and repair & maintenance expenses (+41.6%). With significantly lower profits for the year, SMRT cut its final DPS to 1.50cents, representing a full year payout of 2.50cents (45.6% of FY13 PATMI). Outlook statement remains negative as management highlighted continued increase in operating costs and expects profitability to be impacted in FY2014.
How do we view this?
With the company’s earlier profit warning, the quarterly losses were well expected by the market. However, the magnitude of the dividend cut surprised us (and probably consensus), reflecting a dividend yield of merely 1.7% at the current price. With operating costs trending north, we expect SMRT to report structurally lower profits in our forecast years.
Investment Actions?
Despite a sharp decline in recent months, we believe that the stock of SMRT had not bottomed out. We maintain our Sell recommendation as the unsustainable business model, structurally lower earnings, rising leverage and poor dividend yield support gives investors little reason to own this stock. Unless there is a radical change in the business model, we expect a multi-year de-rating of this stock. With poor cashflow visibility, we switch to our blended valuation method to a simple P/E model pegged to 15X FY14E.
SMRT – CIMB
Stuck on a stalled train
SMRT’s FY13 profit missed expectations as cost inflation outpaced revenue growth. Margin pain will persist until SMRT moves to a more sustainable business model. Until then, not only are profits at risk, so are dividends.
Dividend payout was cut to 45% vs. its previous 60% policy. FY13 core net profit met only 92% of our and consensus estimates. We cut our FY14-15 EPS estimates by 21-27% and introduce FY16. Our target price (DCF, WACC 6.5%) falls to S$1.26. Maintain Underperform, de-rating catalysts are earnings and dividend disappointments.
Costs bite
We expect margin compression to persist as costs outpace revenue growth. SMRT’s revenue grew 2.4% to S$281m in 4Q13 but operating profit tumbled 72% to S$10.9m as higher repair and maintenance, staff and depreciation charges ate into profits. These resulted in an 85% drop in core net profit to S$5.4m. A S$17m impairment in its associate dragged the group into a S$12m loss for the quarter.
Dividend cut a surprise
We were surprised by the cut in the dividend payout ratio to just 45% (final dividend of 1 Sct vs. 5.7 Scts last year). Not only is this lower than the 94% paid last year, it is also below our 60% assumption, which was in line with its previous dividend policy. Management refrained from committing to a dividend policy in light of upcoming capex intensity, suggesting that future payouts are uncertain.
No light in sight
We see the risk of more earnings and dividend disappointment. SMRT’s priority to improve service standards entails spending to build a larger, newer fleet and incurring higher opex for headcount expansion, more stringent repairs and maintenance schedules, higher depreciation for a larger fleet and higher energy consumption for increased train and bus runs. Revenue growth will lag cost inflation. Margins remain at risk.