Free pre-peak morning MRT rides

• Free travel on MRT trains for those who exit at 16 city stations before 7.45am on weekdays
  
• Government to fund this 1-year trial, starting 24 Jun 13
  
• No immediate impact on SMRT and CD
  
• Maintain FULLY VALUED on SMRT on operational challenges; BUY CD for geographical exposure
  

Free travel on MRT trains on weekday mornings.

Singapore’s Land Transport Authority (LTA) announced this morning that it will embark on a one-year trial starting from 24 Jun 13 to provide free travel on the rail network for commuters who end their journey before 7.45am on weekdays at 16 designated MRT stations in the city area. In addition, commuters who exit these 16 stations between 7.45am to 8am will be given a discount of up to 50 cents off their train fare. The government will be funding this trial.

The objective of this trial is to encourage commuters to make changes to their travel schedule into the city area to spread out the morning peak hour crowds.

What are the changes from the current scheme?

Currently, a 50 cents discount is given for commuters who exit at 14 city stations before 7.45am from Mondays to Fridays (excluding public holidays). Refer to table below for a summary of changes.

Our views:

No immediate impact on SMRT and CD. As the trial will be funded by the government, (said to cost S$10m according to The Straits Times), we do not foresee any direct impact on SMRT or CD at this juncture arising from the provision of free travel and discounts during the aforementioned timings. However, it is expected that train trips will be increased during this period to shorten waiting times, and therefore should increase operating costs marginally.

On a positive note, this may alter travel patterns, relief pressure on peak hour travel and may also improve overall public transport ridership.

Ending the Year with a Whimper

Loss guidance follows wage hike – dividend cuts again? The previously unimaginable has happened. SMRT is expecting its first ever quarterly loss in its history for 4QFY3/13. Escalating operating costs and a SGD17m impairment in goodwill in its associate, Shenzhen ZONA, are the primary causes of the loss. We are expecting the PATMI loss to come in at ~SGD2m for the quarter, which still points to profitability at a core level excluding the effects of the impairment. However we expect final dividends to be cut as a result of this announcement. We were among the earliest to downgrade SMRT to a SELL in early 2012. This loss guidance validates our sustained SELL call, and we are reiterating it with a reduced, Street-low target price of SGD1.19.

A fallen dividend angel. SMRT has been a dividend darling in the past, with stable and growing earnings providing shareholders with a steady stream of dividends to look forward to. However those days of stability and certainty look to be coming to an end, as our final dividend forecast for FY3/13 is correspondingly cut by 30% to SG 3.5 cts /share

Posturing possibility, but immaterial to our call. We see a possibility of SMRT lumping all its bad news in a single quarter to posture for a favourable fare review outcome. The method in which public transport fares are decided is currently under review, and land transport companies like SMRT could be attempting to signal its poor financial position should the revised fare formula not equitably account for its rising costs. However, this does not change our SELL call.

SELL call reinforced – fare review lifeline still not in sight. In light of such firm guidance on the challenges ahead for land transport operators like SMRT, we are slashing our earnings forecasts by 25% for FY3/13 and ~10% for FY3/14-15. Our target price is reduced to SGD1.19, as we maintain our valuation peg to 15x FY3/14 PER, a full standard deviation below mean. SELL SMRT – we see no reason to own a stock where earnings continue to be hampered by a postponement in an equitable fare review formula and rising operational costs, which in turn translate to lower dividend yields (~3%) for shareholders.

MORE IMPAIRMENTS?

• Profit guidance for 4Q13
  
• Possible impairment to come in FY14
  
• No turnaround in sight
  

First ever profit guidance issued

SMRT Corp issued its first ever profit guidance for 4Q13, attributing the expected net loss to higher operating expenses and an impairment of the S$17m in goodwill for its Chinese associate, Shenzhen ZONA Transportation Group.

Time to wipe the slate clean

We view the goodwill impairment as a way for SMRT’s new management to turn the page on its past overseas ventures although the timing did take us by surprise. While the Shenzhen ZONA venture failed to yield the desired results, its performance only turned negative over the past two quarters. On the other hand, SMRT was willing to wait out eight quarters of much larger operating losses on its SG bus operations before making a goodwill impairment in 4QFY12.

Further impairment to come

In our view, the review of SMRT’s business segments by the new management is still ongoing and we could see further impairments with regards to the SG bus business. Its operations continue to suffer from growing operating expenses and a write-down of assets could materialise in the coming quarters if operating losses persist and widen beyond the current losing streak of nine consecutive quarters.

Lower final FY13 dividend

For now, our 4QFY13 estimates call for a loss in excess of $4.3m, and this should reduce FY13’s reported profit to around S$90m. Assuming an unchanged 60% PATMI payout – last seen in FY04/05 – investors can expect a halving of last year’s dividend payout.

Valuation lowered

As we roll our valuations forward to include FY15, our fair value declines from S$1.62 to S$1.51 as higher operating expenses and lack of growth opportunities continue to bite. This undesirable combination will likely override any cheer from the upcoming fare increase in mid-CY2013. We reiterate that SMRT is unlikely to see an inflection point anytime soon. Maintain HOLD.

MORE IMPAIRMENTS?

• Profit guidance for 4Q13
  
• Possible impairment to come in FY14
  
• No turnaround in sight
  

First ever profit guidance issued

SMRT Corp issued its first ever profit guidance for 4Q13, attributing the expected net loss to higher operating expenses and an impairment of the S$17m in goodwill for its Chinese associate, Shenzhen ZONA Transportation Group.

Time to wipe the slate clean

We view the goodwill impairment as a way for SMRT’s new management to turn the page on its past overseas ventures although the timing did take us by surprise. While the Shenzhen ZONA venture failed to yield the desired results, its performance only turned negative over the past two quarters. On the other hand, SMRT was willing to wait out eight quarters of much larger operating losses on its SG bus operations before making a goodwill impairment in 4QFY12.

Further impairment to come

In our view, the review of SMRT’s business segments by the new management is still ongoing and we could see further impairments with regards to the SG bus business. Its operations continue to suffer from growing operating expenses and a write-down of assets could materialise in the coming quarters if operating losses persist and widen beyond the current losing streak of nine consecutive quarters.

Lower final FY13 dividend

For now, our 4QFY13 estimates call for a loss in excess of $4.3m, and this should reduce FY13’s reported profit to around S$90m. Assuming an unchanged 60% PATMI payout – last seen in FY04/05 – investors can expect a halving of last year’s dividend payout.

Valuation lowered

As we roll our valuations forward to include FY15, our fair value declines from S$1.62 to S$1.51 as higher operating expenses and lack of growth opportunities continue to bite. This undesirable combination will likely override any cheer from the upcoming fare increase in mid-CY2013. We reiterate that SMRT is unlikely to see an inflection point anytime soon. Maintain HOLD.

Wheeling out its first-ever net loss

SMRT surprised us with its profit warning. The group will slip into its first-ever net loss in 4QFY3/13 as a result of high operating costs and S$17m goodwill impairment for its associate Shenzhen ZONA. But it

will remain profitable for the full year.

We slash our FY13-15 EPS by 4-22% to reflect structurally higher opex and the one-off goodwill write-down. Our target price (DCF, WACC 6.5%) falls to S$1.53. SMRT remains an Underperform, with earnings and dividend disappointments being de-rating catalysts.

What Happened

SMRT issued a profit guidance, warning that 4Q13 will end in losses as a result of 1) increasing operating costs without corresponding fare adjustments, which have derailed profit margins, and 2) S$17m impairment of goodwill for its associate Shenzhen ZONA. Despite this quarter’s losses, SMRT remains profitable for the full year.

What We Think

The S$17m goodwill impairment is non-operational and hopefully, non-recurring. A more pressing concern is SMRT’s ballooning costs. SMRT’s guidance for losses suggests that opex inflation has been more severe than expected. Such costs are structural in nature and will continue to erode margins. We have cut our FY13-15 EPS for higher opex and expect earnings downgrades across the market.

What You Should Do

Investors should steer clear of SMRT. Cost inflation will continue to erode profit margins in the absence of fare hikes.