SGX Yield Stock

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.

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.

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.