SGX Yield Stock

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.