Fair value S$1.30
add: 12m dividend forecast S$0.02
versus: Current price S$1.43
• 1Q14 results disappoint
• Higher OPEX to linger
• Downgrade to SELL
SMRT's 1Q14 results came in below our expectations as revenue growth slowed while higher staff and depreciation expenses caused operating and net profit to decline 49.4% YoY to S$22.2m and 55.2% YoY to S$16.3m respectively.
In the coming quarters - and in the absence of fare adjustments - we expect this trend to persist as higher operating expenses continue to compress margins. In addition, recurring service disruptions suggest elevated repair and maintenance expenses. With the lack of any immediate catalysts (a switch to the new rail financing framework within FY14 is unlikely in our view), we lower our FY14 forecast figures yet again and our DDM-derived fair value estimate falls to S$1.30 (S$1.45 previously). Downgrade to SELL.
Higher staff costs bite hard
SMRT's 1Q14 results came in below our expectations. Revenue growth (+3.5% YoY to S$284.8m) continued to slow in line with the moderation in train and bus ridership while higher staff costs (+23.4% YoY to S$112.7m) and depreciation expense (+10.4% YoY to S$42.3m) caused operating profit to decline 49.4% YoY to S$22.2m. As a result, net profit fell 55.2% YoY to S$16.3m.
More of the same for coming quarters
We expect operating expenses to remain elevated in the coming quarters with staff costs and repair/maintenance expenses as the main culprits. Repeated occurrences of service disruptions suggest that repair/maintenance work will only increase further while higher staff costs related to increased wages and headcount raise the baseline cost figure for FY14.
Possible asset impairments?
SMRT continues to experience sustained competitive pressures for its domestic bus operations and the Shenzhen Zona investment, and further asset write-downs could follow. For the former, unless the fare review committee announces their recommendations within the next two months and its implementation is immediate, the bus operations could log its twelve consecutive quarter of operating losses, while the latter saw goodwill entirely wiped out in the previous quarter.
Lack of catalysts; downgrade to SELL
With the lack of any immediate catalysts and higher opex for FY14, we lower our FY14 forecast figures yet again and our FY14 operating and net profit fall by almost 30% and 34% respectively. Maintaining a reduced payout ratio of 50% for FY14/15, our DDM-derived fair value estimate falls to S$1.30 (S$1.45 previously). Downgrade to SELL.
Publish date: 31/07/13