Don‟t go out in the rain
After a series of earnings disappointments, no thanks to a nightmarish mix of higher opex and the lack of a fare hike, things might get better for SMRT in 2014. Management’s proactive stance in growing its non-fare business domestically and overseas is admirable.
Under our revised rating structure, our call changes from Underperform to Reduce. We maintain our DCF-based target price (WACC 6.5%) of S$1.06. We see de-rating catalysts coming from poor earnings related to cost issues and an inability to navigate regulatory constraints.
The road ahead
In theory, a shift to a cost-plus model could reverse losses in bus operations and go a long way to improving ailing margins, earnings visibility and cash flows. Likewise, a similar asset-light model under the new rail financing framework will serve to accelerate earnings. However, uncertainties surrounding this framework remain: (1) date of implementation, (2) licensing fee amount, and (3) issues relating to the assets transferred out from SMRT‟s book (estimated to be S$1.6bn in operating assets and trains taken over from LTA) to the authority, which may take a longer time, and what the fair price of those current assets will be.
Out of its hands
We believe that SMRT is making inroads with regulators regarding the accounting of asset transfers under the new rail financing framework, although the outcome is out of SMRT‟s hands. Once this is resolved, the end result will be predictable cash flows and a more sustainable financing model, which will alter the fate of the company. Fare adjustment remains a problem (although that can quickly be solved by a potential fare hike coming in early-2014) and revenue growth will still lag behind cost inflation.
A Reduce rating
Until then, the stock may continue to hover at the current level given the present harsh operating expenditures faced by the group. While it seems like its share price has factored in the worst-case scenario, with the market expecting the group to do better, we are cautious about those „swing factors‟, i.e. capex, assets‟ fair value and dividend rate.
Publish date: 29/11/13