Sunday, November 3, 2013

SMRT sees margin stabilisation

SMRT sees margin stabilisation
By Joan Ng
SMRT Corp reported a 56.8% decline in earnings to $14.4 million for 2QFY2014 ended Sept despite posting a 5.3% increase in revenue to $296.3 million. Hitting the company’s bottom line heavily was a 27% increase in staff costs to $118.5 million. Repair and maintenance costs, meanwhile, rose 14.2% to $29.8 million.

Operating profit at its train business has sunk from $24.3 million in 2QFY2013 to just $1 million this quarter.

The company’s balance sheet does not look great either. Cash levels have sunk dramatically. As at March 31, 2013, SMRT had $332.5 million in cash and $213.8 million in fixed deposits. As at the end of September, however, cash had declined to $104.7 million while fixed deposits were down to $68.6 million. Net gearing is now up to 58% of equity from just 8% before. SMRT has $150 million worth of fixed rate notes due in October 2014.

At an analyst and media briefing to announce its results this morning, SMRT CEO Desmond Kuek admitted that there are “macro issues with the transport framework that are beyond the company’s control.” Chiefly, transport fares have remained stagnant for years despite the fact that manpower, electricity and diesel, and repair and maintenance costs have gone up.

Given the bleak picture that the recent results have painted, analysts are not enthusiastic about SMRT’s stock. DMG & Partners Research is maintaining its “sell” call and recommends investors switch to ComfortDelGro Corp “for stronger yields arising from the latter’s better growth potential”. DMG expects that in 2HFY2014, SMRT’s staff costs will likely rise at a similar rate because the group will have to provide year-end bonuses for 2013.

DBS Vickers analyst Andy Sim has a “fully valued” call on SMRT. This quarter’s results were below his expectations, he says, and he is cutting his earnings forecasts for FY2014 by 28% on the back of higher staff costs and higher repair and maintenance costs. He has also trimmed his target price on the stock to $1.08 from $1.20 previously.

So is there still reason for investors to be interested?

In fact, a speck of light may be emerging in SMRT’s tunnel. Kuek says that margins at the train operations have probably hit steady-state levels. “We believe we have probably just about stabilised our operating costs both in terms of staff costs and repair and maintenance costs,” he says. Barring any unexpected costs or events, the current operating margins for the train business, which has historically contributed the bulk of operating earnings, are likely to continue in the near future – until a new rail financing framework is worked out.

At the same time, despite the higher gearing levels and the lower profits, SMRT continues to generate a steady stream of positive cash flow. In the quarter, cash flows from operating activities came to $115.2 million while cash flows from investing activities came to just $50.4 million. As a result, SMRT could still afford to declare a dividend of one cent a share. “We have to keep faith with our shareholders. They have been patient and supportive and understanding and we think we should share some of that dividend with them,” Kuek says of the company’s decision to declare a dividend despite the weak results.

SMRT’s shares closed at $1.285 on Nov 1, down 1.2%. They have lost 24% of their value this year. Even after the decline, the solitary cent makes for a yield of just 0.8% this quarter – less than investors are used to. But Deutsche Bank analyst Wei-Shi Wu thinks share price weakness after the results announcement would be a good buying opportunity. Wu is one of the few analysts who has managed to correctly model and forecast SMRT’s earnings this quarter. Now, she believes business reforms will drive significant earnings growth for SMRT beginning in 2015.

The government had been expected to announce some revision in the transport fare formula this year. But as the year draws to a close, time is now running out. Still, even if investors feel nervous about SMRT’s prospects, they should note that this is a stock to watch.

Publish date: 02/11/13

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