Tuesday, January 14, 2014

SMRT Corporation - Recent share price weakness presents good Buying opportunity (DB)

SMRT Corporation
Price at 3 Jan 2014 (SGD) 1.16
Price target - 12mth (SGD) 1.72
Recent share price weakness presents good Buying opportunity

Stock now at 7-year low but prospects are bright
We upgraded SMRT to Buy in late 2013, given our anticipation of positive business reforms, which we believe will help drive a turnaround of SMRT’s operational performance from 2015. Post our upgrade, we highlighted investors’ skepticism around the political will to implement reforms and their timing.
While talks of the reforms have generated a marked increase in investor interest in SMRT, share price has remained weak. In fact, the stock fell 10% over the past 3 months to a 7-year low, compared with a 4% gain by ComfortDelgro (2.02 SGD). While valuations at 22.6x 1-year forward PE are still not cheap, it is worth noting this is now trending below SMRT’s 5-year historical average valuations. The 2.1x P/B ratio is at the lowest in 5 years. We urge investors to look beyond FY14, as we believe moderating costs and changes to the public transport operating framework will drive significant earnings growth beyond the immediate term. As such, we view SMRT’s recent further de-rating as a good opportunity for additional accumulations.

Operational performance expected to improve from FY15
When we met management in Nov, it was highlighted that cost increase would start to moderate within the near-term. While fleet expansion will likely keep headcount requirements high, there is scope for slight reduction in repairs and maintenance costs. So although total costs may not decline, we expect a deceleration in opex increase to support margin improvement and drive earnings growth in FY15. Furthermore, we anticipate a further boost from the first fare increase in two years to be implemented in 2014. While the exact magnitude of this increase is still being determined, we believe 2% increases over 2014/2015 would not be unreasonable. Ceteris paribus, this could drive 20% upside to our FY15 earnings forecast for SMRT (we currently assume sustained fare declines in our estimates).

Still optimistic of positive business reforms in 2015
More importantly, we view recent comments by the Transport Minister (about the need for a sustainable public transport system) as supportive of our reform thesis. Specifically, we believe a cost-plus model will be adopted for the bus segment in Singapore from 2015. This could drive sector NPAT growth of 35% versus a status quo 10% increase. SMRT’s CEO cited a significantly more collaborative relationship with the regulator as the premise for his optimism that reforms will be implemented before 2016. In his view, implementation will be gradual, with selected parcels of bus routes being tendered out over time. Over the longer-term, we believe there is scope for the change in operating framework to be extended to the rail segment, with further upside for the sector.

Source/Extract/Excerpts/来源/转贴/摘录: Deutsche Bank
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