Thursday 2 May 2013

SMRT

OCBC on 30 Apr 2013

SMRT reported its weakest set of FY results in over ten years as increases in operating expenses – namely staff costs and repairs and maintenance (R&M) expenses – outpaced revenue growth across its various sectors. In the coming quarters, we do not expect much improvement in SMRT’s operating conditions as the increases in operating expenses have yet to plateau given the aging infrastructure and need to restore service standards. With staff costs and R&M expenses likely to continue growing, we could also potentially see further impairments in its bus business, which has experienced its ten consecutive quarters of operating losses. Lastly, reduction in SMRT’s dividend payout for FY13 (45.6%) has tempered our optimism and we reduce our FY14 projections accordingly. Our fair value estimate now falls to S$1.45 but we maintain HOLD on the counter as much of the negatives have already been priced in by the street.

Weak FY13 finally draws to a close
Despite revenue growth on the back of higher ridership, SMRT reported its weakest set of FY results in over ten years. On a full-year basis, SMRT saw a 12.4% increase in operating expenses – namely on the back of higher staff costs (+16.2%) and repairs and maintenance expenses (+32.7%) – to S$1,046m, which reduced its net profit by 30.6% to S$83.2m. In addition, management reduced the FY dividend payout ratio to 45.6% (average of 81% over past five years) and declared a final dividend of only 1 S cents (5.7 S cents last year) to bring its total dividends declared for FY13 to 2.5 S cents. 

Outlook remains challenging
Increases in SMRT’s operating expenses have yet to plateau as the aging infrastructure and inadequate service standards remain stumbling blocks for the group. Management has guided that it will look to increase its headcount by a further 10% in FY14 (+10% in FY13) as well as incur corresponding repair and maintenance expenses.

Further potential downside from bus impairments 
With losses for SMRT’s bus segment widening in 4Q13, we could see further asset write-downs if this trend continues in the coming quarters. Although there is some reprieve from lower fuel costs currently, SMRT will still require a fare increase to help cushion its restructuring pains. As for the proposed switch to the new rail financing framework, we feel that a resolution in FY14 is unlikely given the pace of discussions with the regulators. 

Lower dividend payouts from now
With the disappointing dividend payout ratio of 45.6% for FY13, we adjust our assumptions to accept the likelihood of reduced incentives for investors. After incorporating higher operating expenses and reducing our payout ratio to 50% (60% previously), our fair value falls to S$1.45. Maintain HOLD.

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