SMRT Corporation

UOBKayhian on 5 May 2015

FY15F PE (x): 22.8
FY16F PE (x): 18.3

Despite the good progress made... SMRT’s FY15 net profit of S$91.0m (+47% yoy) was in line with estimates, representing 94% and 96% of our and consensus forecast respectively. Repairs and maintenance costs were 4.7% higher than our expectations, mainly due to the increasing number of trains undergoing scheduled overhaul, an intensified maintenance regime and higher cleaning costs in the group’s train operations. Total revenue outpaced operating expenses as operating and net margins improved by 2.5ppt and 2.0ppt yoy respectively. The fare segment (bus and rail) registered a 4.7% yoy rise in revenue, boosted by higher ridership (+5.1% yoy for bus and +2.6% yoy for rail) and higher fares. Rail business likely to face weak growth in FY16. With SMRT recording its first loss for its train operations and extending losses for its LRT business in 4QFY15, we expect a tough operating environment for the group’s rail business in the near term. The rail segment will likely be plagued by a need to increase operating expenses as repairs and maintenance works intensify due to the ageing rail system. In addition, we expect revenue from the rail operations to grow slower (+3.5% yoy) than the group’s bus (+11.3% yoy), taxi (+7.5% yoy), and rental (+13.4% yoy) operations in FY16. Maintain HOLD with a DCF-based target price of $1.68, implying 24.4x FY16F PE and dividend yield of 2.4% (WACC: 7.9%, terminal growth: 3.0%). We expect SMRT to rerate should there be any further details offering clarity on the railway restructuring. However, the restructuring is unlikely to take place in FY16. We continue to prefer ComfortDelGro for its overseas growth potential, diversification and cheaper valuations.