Kim Eng Research 20 Dec
Rail defects, faulty trains. Three train disruptions in four days haveled the Land Transport Authority (LTA) to order SMRT Corp to observecertain restrictions, effective yesterday. These included reduced trainfrequency during morning peak periods and slower speeds alongcertain stretches of the rail network. The measures followed aninspection of the affected tracks and trains by SMRT and LTA officers,which uncovered 61 rail defects and 13 faulty trains.
Government takes a serious view. Prime Minister Lee Hsien Loonghas ordered a public inquiry. We understand that a formal Committee ofInquiry will be convened soon, similar to that which was formed afterthe collapse of Nicoll Highway on 20 April 2004. The committee willcomprise some members of the independent team of technical expertsand will be assembled by Transport Minister Lui Tuck Yew. It isexpected to make its findings public in the next couple of months.
Earnings to take a hit. We lower our FY Mar12-14 EPS estimates by2-3% as repair and maintenance costs (about 9% of 1HFY Mar12 farerevenue) will likely increase. Other one-off expenses that will beincurred include refunds and provision of free shuttle bus services tohelp affected passengers, as well as possible punitive fines by LTA ofup to $1m under the Rapid Transit Systems Act.
No shoo-in with LTA? The long-term complications associated withrepeated service disruptions cannot be underestimated, in our view.Plans are afoot to build two additional lines, the Thomson Line (TSL)and the Eastern Region Line (ERL), and the government has given thego-ahead for the TSL to be built by 2018 and the ERL by 2020. Eventhough the bids to operate the new lines are not yet open, we believeLTA will take the recent train incidents into consideration, particularlyservice reliability, when awarding the tenders in the future.
Possible dividend cut. We forecast a 0.5 cents cut in dividend payoutto $0.08 along with the decline in earnings. We downgrade the stock toSell with the reduced target price of $1.50, based on 15x blendedFY Mar12F/13F PER (the same multiple we apply to ComfortDelgro).
Rail defects, faulty trains. Three train disruptions in four days haveled the Land Transport Authority (LTA) to order SMRT Corp to observecertain restrictions, effective yesterday. These included reduced trainfrequency during morning peak periods and slower speeds alongcertain stretches of the rail network. The measures followed aninspection of the affected tracks and trains by SMRT and LTA officers,which uncovered 61 rail defects and 13 faulty trains.
Government takes a serious view. Prime Minister Lee Hsien Loonghas ordered a public inquiry. We understand that a formal Committee ofInquiry will be convened soon, similar to that which was formed afterthe collapse of Nicoll Highway on 20 April 2004. The committee willcomprise some members of the independent team of technical expertsand will be assembled by Transport Minister Lui Tuck Yew. It isexpected to make its findings public in the next couple of months.
Earnings to take a hit. We lower our FY Mar12-14 EPS estimates by2-3% as repair and maintenance costs (about 9% of 1HFY Mar12 farerevenue) will likely increase. Other one-off expenses that will beincurred include refunds and provision of free shuttle bus services tohelp affected passengers, as well as possible punitive fines by LTA ofup to $1m under the Rapid Transit Systems Act.
No shoo-in with LTA? The long-term complications associated withrepeated service disruptions cannot be underestimated, in our view.Plans are afoot to build two additional lines, the Thomson Line (TSL)and the Eastern Region Line (ERL), and the government has given thego-ahead for the TSL to be built by 2018 and the ERL by 2020. Eventhough the bids to operate the new lines are not yet open, we believeLTA will take the recent train incidents into consideration, particularlyservice reliability, when awarding the tenders in the future.
Possible dividend cut. We forecast a 0.5 cents cut in dividend payoutto $0.08 along with the decline in earnings. We downgrade the stock toSell with the reduced target price of $1.50, based on 15x blendedFY Mar12F/13F PER (the same multiple we apply to ComfortDelgro).
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