SMRT

OCBC on 2 May 2012

SMRT reported a weak set of FY12 results although revenue increased 9.1% YoY to S$1.057b. PATMI fell 25.6% YoY to S$119.9m following spikes in its operating expenses (energy, staff and repair/maintenance costs) and an impairment of goodwill on its Bus operations (S$21.7m). Management declared a final dividend of 5.7 S cents per share to bring the total dividend payout to 7.45 S cents. Going forward, operational headwinds are expected with higher capital outlay to upgrade and renew MRT assets and elevated levels of energy and staff costs, while dividend payouts will see reductions. However, with its stable operating cash flows and funding avenues, SMRT is well-able to address these issues. Nonetheless, we still tweaked our FY13 projections to incorporate higher operating expenses and applied a conservative 60% PATMI dividend payout ratio, which returned a valuation of S$1.71 under our dividend discount model (previous FV: S$2.04). As such, we downgrade our rating to HOLD on valuation grounds.

Disappointing set of results
SMRT reported a weak set of FY12 results. Although its revenue increased 9.1% YoY to S$1.057b on the back of higher ridership, it recorded a sharp 25.6% YoY decline in profit after tax to S$119.9m following spikes in its energy costs, higher staff related expenses, and an ascension in repairs and maintenance cost. SMRT’s bottom-line was further exacerbated by an impairment of goodwill on its Bus operations (S$21.7m). Despite the disappointing set of results, SMRT kept its dividend commitment and declared a final dividend of 5.7 S cents per share to bring the total dividend payout to 7.45 S cents, which is almost 95% of its FY12 basic EPS.

Additional capex and higher operating expenses ahead
FY13 will be a challenging year ahead for SMRT, and we see key risks in the following areas: additional capex outlay and related repair and maintenance costs (capex in FY13 is estimated to increase to S$500m with the excess expenditure related to a portion of the recently announced S$900m upgrading and renewal plan) as well as elevated energy and staff cost levels (full year inclusion of operations from the CCL stages 4 and 5 etc.)

Downgrade to HOLD; fair value lowered from S$2.04 to S$1.71
While there will be initial selling pressure on the counter following its weak results and anticipated headwinds, we deem the possibility of a sharp double-digit percentage drop to be remote. Train travel remains an integral part of travel for the public community, especially with the lack of affordable alternatives. SMRT should also not have difficulty addressing its higher capital outlay requirements given its existing net cash position. We tweaked our FY13 projections to incorporate higher operating expenses and applied a conservative 60% PATMI dividend payout ratio, which returned a valuation of S$1.71 under our dividend discount model (previous FV: S$2.04). As such, we downgrade our rating to HOLD on valuation grounds.