SMRT

OCBC on 17 May 2012

Following a directive issued by LTA, SMRT will begin replacing, with immediate effect, the power supplying third rail at locations where hairline cracks on some parts of the third rail joints are more visible. The cost for this replacements have not been accounted for by management’s estimates this year, and we expect to see a slight uptick in this year’s capital expenditure with the increase coming from an acceleration of costs from later years. Despite the latest development and ongoing COI hearings, SMRT’s share price has managed to hold steady and even outperformed against a backdrop of broad-market declines. At this juncture, we deem the possibility of further sharp sell-offs to be remote as SMRT services and its operational cash flows remain in demand and resilient. Maintain HOLD with a fair value estimate of S$1.71.

SMRT to start replacing third rail
Following a directive issued by the Land Transport Authority (LTA) yesterday, SMRT will begin replacing, with immediate effect, the power supplying third rail at locations where hairline cracks on some parts of the third rail joints are more visible. Although the presence of hairline cracks does not pose any immediate concerns, the move is more of a precautionary measure and the LTA has also reiterated the need for SMRT to closely monitor the condition of the third rail joints across its entire rail network.

Additional capex not accounted for
SMRT had previously disclosed a S$500m capital expenditure plan for FY13 with the excess from its usual annual budget (~S$100m-S$140m) related to a portion of the S$900m, seven-year plan to upgrade and renew aging MRT assets. According to SMRT’s work and time-line projections, the cost of the third rail replacement has not been included in this year’s estimates. While the final amount will only be known pending the outcome of its third rail checks, we expect to see a slight uptick in this year’s capital expenditure with the increase coming from an acceleration of costs from later years.

Share price has held steady since results
As for SMRT’s share price, it has held steady despite initial selling pressure following its weak FY12 results, and has managed to outperform the FTSE STI Index over the past two and a half weeks (-0.9% vs. -5.3%). While the COI continues its public hearings, we deem the possibility of further sharp sell-offs to be remote as SMRT services and its operational cash flows remain in demand and resilient.

Maintain HOLD
We reiterate our belief that SMRT will not have difficulty addressing its higher capital outlay requirements given its existing net cash position and available MTN programme, and leave our conservative 60% PATMI dividend payout ratio estimates unchanged. Maintain HOLD with a fair value estimate of S$1.71.