SMRT

Kim Eng on 5 May 2014

• Capex for FY3/15E to be maintained at FY3/14 levels of SGD650m, contrary to our expectations for SGD280m.
• Still no visibility on the specifics of the new business models for its fare-based business.
• Lower FY3/15E-17E earnings by 14-51% to reflect higher depreciation charges. TP falls to SGD0.50, still based on 14x FY3/15-17E P/E. Reiterate SELL.

What’s New
SMRT intends to maintain capex for FY3/15E at similar levels to FY3/14 (SGD650m), contrary to our and market expectations for a lower capex given that its asset renewal programme is past its peak. At the 4QFY3/14 results briefing today, management also guided that there is still no visibility on the specifics of the new business models for its fare-based business as details are still being discussed. However, it expects the new rail financing framework to be similar to that for the Downtown Line.

What’s Our View
We are negatively surprised by the capex guidance and have updated our forecast model to reflect this, leading to higher depreciation charges and a 14-51% cut to earnings over our forecast years. We expect SMRT to raise debt to the tune of SGD400m in the year ahead to fund its capex, which would drive net gearing up to 1.07x by end-FY3/15E (end-FY3/14: 0.60x). We lower our TP to SGD0.50 (from SGD0.65), still based on 14x FY3/15E-17E P/E. In the absence of a business model transition, we expect its rail operations to slip into the red in FY3/15E. Reiterate SELL.