SMRT reported another set of poor results in 1QFY14 with profits plunging 55% YoY (S$16m). Heavy staff and repair expenses continued to take their toll. SMRT had reported its first-ever loss in 4QFY13.
Macquarie Equities Research analyst: Somesh Kumar Agarwal
SMRT's 1Q profit plunged 55% YoY to S$16 m. NextInsight file photo Bleeding will continue; Investors have to accept the new normal: SMRT has become half the profitable firm that it used to be. From generating profit in the range of S$160m annually until FY11, the business can now generate only half the profits in our view.
Train business is hardly making money due to additional staff and repair expenses: MRT business EBIT margin fell to only 1.8% in the quarter. Last quarter it was 0.5%.
Earnings and target price revision
SMRT's 1Q profit plunged 55% YoY to S$16 m. NextInsight file photo Bleeding will continue; Investors have to accept the new normal: SMRT has become half the profitable firm that it used to be. From generating profit in the range of S$160m annually until FY11, the business can now generate only half the profits in our view. Train business is hardly making money due to additional staff and repair expenses: MRT business EBIT margin fell to only 1.8% in the quarter. Last quarter it was 0.5%.
Bus business has been bleeding for long; No solution seems to be in sight: Bus business has now reported an operating loss for 11 consecutive quarters. With no fare revisions possible, this business is becoming more and more unsustainable.
Rental and advertising businesses save the day: The non-core businesses have generated all the profit that SMRT is making now.
The new reality is that SMRT is only an S$90-110m profit business: And even all of this profit would be delivered by its non-core business of “rental and advertisement”. Its core businesses – Rail, Bus and Taxi – will hardly make any profit in our view.
Earnings and target price revision
Reducing earnings by 21% and 15% each for FY14 and FY15. Reducing target price to S$0.99 cents from S$1.13 earlier.
SMRT's stock has been on a decline in the past year and could have further downside. Chart: Bloomberg
Nomura Equity Research analyst: Wen Jie Chan
Action and recommendation
At 24x FY14 P/E, the stock deserves a sharp de-rating: With no growth in sight, ROEs plunging to ~10% levels from ~22% in the past, the stock deserves to trade at a much lower multiple in our view. Even on P/B, the stock is expensive at 2.5x FY14E. The company is not even a high dividend payer anymore with hardly any profits left to distribute. We do not see more than 2-3% dividend yield on the stock going forward.
SMRT's stock has been on a decline in the past year and could have further downside. Chart: BloombergNomura Equity Research analyst: Wen Jie Chan
Catalyst: Earnings surprise on the downside
We think the stock could continue to de-rate if earnings continue to surprise on the downside, which are likely to come mainly from a further deterioration of the core business. We also don’t rule out further impairment losses on SMRT’s investment in Shenzhen Zona or its Singapore bus business.
Another de-rating catalyst would be a further reduction in dividends to potentially zero, in our view. Our FY14F earnings/dividend forecasts are 45%/70% below consensus.
Valuation/Risks
The stock currently trades at 38.5/39.1x FY14F/FY15F P/E (EPS: 3.72c/3.65c), which is beyond the high end of its trading range. We estimate SMRT will offer a FY14F dividend yield of 0.7% on our revised dividend estimates.
Key upside risks include higher average fares and passenger growth; higher-than-expected subsidies/grants; better cost control; regulatory changes; and better performance at its associate and engineering division.
Valuation:
We continue to value the stock on a DCF basis, on which we derive our new TP of SGD1.16, representing a 14% cut from our previous TP. We assume a cost of equity of 6.2% and a terminal growth rate of 2%, and cash flows are discounted back to endFY13F. We cut our TP on the back of our lower earnings forecasts.