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

400mrtSMRT'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. 

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.
 


mrt.chart8.13SMRT'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 

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.