SMRT

SMRT: 2QFY14 results were below street expectations; Net profit of $14.4m collapsed by 56.8% y/y although revenue improve a slight 5.3% to $296.3m, as profitability in the group’s fare-based business continues to suffer from the lack of fare adjustments in an escalating cost environment. Despite a healthy ridership growth in train (+3.7%) and bus (+4.0%), labour cost grew 27% after a headcount expansion and wage revision exercise that occurred after the dispute that occurred one year ago, while repairs and maintenance surged 14.2% due to the intensified maintenance regime on the back of ridership growth. Its non-fare segment pulled the group back to black with rental profits growing at 8% on higher rental uplift and an increase in lettable space after a partial launch of Woodlands Xchange. The growth in rental is likely to continue over the next two years, supported by the commencement of operations in the retail space at Sports Hub early next year. SMRT lowered its interim dividend to 1¢ (from 1.5¢). On the back of a weakened balance sheet, Maybank-KE do not expect final dividend to be increased and expect full year payout of 2¢, translating to a yield of merely 1.6%. Deutsche, one of the few with a bullish view on the stock, sees this as a buying opportunity, as the ongoing business reforms should drive significant earnings growth for SMRT from 2015 onwards. However, investors should note that the house also see another round of earnings cuts after the results. On a valuation basis, the stock trades above its 10- year averages with a c.17x FY15 P/E Latest broker ratings Latest brokers ratings as follows: Maybank-KE maintains Sell with $0.80 TP (from $1.00) Credit Suisse maintains Outperform with $2.50 TP (from $2.50)