SMRT

SMRT: (S$1.42) 1QFY16 profit stall; please mind the earnings gap

SMRT’s 1QFY16 net profit fell short of expectation as net profit reversed 10% y/y to $20.1m, representing 18.9% of full year consensus estimate.

Revenue of $320.3m (+7.8%) was driven by all segments, with rail contributing $170.2m (+6.1%), bus $61.3m (+5.7%), taxis $37.8m (+9.9%) and rentals $32.9m (+27.3%).

The top line growth was however overshadowed by a lower operating profit of $27.7m (-5.6%), dragged by fare business (rail/bus) as rail operations incurred losses of $5.7m as compared to $4.3m profit in 1Q15. This was partially mitigated by bus operations, which swung to a $1.2m profit from a $5.6m loss.

Operating profit for non-fare businesses improved 4.8% to $32.1m, mainly driven by $5.5m (+32.2%) profit from taxis, due to a larger and newer fleet and higher rentals of $21.1m (+5.3%) from the redevelopment of Ang Mo Kio Xchange as well as Kallang Wave mall.

EBIT margin compressed to 8.6% (-1.3ppt) as expenses soared 10.1%, with the most damage coming from depreciation ($53.5m, +13%), repair and maintenance ($33.8m, +19.6%), Public Transport Fund contribution and Kallang Wave mall ($60.5m, +24.5%).

Looking ahead, SMRT is expected to face growing operating expenses as it upgrades its ageing rail system and expand its network as talks with authorities about a new rail financing framework is still ongoing, with no date given on its likely implementation. Meanwhile, it will continue to participate in the tenders under the government's new bus contracting model.

Investors are also wary over the potential fine that could be imposed on SMRT for the 7 July breakdown of North-South and East-West MRT lines. Although past fines in 2011-2014 were a slap on the wrist, LTA has raised the penalty to a maximum of $50m last year, which could pose a massive earnings risk given the scale of the latest incident.

SMRT is currently trading at 20.6x FY3/16 consensus P/E and 2.4x P/B.

Latest broker ratings:
Deutsche maintains Buy with TP of $2.32
CIMB maintains Reduce, cuts TP to $1.42 from $1.53
DBS downgrades to Fully Valued, cuts TP to $1.27 from $1.59