Target price: SGD1.38
FY2012 results in line; dividend cut. SMRT reported core FY2012 profit of SGD141.5m, in line with expectations and representing a 12% dip YoY. Core earnings exclude one-off impairment of goodwill related to their bus business1 recognised in 4Q12. Final dividend of S 5.7 cts was declared, bringing total DPS for FY12 to S 7.45 cts (80% of core EPS), a drop of 12% vs FY11. We maintain our SELL call on the stock, with the uncertain outlook on several repair, maintenance and capexsharing issues weighing in with increasing staff and energy cost pressures.
Transport on decline, rental and ads pick-up. SMRT's FY12 train and bus operating profits reported significant declines YoY at
(-20%,- SGD22.5m) and (-570%,-SGD9.9m) respectively. Profits were hit by higher energy, staff and depreciation costs. Rental and advertising profit picked up the slack, increasing 11% to contribute FY12 operating profit of SGD82.1m, which is now slightly higher than the operating profit of the entire train, bus and taxi segments put together (at SGD81.8m).
The SGD900m question and other quandaries. Management was unable to shed further light on cost-sharing arrangements with the LTA on the SGD900m upgrading plan for the rail network. They elaborated that most of the capex will be back-loaded within the 8-year scheme, with the bulk coming from Line Re-sleepering and Re-signalling upgrades. Further capex could also result from the current Committee of Inquiry hearings and could worsen the company’s cashflow position.
Few positives on the horizon, maintain SELL. We maintain our SELL call on SMRT, pegged to 15x FY13 PER on the challenging operating environment going forward. While dividend yield of 4.5% could continue to support the stock on the downside, future payouts appear less certain in quantum and investors used to its historically steady, increasing payouts should be mindful of this fact
Dividend decline
The good old days. Referring to Figure 2, since FY2002, shareholders have enjoyed a steady, increasing trend of dividend payouts up until FY2011. This impeccable dividend track record was lauded as one of SMRT’s key selling points for investors looking for a stable, cashgenerating investment. FY2012’s declaration of a 12% cut in dividend payout went against this trend, although largely caused by a similar 12% dip in core earnings.
Payout Ratio guidance vs cashflow concerns. Management has indicated that they will endeavour to maintain an 80% payout ratio based on core earnings where possible to provide yields of approximately 4% for shareholders. However, constraints on cashflow such as those listed below will need to be considered:
o SGD300m yet to be paid for 17 trains. These trains have not been paid for and are recorded on the company’s books as ‘Current Liabilities’.
o SGD500m additional capex guided for FY13. This comprises mainly acquisitions of buses and taxis, commercial space redevelopments and repair and maintenance expenditure that are capital in nature.
o Long term: SGD900m cost-sharing with LTA. Although part of the SGD900m scheme has already been considered within the SGD500m capex plan for FY13, this 8-year scheme could cause further strain on cashflow should it be decided that SMRT bear a significant part. Assuming a scenario of a 50-50 split with LTA, SMRT would have to incur an additional SGD50-SGD60m capex p.a.
o SGD850m remaining from MTN facility. SMRT still has SGD850m available from their SGD1 bil Medium-Term- Notes facility. Although this alleviates financing concerns in the near term, interest costs will further erode profitability that is already under strain from escalating operating costs.
Fair value S$1.71
NOT DERAILED YET
• FY12 results weaker than expected
• Higher capex and expenses ahead
• But strong sell-offs unlikely
Challenging and uncertain outlook ahead
FY13 will be a challenging year ahead for SMRT, especially in the following areas: additional capex outlay and related repair and maintenance costs as well as elevated energy and staff cost levels.
Challenge #1: Additional capex outlay
Over the past three financial years, SMRT had typically spent between S$100m and S$140m in annual capital expenditure. This amount is set to increase to S$500m in FY13 with the excess expenditure related to a portion of the recently announced S$900m plan to upgrade and renew aging MRT assets over a period of seven years. Although the main issue of funding responsibility remains unclear – SMRT is still in talks with the Land Transport Authority (LTA) on how the cost will be split – management deems some of the upgrades and renewals to be crucial and will commence work as soon as possible. The bulk of the estimated S$900m in capital and operating expenditure will be spent to re-sleeper and re-signal the North-South and East-West lines (NSEW).
In addition to the additional capex outlay, SMRT had also previously announced the procurement of 51 additional trains for the NSEW and CCL (35 and 16 new trains respectively) with expected delivery between 2014 and 2016. Based on previous correspondence, the trains would cost approximately S$800m. Similarly, the issue of cost burden remains unresolved with SMRT still in negotiations with LTA on how the expenditure will be split. Regardless of the proportion, SMRT’s share of capital expenditure is poised to increase, further reducing SMRT’s free cash flows.
Challenge #2: Energy costs to remain elevated
Although electricity costs are currently hedged through Sep 2012, an increase in train runs to cope with heavier public demand will potentially offset any cost savings should electricity tariffs continue to climb. Furthermore, full year inclusion of operations from the CCL stages 4 and 5 will be felt in FY13 and will cause energy costs to increase as well. In terms of diesel costs, SMRT is unhedged at the moment and remains vulnerable to sustained increases in diesel prices. Coupled with an expected increase in the salaries of their bus drivers, operating expenses for these segments will likely persist on a progressive trend.
Downgrade to HOLD, but no need for panic
While there will be initial selling pressure on the counter following its weak results and anticipated headwinds, we deem the possibility of a sharp double-digit percentage drop to be remote. SMRT, with its majority share of the rail transportation in Singapore, remains an integral part of travel for the public community, and coupled with the lack of affordable alternatives (for example: private car ownership due to record COE prices), this limits any ridership drop-offs. As for its higher capital outlay and projected increase in debt levels, it is important to note SMRT’s existing net cash position. Even with increased borrowings, its net gearing will only increase to about 36%
As we roll our valuation forward, we leave our initial revenue projections for FY13 unchanged as increasing ridership levels will continue to drive top-line growth. However, we raised our operating expenses estimates by S$21.3m, driven mainly by higher repairs/maintenance costs as well as greater energy consumption, electricity tariffs and diesel costs, which reduced our bottom-line forecasts by 16.7% to S$132m. Applying a conservative 60% PATMI payout ratio, we obtain a valuation of S$1.71 from our dividend discount model (previous valuation of S$2.04). As such, we downgrade our rating to HOLD on valuation grounds.
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