● Staff and R&M costs take a bigger bite
● Weakest quarter (4Q13) to come
● But negativity already priced in
3Q13 results disappoint
SMRT’s 3Q13 results disappointed as higher operating expenses hit harder than we had anticipated. Although revenue growth came within our expectations (+5.0% YoY to S$281.7m) on higher ridership figures, a spike in staff and related costs (+18.2% YoY; +5.6% QoQ to S$98.5m) and repair and maintenance expenses (+29.1%; +3.3% QoQ to S$26.9m) eroded operating profit margin by 5.9 ppt from a year ago (3 ppt from 2Q13) to 11.4%. Consequently, net profit fell 31.2% YoY (-23.6% QoQ) to S$25.5m.
4Q13: the weakest quarter for FY13
With SMRT still seeking to add at least 350 more staff by end FY13 – and repairs and maintenance costs will continue to grow as emphasis on service standards and reliability remains paramount – we are likely to see operating expenses increase further to end the year with further compression on operating and net profit margins for 4Q13.
Rhetoric unchanged
Management continues to caution over weaker profitability for FY13, and we agree wholeheartedly with this assessment. SMRT will also likely experience its worse
FY since FY06. While there is some respite in the form of electricity and diesel hedges, there is still the overhang of possible senior management changes – and their impact on operational cohesion – as well as upcoming changes to their wage structure.
Forecasts lowered but maintain HOLD
We lowered our projections for 4Q13 further on account of the higher operating expenses but our DDM (dividend discount model) derived valuation of S$1.71 remains unchanged. Ultimately, for all its bad press and mismanagement, SMRT still provides an essential service and its revenue growth will stay stable. Coupled with its need to reward shareholder loyalty – barring any drastic changes by its new CEO – we believe our target payout of 60% of PATMI remains achievable. Maintain HOLD.
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