Despite a 15% decline year to date, we believe that the stock of SMRT had not fully reflected the weak profits in the coming year. With structurally higher leverage and poor dividend yield support, we argue that SMRT should de-rate structurally from its historical levels. The stock of SMRT currently trades at 25X FY14E P/E and yields merely 1.7%. While we expect rental income at the Sports Hub to lead earnings recovery from FY15E, our forecast remains significantly below that achieved in prior years. Maintain Sell with TP of SGD1.00.
We have 3 key concerns on the stock:
1) Structurally higher leverage. We forecast structurally higher financial leverage as SMRT raises more debt to finance its CAPEX. We expect SMRT to take on another SGD150mn of debt in the year and end FY14E with a net gearing of 0.8X. As a result of this structural shift in capital structure, the stock’s financial risk profile will be higher in the future.
2) Fare revenue and OPEX mismatch. Profits at SMRT’s core fare based business had been on a steady decline as operating expenditure (OPEX) outpaced revenue growth by 5-7% over the past 3 years. As a result of this persistent mismatch between fare revenue and OPEX, we expect earnings for the fare based business to remain poor for the next 3 years.
3) Lack of CAPEX visibility. After the high profile rail disruption in Dec 2011, SMRT’s CAPEX more than doubled its historical levels (FY01-11: c.SGD100mn/yr) over the subsequent 2 years. Recent guidance from management suggests that CAPEX would continue to stay elevated and hit an all time high of SGD500mn this year. We also believe that there is a lack of CAPEX visibility for investors beyond FY14E.
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