SMRT fares to increase by 3% from 6 April

Highlights
Yet to turnaround. 3QFY14 net profit fell 44% y-o-y to S$14.2m, and fell marginally q-o-q. Revenue inched up to S$293m, led by higher ridership and rental income but was outstripped by stillelevated costs: staff (+21%), depreciation (+10%), and other operating expenses (+7%). EBIT margin fell by 4.5ppt y-o-y to 6.9%, but was similar to 2QFY14. 9MFY14 profit is only 62% of our full year estimate.

Rental and advertising income mitigated losses in fare revenue segments. The Group’s fare revenue segments (trains, bus) remained lackluster with S$9m EBIT loss, larger than the S$6.5m loss in the previous quarter and a reversal from S$7.4m profit in the year ago quarter. Group EBIT continued to be supported by non-fare revenue segments such as rental and advertising which combined EBIT grew 14% y-o-y to S$25.4m.

Our View
Raised fares but costs remain a challenge. The PTC recently approved a
3% increase in fares with effect from 6 April 2014, with the remaining 3.4% rolled over to next year. While this is a positive development for SMRT, we also expect high operating expenses given the requirement to maintain higher service standards and minimise disruptions. This could negate the positive impact of higher fares.

Downside risk to earnings: higher maintenance costs. After the recent disruptions to train service and ill-timed announcement of the fare increase, SMRT will have to focus more on service reliability and preventive maintenance. This could pressure earnings further.

Recommendation
Maintain Fully Valued, TP: S$1.08. SMRT’s share price had performed poorly in 2013, falling 33%, but we are not ready to change our cautious view, particularly with valuations projected at 25x/23x on FY14F/15F earnings. We expect continued cost pressures as it will have to strive to minimise service disruptions.