SMRT’s dividends risky in 2012: DBS

DBS projects SMRT’s net profit to plunge to S$137m in FY12, and its growth to register a paltry 1% in FY13.

DBS advises investors to disembark and move on given the heightened uncertainties, particularly on regulatory and strategic directions going forward.

Here’s more from DBS:

We believe potentially lower DPS could be additional derating catalyst for the counter on the back of challenges facing the Group. We have lowered our DPS projection for FY13F in light of a muted growth as well as potential pressure to invest more in repair and maintenance, and capex. We downgrade our recommendation on SMRT to Fully Valued with a lower TP of S$1.50. We have cut FY12/13F earnings by 11%/12%.

We advise investors to disembark and move on given the heightened uncertainties, particularly on regulatory and strategic directions going forward.

DPS of 8.5 Scts has likely peaked, more downside than upside
Lowering our DPS in FY13F. We believe prospective dividend payout could have downside risk on the back of lower profits, higher repair and maintenance costs, and possibly regulatory policy changes. As such, we have lowered our FY13F DPS to 7.25 Scts (interim and final payout) equating to a payout ratio of c.77%, similar to FY07 to FY10. This would bring the dividend yield down to 4%, from the current yield estimated at 4.9%. This could have a further negative impact on share price, in our view.

60% dividend policy. SMRT has a dividend payout policy of at least 60% of net profit. In fact, in the past few years, it has paid over 70%, hence providing a reasonable yield.
ComfortDelGro, on the other hand, has paid only 50%of earnings as dividends.

Maintaining DPS in FY12F could bring payout ratio above 90%. We are expecting FY12F earnings to decline c.15% on the back of higher operating expenses. Assuming DPS of 8.5 Scts in FY12F, as per FY11, this could bring the dividend payout ratio to above 90% of net profit, a level not seen since listing. In light of uncertainties going forward, we would not be surprised if a more conservative stance on dividends is taken, resulting in a drop in DPS in subsequent years.

Unlikely to have further upside even if no cuts in place. We believe the market has seen the maximum DPS SMRT can pay over the next 2 years (ie 8.75 Scts per share). This is premised on our projections that net profit will fall to S$137m in FY12F, and register a miniscule 1% projected growth in FY13F. As such, we believe there is more downside than upside risks to the dividend payout going forward.

Ridership updates
Ridership growth still up, but not as robust as before. We see a trend of slowing growth in rail ridership. We acknowledge that there is a captive market for public transport in Singapore, especially with the government’s drive to have the rail network as the backbone of public transportation.

However, rail ridership growth seems to be tapering at high single digit growth rates, unlike double digits in the past couple of years.

Many reasons not to hold on. We project earnings to register -15%/ 1% growth in FY12F/ 13F after trimming forecasts by 11%/12% on higher expenses and lower ridership growth. Higher regulatory risks going forward, as well as the numerous management departures over the last 14 months add to reasons for not holding this counter.

Downgrade to Fully Valued, cut earnings and TP. We lowered our PE/DCF-based TP to S$1.50 given lower earnings, and a lower target PE valuation peg of 13x (-0.5 std dev from average) given sub-par earnings growth. We are cautious on the counter and downgrade SMRT to Fully Valued.