Here's the only silver lining in SMRT's ugly results

New rail-financing framework is on track.

According to CIMB, the ailing health of SMRT's business model is well documented and is affirmed by the 1QFY3/14 results. The only hope of restoration lies in the new railway financing framework, which, for SMRT’s sake, better come fast.

Here's more:

1QFY3/14 net profit was 4% short of our below-consensus estimate. We have adjusted our FY14-15 forecasts by -3.2-0.5% to account for various
operating expenses and a higher effective tax rate.

We maintain our Underperform rating and lower our target price (DCF, WACC 6.1%) to S$1.24. De-rating catalysts are earnings and dividenddisappointments.

Let’s face it, results are ugly. Higher operating costs dragged the 1QFY3/14 profit lower, which was not helped by a muted growth in revenue. Revenue rose 3.5% yoy thanks to the strong ridership in Singapore. However, the net profit tumbled by 55% as costs escalated in several business segments.

Although we had projected higher costs, the magnitude of cost increase came as a surprise.

No near-term solution yet. We increase both our rental and taxi other overheads forecast. We have made a provision for higher effective tax rate due to the non-deductibles. 

We are also unsure of whether the rising capex (S$500m) can be fully funded internally given the higher run rate of operations. We also fear there is a risk of further dividends cut if investing cashflow is compromised.

Finding the silver bullet. While we believe the revenue growth will still lag the cost inflation, we do not think that such unsustainable model will crumble, especially when the Ministry for Transport has acknowledged the financial pressures faced by the public transport operators. The kicking in of the new rail-financing framework that will allow for more predictable cashflows and a more sustainable financing model will change the landscape.