SMRT bus business hammered by higher costs

Revenue is increasing at a respectable 5% pace but faster-rising operating expenses are eating up potential profits.

This led to the SMRT's ancillary businesses to contribute about half of the opertaing profits for the past recorded quarter, a ration that could balloon as SMRT seeks to increase rental space and drive up income to shore up its cost-hobbled transport segments.

Here's more from PhillipCapital:

Excluding the one off impairment charge to its Bus business, profits for the year was not far off our estimates and probably in line with market expectations. However, CAPEX guidance of S$500mn in FY13E was significantly higher than our expectations and approximately 5 times average levels for the past 10yrs. With the high levels of cash outflow expected in the year, FCF is likely to turn negative in FY13E.

Ridership growth continues. With the full opening of CCL in Oct 2011, average MRT ridership grew 9.6% y-y for the quarter. CCL’s average daily ridership increased to 350k, from 300k over the past two quarters. We attribute the 4.1% growth in average Bus ridership in the quarter to better network connectivity, with the opening of CCL stage 4 & 5 in the North Western parts of the island.

Profit declined at core fare based business. With stronger ridership, quarterly revenue increased by 13% and 5% for the MRT and Bus business respectively. However, with higher operating expenses, profitability declined for both business segments. MRT operations was impacted by costs associated with the major disruptions in Dec 2011 of c.S$3mn. Bus operations reported another quarter of loss. Due to deteriorating operating outlook, SMRT impaired the S$21.7mn goodwill associated with its Bus business.

Ancillary revenue streams remained steady. SMRT’s Ancillary businesses contributed approximately half of the Group’s operating profits. In 4QFY12, rental revenue increased 14% y-y, with similar levels of commercial space to the previous quarter. For FY13E, SMRT expects to increase rental space by 1,920sqm that could drive incremental revenue of c.S$4mn, by our estimates.

CAPEX updates. SMRT guided for CAPEX of S$500mn in FY13E, which is approximately 5 times average levels for the past 10yrs. After accounting for cash payments associated with train CAPEX in FY12, we estimate that SMRT would report negative FCF of c.S$480mn in FY13E. Consequently, we expect SMRT’s future capital structure to incorporate higher levels of debt. To ease the strains on its balance sheet, we believe that SMRT could switch to the new rail financing framework for future train deliveries.