SMRT's staff costs rocketed 23.4% to $112.7m

Is the $500 wage hike doing any good?

According to DMG Research, SMRT’s yield story is losing its luster. The stock is trading at a 26.6x FY15 (FYE March) P/E and offers a 1.7% FY15 yield vs ComfortDelGro (CD SP, BUY, SGD2.25)’s 14.3x FY14 P/E and 3.8% FY14 yield.

Even with an anticipated fare hike, its escalating staff cost may be detrimental to the company’s margins. Maintain SELL, with our new DCF-based TP at SGD1.11 (WACC: 7.6%, terminal growth rate: 1%).

Here's more from DMG Research:

Margins still under pressure despite possible fare revision. We expect the suspended fare hike for Singapore’s train and bus operations to resume in the near future, possibly towards year-end. Despite factoring in the increment, we still expect SMRT Corp (SMRT)’s margins to come under heavy pressure. In view of higher staff costs, maintenance costs and depreciation expenses, its operating margin is expected to dip by 3ppts to 6.8% in FY14, before recovering to 8.4% in FY15.

Staff costs the main culprit. SMRT revised its wages back in March, with some 4600 non-executives receiving a monthly SGD500 pay raise each. This, together with a 5% increase in manpower and yearly wage adjustments, resulted in staff costs jumping 23.4% y-o-y to SGD112.7m in 1QFY14. We believe that the percentage increase in staff cost will remain, if not worsen, moving into 2HFY14 as the group is expected to provide year-end bonuses for 2013.