Worst is not over for SMRT: DBS

Government regulation may add substantial burdens on operating its transport systems.

The Land Transport Authority will most likely impose onerous conditions to prevent another repeat of the disruptions, observes DBS.

Are you missing the full picture behind SMRT's disastrous quarterly results?

Here's more from DBS:

3Q drop as expected. Net profit dropped by -14% y-o-y to S$37m, while revenue grew by 10% to S$268.2m on higher ridership, taxis, rental and advertising revenues. The drop in profits arose from higher electricity and diesel costs (S$40.4m, +31%), repair & maintenance (S$20.9m, +15%) and other operating expenses (S$48.1m, +21%). EBIT fell to S$46.4m (-11% y-o-y) while margins dropped by 4.1ppts to 17.3% (3Q11: 21.4%). Largest contributor, train segment posted 14% y-o-y drop in EBIT to S$25.7m, but this was partially helped by stronger contribution from rental (S$15.6m, +9% y-o-y) and advertising (S$5.6m, +18% y-o-y) segments.

4Q to be lackluster with rising expenses. 9M12 net profit formed 77% of our full year estimates (9M11: 79% of FY11). We maintain our projected c.15% fall in FY12F net profit, and a lackluster growth of 1% in FY13F. Management has guided for its train profitability to be impacted by higher professional, legal and repair & maintenance costs arising from last Dec’s MRT train breakdowns. In addition, its bus operations remain in the red due to high diesel costs and impairment of goodwill could ensue if this persists (current intangibles for Bus: S$21.7m).

Cautious view maintained, TP $1.50. We remain cautious on the counter arising from regulatory risks post the release of the Committee of Inquiry’s findings, and recommendations. LTA, in response to a newspaper forum on 27 Jan, indicated that it “will thoroughly review the regulatory and penalty framework and its oversight over the operators’ maintenance regimes to strengthen it where necessary”. We believe it is likely to be more onerous on the public transport operators going forward. We continue to prefer ComfortDelGro (at c.12.2x FY12F PE) for its lower valuation, and more geographically diverse business contributions. Our TP of S$1.50 is based on average of PE (13x FY12F) and DCF (WACC: 7.1%, t=1%).