What is the news?

SMRT reported a sharp fall in net profit to S$25.5mn (- 31%y-y) in the quarter. While energy expenses remained stable, staff cost rose to a record high of S$98.5mn (+18.2%y-y, +5.6%q-q). Management guided that the group’s profitability in the next 15 months will deteriorate due to higher operating costs. Specifically, staff costs, depreciation expenses and repair & maintenance costs are likely to increase further.

How do we view this?

SMRT’s results for this quarter surprised on the downside. Operating losses at the bus segment of S$7mn continued to be a drag on the group’s profits. Higher staffing levels for maintenance work also led to a significant fall in profits for the rail business. The only positive development is the lower than expected share of CAPEX to be borne by SMRT for the upgrading of rail assets.

Investment Actions?

We believe that SMRT would suffer from structurally lower profitability at its core fare based business. While healthy contribution from the ancillary businesses would provide some buffer, we expect unexciting earnings in the near term with the mounting cost pressure at the core business. Our target price is revised up to S$1.41 (previous: S$1.35) as the lower than expected rail CAPEX led to higher FCF projections. With the stock trading at a hefty 21X FY14E P/E, we see no reason to own this stock. Maintain Sell.

Source: PhillipCapital Research - 30 Jan 2013