• 1QFY15 PATMI up 36.8% YoY
• Fare business’ operating losses narrowed
• Raise FV but maintain HOLD

1QFY15 earnings exceeded expectations

SMRT reported a decent set of 1QFY15 results which beat ours and the street’s expectations. This was achieved despite a S$1.6m fine by LTA over four train service disruptions. PATMI jumped 36.8% YoY to S$22.4m on the back of a 4.3% increase in revenue to S$297.1m. The former constituted 31.8% of our FY15 forecast and 30.2% of Bloomberg consensus. Both SMRT’s Fare business and Non-fare business recorded an improvement in operational performance. Operating losses narrowed from S$5.5m in 1QFY14 to S$1.1m in 1QFY15 for the former, boosted by higher ridership and average fares as well as productivity gains; while operating profits climbed 17.4% YoY to S$29.9m for its Nonfare segment.

Yet to reach a mutual agreement with LTA

Singapore’s Transport Minister Mr. Lui Tuck Yew recently commented that there was still a “wide gap between SMRT’s expectations and LTA’s position” with regards to the new rail financing model. As expected, management remained tight-lipped on this issue during the conference call, but highlighted that it hopes to reach a win-win situation with the authorities. According to LTA, SMRT also has ~S$2b of financial obligations from 2014 to 2019 under the existing financing framework. We believe this situation would change once LTA implements a new rail financing model to enhance the sustainability of the transport sector. The recent introduction of the “Government contracting model” for buses is proof that the government is committed to achieving this goal.

Maintain HOLD

We bump up our FY15 and FY16 PATMI projections by 18.8% and 8.8%, respectively. We also raise our terminal growth rate assumption from 1.5% to 2.0% to take into account the positive long-term prospects of SMRT. Correspondingly, our DDM-derived fair value estimate increases from S$1.40 to S$1.65. While we like SMRT’s solid 1QFY15 operational performance, its share price has already appreciated 34.9% YTD. Moreover, there is still uncertainty over the timeframe and details of LTA’s rail financing framework implementation. This may limit SMRT’s near-term share price upside potential, in our view. Hence, we maintain our HOLD rating on SMRT.

Source: OCBC Research - 31 Jul 2014