• Series of train disruptions
• Remains upbeat on same growth catalysts
• Lower FV; reiterate BUY

A series of unfortunate disruptions

SMRT’s trains experienced five disruptions over the past two weeks across the North-South Line (NSL), East West Line (EWL), Circle Line (CCL), and Bukit Panjang LRT Line. Last year, SMRT were fined S$1.6m for two safety breaches and two train disruptions. Of the S$1.6m, the heavier fines came from the two safety breaches amounting to a total of S$1.3m. On these recent incidents, the longest delay was more than four hours on NSL on 23-Feb due to damaged train components. With these disruptions deemed unacceptable by LTA, we updated in our forecasts to provide for fines in FY16 with an amount slightly more than twice of what was paid in FY15.

Higher expenses expected but growth catalysts still present

SMRT announced last Friday its plans to improve rail reliability. There were two key points that required us to update our forecasts from FY16 onwards: 1) SMRT is expected to expand its workforce of engineers and technicians by another 39% and 24% respectively, by 2018, and 2)SMRT to provide more training to ground staff, setting up maintenance operations centre to support and coordinate response by maintenance teams during rail incidents as well as investing to equip maintenance teams with computer tablets to support maintenance needs. However, we believe its growth catalysts are still valid: 1) energy expenses to see further savings as electricity costs is expected to continue to decrease while FY16 diesel needs are largely exposed, 2) full-year rental income contribution from Kallang Wave Mall in FY16, 3) taxi rental income growth through fleet renewal, 4) core bus operations to turn profitable with forecasted margins of ~9.0%, from 2QFY17 after transit to new bus model, 5) potential LTA’s purchase of SMRT bus assets with lump sum cash payment resulting to possible special dividend and/or acquisitions for growth, 6) longer-term catalyst of transit to new rail financing framework, leading to potential purchase of train assets by LTA, though no timeline is provided by LTA.

Lower FV; reiterate BUY

Consequently, we cut FY16 PATMI forecast by 10.5%, as we incorporate higher expenses and potential fines. We reiterate BUY on SMRT on positive growth outlook although our DDM-derived FV decreases from S$1.90 to S$1.85.

Source: OCBC Research - 9 Mar 2015