The 23% year-on-year plunge in PATMI underscores the challenges faced by SMRT Corp (SMRT), to maintain reliability of an aging rail network, requirements of an expanding network, and the Regulatory demands of higher service standards. Rail maintenance related expenses (MRE) this quarter came up to 49% of Rail revenue. This is consistent with what Management had been guiding since the 2QFY16 results briefing.
1QFY17 Rail segment (comprising Train and LRT) extended its losses from S$8.5mn in the preceding quarter of 4QFY16; and S$5.3mn loss from a year ago in 1QFY16. Fare revenue growth has not kept pace with the elevated levels of operating expenses, and we expect the Rail segment to continue being unprofitable for intermediate term, at least for the duration of the ongoing multi-year programmes to renew and upgrade the Rail network.
Rental segment, which has traditionally been the bulwark to SMRT’s profits reported lower year-on-year profit for the first time. Revenue/EBIT were 1.3%/2.4% lower y-o-y to S$32.4mn/S$20.6mn. Management attributed the weaker contribution to accounting straight-lining of rents.
Investment Actions: Accept the Scheme
Our view remains unchanged, in that SMRT will continue to experience depressed earnings for the intermediate future. We are forecasting 20% y-o-y lower PATMI for FY17e. The Scheme Price of S$1.68 implies a rich forward P/E multiple of 35.3x over our FY17e earnings estimate.
We recommend minority shareholders take into consideration their opportunity cost and Accept the Scheme of Arrangement offered by Belford Investments Pte. Ltd. (Belford), wholly-owned subsidiary of Temasek Holdings Pte. Ltd. (Temasek).