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2Q15 results ahead of expectations. 2Q15 earnings were ahead of expectations at S$25.3m (+75% y-o-y, +13% q-o-q) driven by revenue growth of 6% (S$314m), lower fuel costs, higher other operating income and better operating efficiencies. Revenue growth was largely a result of higher ridership, average taxi rental rates, and contributions from property (rental rates and rental from Kallang Wave). EBIT margin improved 3.9ppts from cost efficiencies in the bus segment and lower electricity cost in Train operations. An interim DPS of 1.5 Scts was declared (1H14: 1 Sct) in line with a higher profit.
DBS Vickers: "We raise FY15F-FY17F earnings by 16%-25% after accounting for: (1) better 2Q15 results; (2) lower diesel and electricity expenses on lower oil prices...."Positive impact from lower oil prices. Oil prices have recently corrected by approximately 20% from c.>US$100/bbl to US$80 on growing shale oil supply and slowing global demand growth. This could continue to provide a tailwind for earnings.
Based on our forecast, a 1% decline in oil price has a 1.2% positive impact on SMRT's net profit, assuming all other factors are constant. Our Oil & Gas (O&G) team sees the likelihood of oil prices remaining capped for the next 12-24 months, and expects prices at US$95/bbl and US$92/bbl for 2015 and 2016, respectively.
Raise FY15-17F earnings by 16%-25%. We raise FY15F-FY17F earnings by 16%-25% after accounting for: (1) better 2Q15 results; (2) lower diesel and electricity expenses on lower oil prices; and (3) higher other operating income due to higher BSEP (Bus Service Enhancement Programme) grants. We have assumed 10%-16% lower oil prices at US$95/bbl (FY16F) and US$92/bbl (FY17F), offset marginally by higher USD/SGD rates.
Upgrade to BUY, TP S$1.86. We find valuations more palatable after our earnings revision with FY16F PE at 20x vis-à-vis FY14-FY17F earnings CAGR of 27%. In view of the attractive PEG ratio of 0.8x, we upgrade our recommendation to BUY with higher TP of S$1.86, pegged to average valuations based on DCF (WACC: 5.2%, t=1%) and 18x FY16F PE (historical average).
