How SMRT will fare in profits game after back-to-back losses

S$110.3mn profits forecast may even dip further.

According to Nomura, SMRT expects to report a net loss in 4QFY13F due to 1) deteriorating profitability and 2) a S$17mn goodwill impairment of its associate, Shenzhen ZONA Transportation Group Co. Ltd.

Here's more:

We note that 9MFY13 net profit was S$95.2mn and 4QFY13F is flagged as a quarter of loss. Consensus is expecting S$121mn, which means that the street is off the mark by at least 20%.

The number also implies that street was expecting a 4QFY13F profit of S$25.8mn, which appears to be too bullish now. We are expecting S$110.3mn for FY13F and a 4QFY13 profit of S$15.1mn, though we will need to revise that downwards for the impairment.

Is it expected?
We have flagged the risk of impairment in our earlier report (Negatives not fully priced in, 11 Mar 2013), so this does not come as a surprise to us but we suspect it may be to the street.

How does it affect the numbers?
We have not built in the impairment loss in our numbers, due to the subjectivity of impairment which is largely at the discretion of management. Hence, we will need to review our numbers downwards in light of this impairment.

Nonetheless, the business should remain profitable in 4QFY13 if we strip out the impairment, though the profit warning hints at a much weaker 4QFY13 operating performance than expected by consensus.

Dividends at risk
Dividends are at risk due to lower reported profits. The question remains as to whether the company will pay out dividends based on the normalised profit or the actual reported profit.

Separately, dividends are also at risk due to a potentially lower payout ratio, as we believe that the group needs to conserve cash for future capex.

Hence, even if normalised profits are used as the basis for dividend payment, it also remains to be seen whether the payout will be in line with historical experience.

The group has a stated payout ratio of 60%, though they have historically paid above that.

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