Why SMRT's profits nightmare isn't over yet

Next 12 months may be worse.

According to Nomura, management guided that profitability in the next 12 months will deteriorate due to higher operating costs arising from higher service standards, a larger fleet and an ageing rail network. Higher staff costs will inflict both Trains and Buses due to: i) increased headcount; and ii) wage adjustments. Current staff count is expected to grow by another 3-5%.

Here's more:

Separately, higher depreciation and repair/maintenance cost will hit theTrain segment specifically due to: i) a larger fleet; ii) taking over of the Dover & Changi stations from LTA; and iii) continuing efforts to enhance service and reliability of the rail network. The Bus segment will also face higher depreciation cost from a larger fleet.

Management highlighted that the group might have to impair its bus assets if the situation does not improve. Currently, the value of bus assets on its book stands at S$205mn.

Management expects to spend ~S$500mn for FY14F. However, no visibility on the allocation of the capex spend has been given.

We note that on 1 Apr 2013, the group purchased the operating assets for and associated with the Changi Airport Extension and Dover MRT station at a carrying value of ~S$93mn and this falls under the S$500mn capex spend expected. However, the payment of S$306mn for the delivery of 17 new trains, which has been incurred in Apr 2013, is not within the S$500mn capex guidance.

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