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Can SMRT Drive Up its Dividends?

Credit: Jason D' Great

Welcome to the second part of the article on SMRT Corporation Ltd.  (SGX: S53). In my previous article, I covered the sources of revenue for SMRT. Now we look at the profit and balance sheet for the company.

As a recap: Shares og the company are down 20% from 2010. During this same timeframe, the company distributed a total of about 29 cents per share in dividends. By comparison, the capital gains of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI) was 14.5% for the same duration.

A closer look at profits

From our previous article, we have observed that SMRT has grown its revenue by a compounded annual rate of 5.3% over its past five completed financial years.

In here, we shall take a look at the company’s operating profit by different business segments to see if the top-line growth has managed to trickle down to the bottom-line. Furthermore, we will look at SMRT’s operating cash-flows and capital expenditures to see if the company has been able to generate free cash flow.

Can SMRT Sustain its Dividends? - 1

Source: Company Earnings Presentation

From the operating profit point of view, the scenery ain’t so pretty. The overview is that SMRT has seen its operating profit fall by more than half in those five years. This comes despite the increase in revenue during the period. The Train operations has been experiencing sharply declining operating profits while the Bus operations has been haemorrhaging money. On the flip side, the Taxi operations, Rental, and Advertising has been the most profitable operating segments for the company for the financial year ended 31 March 2014 (FY2014).

Can SMRT Sustain its Dividends? - 2

Source: Company Earnings Presentation

The operating cash flow for SMRT paints a slightly better picture of financial health. Granted, there was a steady decline over the past five financial years, but it was not of the same magnitude as its operating profit (which more than halved).

However, capital expenditures for the company has picked up sharply since FY2012. In particular, SMRT has seen its capital expenditures spike up to $651 million for FY2014. The sharp jump was partly due to the $266.9 million spent to add more trains. The high capital expenditure and declining operating cash flows led to the company being free cash flow negative for FY2014.

Can SMRT Sustain its Dividends? - 3

Source: Company Earnings Presentation

With the big increase in capital expenditures in FY2014, it might not be surprising to see that SMRT has piled on the debt from FY2013 onwards. This has caused the company to have more debt than cash for FY2014. The company’s cash balance has also declined over the past five financial years.

Foolish summary

In view of the deterioration in the balance sheet and operating cash flow, it isn’t surprising that the dividends for SMRT were cut from S$0.085 per share in FY2010 to S$0.027 per share in FY2014. The dividend pay-out was the lowest in FY2013, and rose in FY2014. However, Foolish investors might want to look for signs of operating cash flow improvements with moderated capital expenditure before expecting higher dividends from the company.

On a positive note, the nature of SMRT’s business (daily usage by commuters) provides a stable source of revenue. However, it is for the company to make the sales count, and turn a profit.

Moving forward, all eyes should also be on the new government bus contracting model that will kick off in 2016. According to the Ministry of Transport, contracts for 20% of the existing bus routes will be tendered out in the first phase. Each contract would last for five years, which can be extended for two years based on performance. Ultimately, there could be added competition for the bus routes, but with lower capital spend as well.

As of the closing price last Friday (28 November 2014) of $1.63, SMRT traded at a trailing earnings ratio of about 31, and has a dividend yield of around 1.7%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.